published in Radio Transcript Newspaper in late 1992 Clearing the air Free marketeers take to the friendly skies On October 30, after a public speaking appearance here in the renaissaince city, President-elect Bill Clinton expressed his disapproval of the USAir-British Airways deal to a radio reporter. The following day WKQV (1410 AM) turned the question over to its listening audience in its daily phone poll. "Do you agree with the Democratic candidate?" was the gist of their question. Setting what must be a record for the number of phone poll responses to WKQV, Pittsburgh voiced a resounding "No" of 6000-plus votes, with under 400 agreeing with Clinton. USAir employs approximately 12,000 Pittsburgh Area residents.       The USAir-British Airways contract, already signed by both parties, could create the world's second-largest air carrier (in terms of passengers carried) after Aeroflot, the airline of the former Soviet Union. It would allow for flight-code sharing on passenger and baggage tickets between the airlines, making connections between the airlines (e.g. USAir from Minneapolis to Pittsburgh, then British Airways from Pittsburgh to London) simpler for customers. British Airways (BA) hopes this simplification will increase its passenger traffic to and from the U.S. This is already a common practice between many airlines such as United and British Midland.       Under the agreement, BA would give USAir a $750 million all-cash investment (unusual compared to most deals done in the 1980s which were for some cash, plus stock, options, routes, etc.) in return for four members of a new, 16-member USAir board of directors, 21% of USAir's voting stock, and 44% of its equity. BA would get no additional routes in the U.S. All these terms fall within U.S. law.       USAir is the last of the sizable U.S. carriers without a substantial inter-nation partnership. USAir desperately needs the cash infusion (it lost over $305 million in 1991 alone). If the deal goes through, BA will anticipate the likely liberalization of air transport that will take place between the U.S. and the entire European Community (EC) over the next decade. The contract has yet to be approved by the U.S. Department of Transportation (DOT), currently under the lame-duck direction of Secretary Andrew Card.       In July, when the deal was first submitted to the DOT, Card foresaw no difficulty in approving the deal if it complied with the current bilateral agreement between the U.S. and Britain. He called the deal an "innovative financial and operational agreement" holding "the promise of competitive benefits." Federal Express and the "Big Three" U.S. airlines -- American, United, and Delta -- quickly protested.       Delta chairmain Ronald Allen, in a letter to Card, said BA "must be seen for what it is -- a foreign carrier cloaked in the protection of one of the most restrictive and anti-competitive international aviation regimes in the world, seeking control over a U.S. carrier in violation of our government's current law and policy."       Let's take these charges one at a time.       Is BA "cloaked in the protection of one of the most restrictive and anti-competitive international aviation regimes in the world"? Well, if it is, the blame lies at least partially with the Big Three themselves. In 1991, United and American bought Pan Am and TWA's routes to Heathrow, London's main airport. However, the bilateral agreement between the U.S. and the U.K. specified Pan Am and TWA as the only airlines allowed to land at Heathrow.       So, under pressure from United and American's lobbyists, the U.S. renegotiated the bilateral agreement making many concessions to Britain and getting nothing but the same access to Heathrow we had previously, but now with different carriers.       The U.K. got the right to operate between six European countries -- Belgium, France, Germany, Ireland, Luxembourg, and the Netherland -- and the U.S. They also got seventh freedom rights, which means British carriers can fly from points outside Britain to the U.S. then to a third country. The U.S. has no seventh freedom rights with the U.K. These rights and the number of flights allowed between the U.S. and U.K. are the heart of the current trade imbalance.       Charge two from Delta's chairman is the BA is "seeking control over a U.S. carrier in violation of our government's current law and policy." This is the crux of the matter. If the U.S. DOT decides BA will have control over USAir, they cannot approve the deal. Under the contract's terms, BA will appoint four members of USAir's 16-member board. All major decisions are subject to a super-majority of 80% of the board, giving BA the power to stop USAir policy decisions but not create them.       Major decisions are defined to include, among other things: hiring, firing, and pay of senior executives; selling route authorities or operating rights; creating annual operating budgets, capital budgets, and financing plans; making capital expenditures or investments not in agreed-upon budgets in excess of $10 million; incurring debts not in agreed-upon budgets in excess of $50 million.       This 80% super-majority is the major obstacle to DOT approval because it may or may not be considered "foreign control of" a U.S. air carrier. BA and USAir say it's not. Sir Colin Marshall has said "I don't see how the right to say 'no' to certain decisions -- most of which are related to financial matters -- can constitute control ... [these measures are] perfectly reasonable given the size of our investment set against the financial background of USAir."       The voting provisions sought by BA are the same as those being sought by American in its bid for a share of Canadian Airlines International and by Air Canada in its bid for a share of Continental. Marshall is correct: in purely business terms the BA_USAir deal may be fair, but in terms of American trade law it is probably not.       Under pressure from FedEx and Big Three lobbyists, Secretary Card has gine from openly optimistic about the deal to cautiously concerned. In August, he said he would not impose increased U.S. access as a precondition for approval but he is "always looking to be very aggressive to protect U.S. interests ... [and] interested in making sure our carriers have access to international markets."       Currently U.S.-U.K. talks on the bilateral agreement have stalled, and every indication is that they will not be complete by December 24, the self-imposed deadline Card has set for the DOT decision. This is also the last day before the BA-USAir deal becomes non-binding.       The Bush policy on air transport has clearly been for freer trade and deregulation. Price wars have made the U.S. airlines consolidate, but they are leaner. American air carriers average a cost of 9 cents per passenger mile, compared to state-owned airlines such as Air France's cost of 40 cents.       The U.S., since March, has offered and pursued "open skies" agreements with foreign nations. We would not require the benefits to each nation be equal, as long as the rules were very open and the same for both sides. The U.S. would like these agreements to lead to full openness around the globe, so that eventually foreign airlines could operate intra-U.S. flights (this is strictly forbidden now) and vice versa.       Jeff Shane, assistant secretary of the U.S. DOT for policy and international affairs, this June said, "There needs to be a competitive prod in the form of a carrier establishing a much, much larger foothold in North America and forcing everyone else to play catch up ball." This would, in theory, encourage protectionist countries to open their markets in order to get into the U.S. market. On September 4th, the U.S. and Netherlands signed a limited "open skies" agreement.       This, naturally, displeases the Big Three because it makes the U.S. more open to foreign competition while the protectionist dominoes slowly fall. The larger EC nations and their state-owned airlines would rather this didn't happen either. They would prefer to liberalize within the EC, give their airlines time to become efficient, and then try competing with U.S. airlines. France has denounced its agreement with the U.S.; Germany is contemplating doing the same.       Air Line Pilots Association president Randolph Babbitt this August said the Bush administration has pursued the goal of "a free market at any cost -- and the cost is more than the industry can bear," considering job and financial losses. Europe is protectionist, he said, and the U.S. can't change the marketplace alone.       Yet that's what we've been tryingto do for some time. Sir Colin Marshall, CEO of BA, said this is a problem for the U.S. "[T]o see the U.S. turning down such an opportunity [for free trade] is going to encourage many of those other governments to raise their own barricades and fortifications." Indeed, it might be seen as going against the deregulationand free tradearguments the U.S. has been making at the GATT negotiations.       Since the election, Clinton has waffled on the issue and now supports the BA-USAir deal.probably, though, the deal gives too much control to BA, and will not go through. However, Secretary Card, BA, and USAir are correct: the bilateral agreement and the BA-USAir contract are separate issues and the Big Three U.S. airlines' cry that the "U.S. must insist" on changing the bilateral agreement before approving the BA-USAir deal is wrongheaded. The U.S should press the British for an agreement that is closer to equal, and the BA-USAir deal should have nothing to do with it. Ideally, the U.S. should seek an agreement with the EC, not with individual countries as is our current policy.