European Union transportation officials last month unanimously approved an Open Skies agreement that sets the course to liberalize transatlantic air travel. Aviation experts expect U.S. approval of the agreement to send ripples through the industry for years, prodding European airline consolidation, lowering transatlantic fares, expanding antitrust immunity among airline alliances and opening more routes and frequencies between Europe and the United States.
The agreement, to be signed later this month and go into effect in March 2008, gives carriers greater access to foreign money and markets, and promises to increase competition. However, the treaty could crumble yet as some of the most contentious issues between the United States and the European Union remain up in the air until later-stage negotiations.
While analysts said benefits to corporate travel buyers likely won't come into play until at least next year when the deal is implemented, lower fares and increased transatlantic air services are in the pipeline, Standard & Poor's managing director of ratings services Phillip Baggaley told corporate travel buyers last week during the National Business Travel Association Financial Forum in New York.
The deal would spark lower fares "across the Atlantic," he said, as new services take to the skies. "You'll see a period where some big airlines will try some new routes, and there will be a shaking-out period of lower fares," Baggaley said.
Director of Ohio State University's Aviation Institute Darryl Jenkins said downward pressure on fares would affect leisure and business class fares disproportionately, causing a greater decrease on the leisure side.
The endorsement of the agreement immediately set airlines on the path toward new services. Continental, for example, wasted little time in announcing plans to inaugurate flights between Houston and Heathrow before summer 2008, subject to approval. On the other side of the Atlantic, Ireland-based Aer Lingus said it plans this year to launch new long-haul service to San Francisco, Orlando and Washington Dulles in light of the new agreement. More carriers are likely to embark on similar expansion plans afforded by the agreement, analysts said.
"This Open Skies agreement paves the way for much-desired increased service between the United States and Europe," Air Transportation Association president James May said in a statement. "It has the potential to provide enormous benefits to our respective customers and economies."
Although major moves toward consolidation among major U.S. carriers appear to be on hold following the collapse of US Airways' bid for Delta, experts suggest the new agreement would propel merger moves within Europe. "We think consolidation will accelerate in Europe," Baggaley said last week.
The likeliest candidates, Baggaley noted, are smaller national carriers throughout Europe. Under the air treaty, European airlines now can operate flights to the U.S. from any EU country, as opposed to just from their home country.
"Smaller European airlines—all these little flag carriers flying from a protected home market to the United States—now may have a British Airways or Lufthansa march into their market," Baggaley said.
Among the largest gains for several U.S.-based carriers is access to Heathrow, "which is a crucial connecting point for flights globally and considered the best airport for Europe's financial capital," Calyon Securities analyst Ray Neidl said. Authorities no longer will afford protected positions at the airport for such carriers as British Airways and American Airlines.
Continental president Jeff Smisek last week during the NBTA Financial Forum didn't miss a chance to plug the carrier's plans to enter Heathrow next year, and other carriers are expected to follow. Delta CEO Gerald Grinstein said, "A key focus for Delta has been to obtain meaningful access to London's Heathrow International Airport." Baggaley noted that "take off and landing slot restrictions" would remain at Heathrow, but "there are a lot of slots to be traded around."
In addition to competition caused by new service and frequencies, a new level of cooperation could be on tap. The agreement sets forth "new cooperation arrangements between competition authorities with a commitment to promote compatible regulatory approaches to alliance agreements and other cooperative arrangements between airlines." Antitrust issues—faced in at least some markets by all alliances—have made it difficult to structure singularly priced alliance deals for corporate travel buyers
(BTN, Jan. 22).One SkyTeam member carrier told BTN that the alliance likely would seek another round of transatlantic antitrust immunity in light of the new agreement. SkyTeam's most recent attempt was not as successful, as carriers in 2005 withdrew their request for antitrust immunity following resistance from DOT. The alliance partners said they would, at a later date, pursue their request
(BTN, Jan. 23, 2006).Meanwhile, American Airlines chairman, president and CEO Gerard Arpey last month, prior to the deal's EU passage, told BTN, "We're very hopeful that we'll eventually get there with British Airways and others" in the Oneworld alliance.
Other terms of the agreement remove "restrictions on pricing on all routes between the EU and U.S., but with a derogation to maintain the prohibition on price leadership by U.S. airlines on intra-EU." The deal provides unlimited codesharing "between EU, U.S. and third-country airlines," while also setting forth allowances to harmonize air security policies and safety procedures, among others.
The agreement only resolves some of the issues between the parties. The second stage must begin within 60 days of enactment, and EU transport officials could suspend the deal if the U.S. declines further concessions.
Foreign ownership rules—the sticking point that caused prior negotiations to collapse—remain largely unresolved. The first-stage agreement allows foreign ownership stakes in U.S. airlines to exceed 50 percent, while European countries would have "the right to limit U.S. investments in EU airlines reciprocally to 25 percent voting equity."
"U.S. ownership was the key issue that blocked Open Skies before," Standard & Poor's Baggaley said. "There's only a very modest change in terms of how much economic ownership, if not voting control, European airlines might take."
The lack of new provisions on foreign ownership prompted Ohio State's Jenkins to call the deal "Open Skies Lite."
European Commission vice president Jacques Barrot said, "This first phase of our transatlantic agreement is not a dead end. I am confident that the process we have started today will continue onwards to deliver greater freedom for investors in aviation, even closer cooperation between the two sides and a healthier air transport industry in general, not just across the Atlantic, but in due course with other countries all over the world."
Neidl said, "It appears to us that the U.S. obtained almost everything that the negotiators wanted, while the EU received a minimum of their requests, which included more ownership possibilities in U.S. airlines, the opening of domestic service in the U.S., abolishing the Fly America program for U.S. government employees and fifth freedom rights."
Neidl noted doubts on the "termination clause" being invoked, but "it does remain a potential threat to the agreement and the airlines that we consider to be winners from the agreement."