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Focuses on a European Commission (EC) policy paper on the European aerospace industry. The paper urging creation of so-called clusters of consolidated companies as likely the best way to improve the industry's competitive position; Additional measures for improving European industry competitiveness cited in the paper; Figures on United States and European defense industrial base, as of October 6, 1997.

This article reports that tension is mounting between the European Commission and the management of European airlines about the direction Brussels, Belgium, is taking in regulating the sector. Airline representatives are concerned they are being saddled with billions of euros in additional yearly operating costs as they grapple with intense competition and high fuel costs. In the past two years, the commission has been gradually expanding its air transport agenda. But airline representatives appear increasingly unhappy with the situation and feel, to a large extent, they are being treated more harshly than other industrial sectors. Disagreements surround European Commission initiatives ranging from air passenger rights to emissions trading to dealings with countries outside the EU. In the latest sign of tension, Jacques Bankir, chairman of Air France subsidiary Regional and a board member of the European Regions Airline Association has sent a letter to EU Transport Commissioner Jacques Barrot requesting that Brussels rewrite a 2001 white paper on European transport policy.

The proposed merger of Air France SA and KLM, the first major airline consolidation in Europe, is unfolding, raising some concerns on Wall Street and in academia as of March 2004. Michael Linenberg of Merrill Lynch observes that the merger will create the world's largest airline holding company, with 24 billion dollar in annual sales. In a timely paper issued last week, Jan K. Brueckner of the University of Illinois at Urbana-Champaign and Eric Pels of Amsterdam's Free University concluded the merger and expected airline alliance realignment will reduce competition in intra-European markets and in transatlantic markets where merger partners compete. The authors expect the merger to spawn a mega-alliance, comprising the world's four largest airlines. Long-time KLM partner Northwest Airlines and Delta Air Lines, an ally of Air France in the Sky Team, will likely join forces.

The article presents information related to the aviation industry in Europe, United States and Asia-Pacific. Spain is unhappy with the industrial return from its share in EADS, in which government-holding company Sepi has a 5.6% stake, according to Spanish press reports. Both the EH Industries EH-101 helicopter and Lockheed Martin Joint Strike Fighter are liable to be discussed in the margins of this week's state visit by U.S. President George W. Bush to London to meet British Prime Minister Tony Blair. Australia is shifting some of its modernization plans as a result of an update to its 2000 defense white paper.

Lofty equipment aspirations and base financial reality will confront some of Europe's main defense players with critical choices over the coming months. Following in the wake of Germany's budgetary woes, Great Britain and Italy are now struggling with defense-expenditure dilemmas. Rome is being forced to curtail and delay acquisition programs, while in London, England, the ministry is grappling with both short-and long-term financial difficulties. In Great Britain, the government is trying to paper over a short-term defense funding problem, while the Defense Ministry faces considerable difficulty resolving a mismatch between available resources and requirements in its medium-to-long-term equipment program.

This article reports that when Heathrow's Terminal 5 finally comes online in 2008, it will add 30% in passenger handling capacity to Europe's busiest airport. But there will be no similar growth in runway capacity. In a 2003 white paper, the government supported a third runway at Heathrow, but with two key caveats: that existing runways be used better, and that any noise and emission challenges associated with additional runway capacity be resolved. Adding a third runway will be contingent on meeting European Union nitrogen dioxide emission limits and not increasing the airport's noise footprint above 57 dB. A third strand in the Project Heathrow study concerns public access and the environmental implications associated with increasing ground-transportation infrastructure.

The European Low Fares Airline Association (Elfaa) last month submitted to the EC a Discussion Paper reviewing unresolved regulatory issues. In France, airport/security taxes often surpass Ryanair's and EasyJet's lowest fares. According to Elfaa leaders, up to 59% of passengers on European low-fare carriers are new aviation travelers, including 1% who would not travel at regular fares. The Ryanair-EasyJet rivalry shows largely similar results. In July, Ryanair PLC carried 2.48 million passengers and EasyJet 2.41 million passengers. Ryanair also filed a complaint against the British Airport Authority with London's High Court for abusive fuel levies at London Stansted.

Reports on the concerns of the European Regions Airline (ERA) association regarding the `Air Transport and the Environment,' a European Commission (EC) white paper. Expected number of passengers forecasted by the ERA for 1998; Details on the proposed EC tax; Failure of Eurocontrol to assess the effectiveness of its Eatchip program in improving airport operations.