In China, Airlines See A Route to Some Security

As a result of trade agreements between the United States and China, a handful of U.S. airlines, having been in and out of financial trouble since their industry was deregulated, now have a shot at securing the rights to serve one of the most lucrative -- and least competitive -- aviation markets in the world.

The new routes they seek, the next of which will be awarded by the Transportation Department this fall, will be insulated from almost all competition from other U.S. airlines. As such, they are a rare and highly prized commodity in an industry struggling to survive against competition from low-cost U.S. carriers as well as foreign competitors.

As a result, the competing airlines are using all the publicity and lobbying influence they can muster to go after them. Delta Air Lines, which wants to secure a new, exclusive routes between Atlanta and Shanghai and Beijing, has lined up a number of politicians on its side and even arranged a spectacle at the Atlanta Zoo -- where Delta executives posed near three giant pandas, who were portrayed as supporters of the airline's bid.

With trade between China and the United States growing and the Olympics being held in Beijing next summer, the flow of people between the two nations also has escalated. As a result, few industries covet new markets in China more than commercial aviation does. Only four U.S. carriers -- American Airlines, Continental Airlines, Northwest Airlines and United Airlines -- are currently allowed to fly to China with a limited number of flights from 13 U.S. cities. Air China, China Eastern and China Southern have reciprocal service, but only to Los Angeles, New York and San Francisco.

Under a trade deal in 2004, U.S. carriers are to be awarded six new routes by 2009. That prospect is particularly inviting for airlines that have been struggling at home. The regulated nature of international service harks back to the era before U.S. airline deregulation in 1978, when flights, fares and routes were regulated by the government -- and revenue was predictable.

"Whoever gets this is going to be sitting on a gold mine, because they're going to get a route and the assurance, at least for a while, of restricted competition," said Sam Peltzman, a University of Chicago economist who worked on a United route bid in the 1980s. "These are regulated markets; they're not free-entry."

International aviation is unique among industries when it comes to trade, because it is so tightly controlled. For the most part, in order for an airline to fly from one country to another, there must first be a treaty in place that explicitly allows such flights. This restrictive system took root in 1944 during World War II, when countries such as England, lacking the air power of the United States, insisted that post-war international aviation be controlled by bilateral treaties.

The United States has slowly been replacing its more restrictive bilateral agreements with free-market "open skies" agreements that generally allow unrestricted flights between two countries. But those agreements have come more slowly with some European countries that want access to the U.S. domestic market in return -- and with countries such as China and Japan that have sought to protect their fledgling aviation industries.

Those markets, too, are beginning to open, as evidenced by the latest campaign for the China routes. "It'll evolve," Peltzman said. "In 10 years, you're going to see non-traditional Chinese carriers entering their market, and more competition will open up." But for now, the routes are highly coveted.

Under the agreement with China, the Transportation Department will award U.S. carriers one route this fall to either Beijing or Shanghai; one next year to Guangzhou, which was once known in the West as Canton; and four in 2009 to various destinations. Some analysts estimate a China route to be worth $200 million in annual revenue. Because the routes are so limited, competition is scarce, allowing airlines that have routes to charge a hefty sum for each ticket -- generally somewhere between $1,000 for a coach seat and $15,000 for first class.