Negotiators from the United States and the European Union next month will begin the arduous task of creating an open aviation area spanning the Atlantic and integrating the world's two largest commercial air markets. If completed, the liberalized framework would replace existing agreements between the United States and individual European states, including the generation-old Bermuda II treaty with the United Kingdom, and likely would include easier avenues for cross-border mergers, foreign investment and restructured rules governing market access for airlines on both sides of the pond.
"Foreign ownership is not the most important topic," said Leo van Wijk, CEO of KLM Royal Dutch Airlines. "What is most important is that there is a level playing field. The whole environment is much more ready than last year for a firm and final decision." Van Wijk added that European Commission leaders are determined to resolve the issue before their current terms expire next summer. "There still are quite a few issues that national governments can influence, favoring national airlines," he continued. "We need this agreement between the E.U. and the U.S. because it will accelerate the process with countries like China and Japan."
Developments among Europe's key players, meanwhile, will impact the transatlantic business travel market in many ways, from significant changes in premium products to new airline partnerships. Three of the four largest carriers in the region—Air France, British Airways and KLM Royal Dutch Airlines—as well as Swiss International Air Lines, are on the verge of announcing new alliances that would, at least, redraw competitive lines and possibly signal the beginning of much-anticipated European airline consolidation. Separately, BA and partner American Airlines on Sept. 17 will launch beyond-hub codeshare services
(see column).U.S. and E.U. regulators share the goal of fostering competition, but each side will be asked to give up certain market advantages. The United States will push for additional access to London Heathrow Airport. Currently, American and United airlines are the only two U.S. carriers permitted to operate transatlantic flights to and from the key airport, a scenario that also benefits U.K.-based incumbents British Airways and Virgin Atlantic. The European Union will seek rights for European carriers to operate between U.S. cities, called cabotage, which currently is prohibited by the U.S. government.
"If Heathrow opens up and we do away with the cabotage restrictions, there will be greater competition and cheaper fares," said Jim Lennon, global travel leader for PricewaterhouseCoopers. "More competition breeds better pricing and improved service. There is a lot that U.S. carriers can learn from foreign competition, and vice versa. Airline partners will have to become more closely aligned because of network needs and that ultimately will result in a better product."
The outcome of liberalization talks will mean different things to each transatlantic airline, depending on alliance affiliation, existing route authority and other specific market characteristics. American, for example, already is in London Heathrow and has not been given antitrust immunity with principal European partner British Airways.
"All we'd like to do is what United-Lufthansa and Northwest-KLM are allowed to do," said Dan Garton, AA executive vice president of marketing, referring to joint initiatives at other alliances, previously permitted by the U.S. Department of Transportation and European regulators. He added, however, that AA's and BA's "view of a fair price" for antitrust immunity "has not changed," indicating that the partners still would be unwilling to hand over a large number of Heathrow slots to competitors
(BTN, Jan. 25, 2002)."It will be tough for the E.U. to force the U.K. to give Heathrow access. Once it is opened, that's the end, and the U.K. won't have control," said Caro Cook, International Monetary Fund senior transportation officer. "I am not certain what the benefits are for the Europeans. There is plenty of access to the U.S. market and a very good and mature network inside the U.S. On the transatlantic, bringing more capacity and price wars into the mix only will destabilize the market."
Cross-border consolidation is among the more crucial items on the agenda for U.S. and E.U. negotiators, considering financial turmoil facing carriers on both sides. "In cross-border acquisitions, the marriage vows are much more solid," AA's Garton said, contrasting such commitments to rather fluid alliance partnerships that confuse customers. "That is the way we are going to go, eventually. For now, there is a lot going on intra-Europe, which is likely to be where more of the concern and action is."
Swiss currently is negotiating a potential alliance and/or equity transaction with BA, and KLM is engaged in similar talks with Air France. Van Wijk last week indicated to BTN that KLM's final alliance strategy could be announced as early as this month.
On the U.S. side, if airlines are not seeking full-blown mergers with non-U.S. carriers, they at least are receptive to foreign investment, considering their ongoing cash crunch. United, for example, last fall talked with Star Alliance partners about financial aid as part of its bankruptcy restructuring.
"There should not be a prohibition on foreign ownership," said Northwest Airlines CEO Richard Anderson, speaking last month at the National Business Travel Association conference in Dallas, "but airlines are funny entities, and consolidation is very hard."
To foster foreign investment, Congress, on the request of DOT Secretary Norman Mineta, is considering a proposal to raise the ceiling on foreign ownership of voting stock in U.S. carriers from 25 percent to 49 percent.
"This change would help make our carriers more competitive internationally and would also make U.S. law broadly consistent with the rules governing ownership and control within the E.U. and many other trading partners," said Jeffrey Shane, DOT undersecretary for policy, speaking this summer at a conference of airport executives. "It is increasingly clear that airlines and their governments are becoming much more open to modifying the traditional restrictions on inward investment to improve access to capital and remove barriers to competition."
In some U.S. government circles, foreign investment is frowned upon, partially due to the Civil Reserve Air Fleet, a program that contractually binds U.S. commercial carriers to supply the U.S. Department of Defense with equipment and personnel, should the need arise, as it had during both Persian Gulf wars.
Another sticking point that may undermine liberalization efforts is each side's position on government support. European regulators strongly discourage financial support for airlines by their home country's government, while the U.S. government twice in two years has crafted a relief package for ailing domestic carriers. That, according to a European Parliament statement last week, "risks placing E.U. carriers at a major competitive disadvantage, and the issue needs to be satisfactorily resolved during forthcoming negotiations."
Yet another controversial subject on the agenda is data privacy. The United States has been pressing for access to passenger data as part of new security initiatives following the terrorist attacks of 2001. E.U. regulations, however, carefully safeguard personal information. The European Business Travel Association indicated the E.U.'s position is that passenger name record data can be used only for the current trip and that "building a travel history is a violation of privacy regulations." Other discussion topics likely will include differences in industry labor laws, global distribution system rules, capacity concerns, environmental regulations, fares and safety and security standards.
"In these negotiations, the United States will be seeking to build on the foundation established in the Open Skies agreements we have concluded with 11 of the 15 E.U. member states," said a DOT spokesperson.
AA's Garton said the talks, at the very least, provide a single point of contact for U.S. regulators and airlines. "Other times, we had huge challenges because we had dual European points of contact," he said. "When they had remedies for us, they'd be different and additive."
Formal discussions between the two sides are set to begin in Washington on Oct. 1, with a second round in Brussels in December. The process is expected to take approximately two years, slowed by 2004 U.S. government elections and changes within the European Union.
Ludolf van Hasselt, head of the Air Transport Agreements unit of the Directorate General for Transportation and Energy within the European Commission, in a meeting last month with EBTA, said an interim agreement likely will precede a truly open Atlantic market.
KLM's van Wijk said he "personally made a strong plea" to E.U. Transport Commissioner Loyola de Palacio for a realistic agreement. "If you want to accomplish something, don't be too ambitious," he said. "If you go for the full monty, you may not achieve the result in a short period of time."
Part two of Transatlantic Negotiating will appear in BTN's Sept. 22 issue.