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."
Markets OpeningInternational 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.
"We tell our airport clients, you're either Sinocentric or you're out of the program. That's going to be the No. 1 dominant economy, so plan on it," said Michael Boyd, an aviation consultant.
US Airways and Delta are now the only two major "legacy" airlines -- those that date to before the 1978 deregulation -- that do not have a China route. US Airways is competing against American, Continental, Delta and Northwest for one of the 2009 routes.
Delta, unhappy about having been passed over on two previous applications, is putting most of its weight behind its campaign for this year's route. The only other competitor this year is Northwest, which has service to China from nine U.S. cities but currently funnels the flights through its Tokyo hub.
The Transportation Department has said it awards routes where they will accomplish the most good for the most people. Delta is considered the front-runner this year by virtue of the fact that it has no China routes, but the airline isn't taking any chances. It has predicated much of its post-bankruptcy strategy on expansion into Asia, and is employing a full-court media and marketing blitz.
"It's very, very important to Delta. Asia is one of the areas into which we're expanding currently," said Sametta Barnett, Delta's director of government affairs. "It'll be very important to us in terms of rounding out service patterns."
In documents filed with Transportation, the airlines have pulled no punches. Delta responded to Northwest's entry into this year's competition by saying that Northwest has "taken chutzpah to new heights" by trying to add more routes. And American, in filings related to the 2009 route, called Northwest and United "duopolists" and suggested that they were the least worthy competitors.
Aggressive StrategiesThe decision on which airlines get the new routes is up to Andrew B. Steinberg, since last fall the assistant Transportation secretary for aviation and international affairs, though no doubt Secretary Mary E. Peters will have a chance to evaluate his choice -- and could by law supersede him if she thinks a decision involves national transportation policy.
Steinberg is a former counsel for American Airlines and the Sabre reservation system it spun off. He joined the Bush administration four years ago as general counsel for the Federal Aviation Administration.
Other than through the formal regulatory process, airlines may not communicate with the department about the route cases. So in addition to public relations events, such as the one at the Atlanta zoo, the airlines' efforts to convince the department that they would best serve the public good have included lining up endorsements from notables, including governors, members of Congress and businesses both large and small.
Eleven Southeastern governors are campaigning on Delta's behalf, including backing the airline's contention that the region is becoming a major hub for business with China. Georgia's Republican Gov. Sonny Perdue is expected to open a state office in Beijing by year's end and has been campaigning for a Chinese consulate for Atlanta. United got California's Republican Gov. Arnold Schwarzenegger to endorse its bid for a route from Los Angeles to Shanghai. In a news release, Schwarzenegger said the route would "pump up" California's economy.
One former Senate aide who is now a lobbyist said the letters of local and political support are primarily a defensive maneuver, because they have come to be expected. "When I was on the Hill, I used to think, 'Why does everybody want all these letters? Who reads them?' But now that I'm off, I realize it gives them the ability to say, yeah, there's support for this decision,' " said the lobbyist, who asked not to be identified for fear of annoying his clients. "You have to demonstrate that there are people that support you. You have to show that you really care."
Michael E. Levine, a law professor at New York University and former executive at two legacy airlines, said technically the decision is apolitical. "But the process is actually slightly mysterious in the sense that it's hard to know in any individual case how much politics is involved in the selection," he said. "It's almost never zero, and sometimes it can be intensely [involved]."
The White House has no formal role in the process, though a former Transportation official who was involved in international route cases said the extent of back-channel involvement has varied. "Some staffs take the view that we don't even want to know about this thing, just stay away because it's too politically sensitive," he said. "Typically the White House has taken a hands-off approach. Though, way back there, I have seen cases where the White House sort of made it clear to the secretary what carrier they'd like to see serve a route."
The former official, now a consultant who did not want to be identified for business reasons, said most route cases aren't unduly influenced by politics -- a notable exception being United Parcel Service's successful bid for a China route in 2000. "That was the granddaddy of all lobbying efforts to win a China route," he said, adding that the scope of UPS's business, which extends to every congressional district, help put it over the top. "The breadth of support -- none of the airlines expected it."
Boyd, the aviation consultant, said observers can still expect the usual political "horse trading" around these route cases. "There's some political pressure that can be put on. That's how you get senators on your side." Airlines "say, 'if you help us with this senator, we won't pull out of your hometown.' "
Levine said Congress' influence varies. A lawmaker might promise to vote for an administration initiative in return for a favorable nod on a route bid for their favorite airline. "Not corrupt buying," he said, "just the usual Hill stuff."
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