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Now that European Union transport ministers approved a new aviation pactwith the United States, carriers on both sides of the Atlantic are positioning themselves to expand transatlantic services. At the same time, regulators already are looking to second-stage negotiations that could ultimately lead to either more thorough liberalization between the world's two largest commercial aviation regions or an unraveling of much of the progress achieved thus far.
Assuming the deal (which the U.S. Department of Transportation dubbed Open Skies Plus) is signed on 30 April at an E.U.-U.S. summit in Washington, its provisions would take effect 30 March 2008. Many anticipate more service options, lower fares and deeper alliance coordination to follow.
"There will be lower fares across the Atlantic, and not just at [London] Heathrow," said Phillip Baggaley, managing director for corporate ratings at Standard & Poor's, speaking last week at the National Business Travel Association Financial Forum in New York. "Big airlines will try some new routes and there will be a shaking-out period with the lower fares before some of them give up and decide they don't want to fly from another country to the United States."
Still, Heathrow is the big prize for carriers that previously had been prevented from flying between that airport and North America. "Why would you want to go into Heathrow?" asked Darryl Jenkins, director of Ohio State University's Aviation Institute, also speaking at the NBTA forum. "To get the enormously high business fares that are there. That is why they are all lining up. They want to feed at the proverbial trough."
United Airlines and bmi (which owns 12 percent of Heathrow's take-off and landing slots) this week applied to U.S. DOT for a deeper transatlantic partnership through antitrust immunity. The Timesof London quoted bmi CEO Nigel Turner as saying, "This paves the way to an alliance; it does not guarantee it. We want to put in place all the steps now to fully take advantage of open skies." United, which may look to expand its Heathrow services to include flights from additional U.S. points, also could expand its code-sharing deal with Lufthansa, according to an employee memo posted last week.
Continental Airlines and Delta Air Lines already expressed interest in offering Heathrow service, potentially supplementing flights by incumbent U.S.-based operators United and American Airlines. Continental said it "immediately" filed for rights to serve additional routes to Europe and specifically noted plans to begin Houston-Heathrow service by next summer.
"We welcome an agreement that will guarantee Delta and our SkyTeam partners the ability to participate more broadly in European markets, particularly London's Heathrow airport," according to a statement by Delta CEO Jerry Grinstein.
Though access to London Heathrow on paper looks fantastic to previously barred airlines, the practical matter of securing it could slow any new competition. Those that already have slots won't easily surrender them, though they could potentially be traded or shared amongst alliance partners.
"Potential negative impacts for United come from increased competition," United executives acknowledged to employees, "but the company expects slot and terminal capacity restrictions at Heathrow to moderate any negative effects there." [British Airways plans to open its Terminal 5 at Heathrow just days before the 30 March 2008 effective date of the Open Skies agreement.]
While it is the most notable change, loosened restrictions at Heathrow represent just one possibility for new transatlantic services. Irish carrier Aer Lingus, for example, plans to start new flights to Orlando, San Francisco and Washington Dulles. Bigger European carriers may try routes between E.U. nations outside their traditional home markets and airports in the United States. "Air France and Lufthansa, in particular," Baggaley said. For example, "There are areas in Eastern Europe where Lufthansa is strong. Maybe they'll fly from Warsaw to the United States."
Those types of developments, Baggaley added, could disadvantage smaller European carriers that currently have limited competition on routes from their home markets to U.S. cities. "Bigger airlines will barge into their markets," he theorized. "Consolidation will accelerate in Europe. You'll see fewer and larger carriers."
Spain's Iberia Airlines--in which BA already holds a minority stake--also could become part of a cross-border merger. "BA, for example, could acquire Iberia, or Virgin [Atlantic] could establish direct subsidiaries in other E.U. member states, and those British-controlled airlines could operate wholly outside the U.K. to the United States," suggested U.S. DOT deputy assistant secretary John Byerly, during a speech last month in London.
Despite those options for European airlines, "It appears to us that the U.S. obtained almost everything that the negotiators wanted while the E.U. 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," according to research note from Calyon Securities analysts.
However, given "termination" clauses in the pact, both sides are compelled to negotiate a second phase of the agreement, which, according to many in Europe, should lead to a common aviation area spanning North America and the European Union. Such a development would theoretically allow British Airways, for example, to operate commercial service between two U.S. airports. Called cabotage, such intra-market rights always have been firmly denied by U.S. regulators.
"With the E.U. having given away their most valuable negotiating asset--Heathrow--the U.K. government must stand by its pledge to withdraw traffic rights if the U.S. does not deliver further liberalization by 2010," according to a statement by BA CEO Willie Walsh.
"It is not really Open Skies," said OSU's Jenkins. "It is Open Skies lite. It is better than a kick in the butt but still a long ways from the ultimate goal."
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