Survival of the Biggest

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Industry executives believe that Lufthansa—its JetBlue stake notwithstanding—would be a likely ally for United and Continental, and British Airways could attempt to partner with either American or a regional carrier.

That the European airlines would be the aggressors is a turnabout, given that the U.S. players have historically been stronger. But the rise of low-cost carriers has spurred debilitating fare wars that have left big carriers bleeding billions over the past decade. By contrast, the major European airlines have been largely protected by rules limiting the ability of upstarts to gain access to gates as easily as they can in the U.S.

The latest moves have been triggered by the Open Skies Treaty signed last year by the U.S. and European Union. In the near term, the treaty gives both U.S. and European carriers greater freedom as of Mar. 31 to fly more transatlantic routes, as British Airways plans to do with its new OpenSkies subsidiary. The name was chosen because it "signals our determination to lobby for further liberalization in this market," British Airways Chief Executive Willie Walsh told reporters in January.

While the aviation pact raises the equity stake European carriers can take in their U.S. counterparts from 25% to 49%, for now it limits the investing airline to no more than 25% voting control. That's a restriction European executives are already pushing to have lifted. In a Feb. 4 op-ed in the Financial Times, Walsh demanded U.S. bureaucrats "sweep away the anachronistic restrictions on the ownership and control of airlines, so that EU investors can take majority stakes in U.S. airlines and vice versa." And if the U.S. doesn't acquiesce by 2010, Walsh warns, "we shall press for the termination" of the Open Skies treaty.

Still, both U.S. and European execs are mindful of the certain opposition they'd face from politicians, who fear not just cuts in jobs and service but the loss of their ability to commandeer aircraft during national emergencies. Indeed, industry insiders point to the uproar when a Dubai-owned company attempted to acquire a firm that managed some key U.S. ports. Labor unions could also be an obstacle, as pilot groups could fight any mergers with airlines that employ lower pay scales. Consequently, analysts believe U.S. and European carriers are likely to opt at first for joint ventures in which they would fly more routes for each other, splitting profits. Only then, if opposition eased, would full mergers follow. The question is whether the U.S. airlines will be the carriers that survive.