Europe’s airline industry has traditionally been characterized by monolithic national carriers with strong links to their national governments, a lack of competition on routes, prices, and services, and little emphasis on the bottom line. Not surprisingly, these airlines, with a few exceptions, have not even earned their cost of capital.

But change is in the air. Deregulation is beginning to open up previously protected markets and to create competition on the basis of price and service. Governments, for a variety of reasons, are starting to give up ownership of their national airlines. Restrictive ownership rules are being dismantled, allowing foreign airlines to buy stakes in formerly national carriers. And Brussels is getting tougher on governments within the European Union providing subsidies to their airlines every time they get out the begging bowl. When deregulation is completed in 1997, any EU airline will be able to fly anywhere within the single market—and to compete in nearly all service activities, such as ground handling, catering, and check-in.

Moreover, non-European players are beginning to compete in markets previously reserved for national companies. Most notable among them are carriers from North America, which have...