Good luck to them. At the rate the latest US-UK liberalisation negotiations are progressing, none of those carriers is likely to be successful before 2026.
Since 1991, when the UK allowed American and United into Heathrow as respective successors to TWA and Pan Am (Virgin also won the right to move some of its services there from Gatwick), close to 20 negotiating rounds have taken place between the two countries in an attempt to liberalise Bermuda II, the two countries' bilateral that British Airways chairman Sir Colin Marshall recently, and unapologetically, dubbed 'a classic example of managed competition.' The sum total of new US services won to the vaunted 'gateway to Europe and beyond' in those five years? One capacity-restricted daily service for United from Chicago, the result of a US-UK 'minideal' last June.
The US deadlock with the UK continues even as it closes in on completely liberalising the US-Germany relationship after successfully opening the skies with nine European countries and Canada last year. But unlike those countries, the UK has one great obstacle to a liberal agreement: lack of capacity at London's two main airports, particularly Heathrow. 'The battle for [US-UK] open skies is really a dreadful misnomer,' says David Tait, executive vice president North America for Gatwick-based Virgin Atlantic Airways. 'What in fact we are talking about is the much more down to earth problem of open airports. That is the biggest stumbling block with the US-UK talks.'
The US' limited success in getting new services into Heathrow is just part of the story. With 83 per cent of its 55 million passengers flying to and from other countries in 1995, Heathrow is the world's largest airport in terms of international passengers. But for a variety of reasons, including the fact that US-UK traffic accounts for more than 30 per cent of BA's annual revenue, the US' lack of success has, rightly or wrongly, become a high-profile symbol of airline industry restraint of trade. Says one US official: 'Churchill's "special relationship" doesn't mean much at Heathrow.'
But even US officials recognise Heathrow has a problem. The airport is curfew restrained. For transatlantic services there are basically two, four-hour windows for departures and arrivals because of time-zone differences. Add in 35,000 aircraft movements in January alone (for domestic and international flights) and environmental restrictions that limit operations to 80 an hour, and Heathrow's 'peak-hours', more than 90 per cent full, have become saturated. An official at Airport Coordination Ltd (ACL), which governs the allocation of landing and take-off rights, estimates that demand exceeds supply by 15 per cent.
Runway aprons are overcrowded and the airport's four terminals are so full that British Airport Authority figures from 1994 show the capacity-controlled passenger numbers expected in 2001 were already exceeded last year. A fifth terminal is currently the subject of a public enquiry but would not open before 2003. 'There is no question that Heathrow is congested,' says a top US transportation official. 'That is all clear. What we are arguing is the bilateral's limitations.'
For TWA, struggling to reestablish itself in the US-UK business market, Heathrow is so important that the airline used its lobbying muscle last October to sink a US-UK deal that would have secured it access to Gatwick from New York (while probably giving American Dallas-Heathrow and Continental Newark-Heathrow). Gatwick simply would not work, says Scott Gibson, TWA's vice president of planning. 'All our competitors out of New York fly to Heathrow, and the business traveller refuses to fly to Gatwick,' he says, recanting a familiar story about Heathrow having connecting services to 57 per cent more European cities than Gatwick. 'We estimate there is a 15 per cent difference in yields,' he adds. Though TWA was angry with US negotiators for considering anything but Heathrow, its ire has also been directed at the UK. Gibson complains that between July 1990 and July 1995 more than 30 non-US airlines have begun serving Heathrow. During the same period the number of monthly flights increased by 1,799 and total departures increased by 26 per cent. 'They have been growing capacity as a whole,' he argues. 'This idea that Heathrow has no room is ludicrous.'
The tale of Heathrow congestion is primarily told in the currency of airport landing and take-off slots (a slot equalling one arrival and departure). There were close to 420,000 aircraft movements last year of which BA controlled 37 per cent - though US General Accounting Office figures maintain the carrier controls 44 per cent of the US-UK market. The next largest share was held by British Midland with roughly 13 per cent. American, with close to 9,000 slots, holds only a 2 per cent share; United slightly less with 1.8 per cent; and Virgin, one of the most vocal critics of ACL's slot distribution methods, only had 2,435 slots.
Most airline and government officials say that Heathrow's slot allocation body, comprised of seven UK and five non-UK members elected for two-year terms, is fair with its awards. Virgin's dilemma, like most carriers other than BA, is that a grandfathering process mixed with a built-in bias for awarding rights to new airlines makes winning new slots extremely difficult.
Still, not many UK officials would argue that available capacity has grown at Heathrow; in 1995 it grew by 2 per cent. Indeed, by virtually every standard - American Airlines has increased its Heathrow slots by 37 per cent since entering the market five years ago - capacity has been growing incrementally. The growth has come from small increases in operating efficiencies in good weather, although total movements will still not exceed the environmental cap. The problem of course is that an airline must first have access to Heathrow to benefit from any growth.
'There are increases every year, but they are astonishingly small,' says American's Jim Watt, who currently acts as secretary of the Heathrow slot committee. With roughly 30 new slots a year, a fourth daily Chicago-Heathrow service that American has the bilateral rights to, can only be flown for one month during the peak season. 'We like to build up in the peak of the summer, June. Then [the next year] I'll go out from there and try to add July or May.' This way, American gets a new year-round daily service in just 12 years.
There are, of course, short cuts, and the US carriers 'are excellent at understanding the system in terms of getting the best for themselves,' says an ACL source. This means keeping track of historic services, staying in close contact with the slot coordinator and even finding non-traditional sources of slots like the ad hoc reserve, a set-aside for business aviation or emergency needs that has been known to be raided by scheduled carriers.
There is also the 'swap and sell' method. Strictly speaking, the sale of slots is not permitted under European rules, but it does take place in the form of swaps plus remuneration. Sources outside American say that the airline has taken part in the purchase of slots at Heathrow, though Watt only says that 'We have long advocated the buying and selling of slots' in London. Perhaps the best-known swap of slots was between alliance partners Lufthansa and United, when the latter left the fifth-freedom markets beyond Heathrow and gave those slots to Lufthansa. Lufthansa then gave United access to its Heathrow slots for transatlantic use.
Sources say Heathrow slots are at least as valuable as slots in the US, which permits their buying, selling and leasing. A Chicago/O'Hare slot, for example, has been known to sell for anything between several hundred thousand dollars and $4 million. The European Commission is expected to make a ruling on a review of the current EU slot allocation system by August, an official says.
BAA believes that Terminal 5 will be the answer to the capacity issue if, as expected, the average number of passengers per aircraft movement increases. A 1994 House of Commons transport committee report said this figure could grow to 177 passengers per aircraft by 2016, against 122 in 1993 and 129 in 1995.
The increased count of passengers per plane could come largely from a BA plan to increase the average size of its aircraft at Heathrow, so that the smallest gauge would be a B747 and the largest a stretched version of the B747 that could be available by the end of the decade. Though BA's Sir Colin has testified in Terminal 5 hearings that BA will not move its high-yield Heathrow services to Gatwick, the airline is moving its African and Eastern Europe flights there.
BA has also instituted a marketing plan to raise the profile of Gatwick, which not only suffers from poor connecting traffic and lower yields, but also has a damaged reputation as the former home to Air Europe and DanAir, both of which went bankrupt in the early 1990s. Barry Humphreys, Virgin's director of government and external affairs, says Heathrow's limits will also force Virgin to reconsider its plans for future growth: 'As a long-term principle, we plan to add one or two routes a year [and] we are having to think about expanding at Gatwick.'
But where there was plenty of room just a few years ago at Gatwick due to some airline failures and the 1991 opening of Heathrow, it is quickly filling up again. In addition to moving international services there, BA is putting in connections to make it more attractive. It is estimated peak-hour capacity is more than 85 per cent full - a similar level to Heathrow.
But there is a critical difference, according to Laurie Price of consultants SH&E: of Gatwick's 22.4 million passengers last year, more than half flew with charter carriers. It is these services that both BA and Virgin believe will move to Stansted, London's third airport. 'It is almost inevitable that the charters will go to Stansted,' says Chris Allen, BA's vice president of competition and industry affairs, adding that the 'variability' of the charters' services mean they can't grandfather slots. 'Every time they give [a slot] up, they will need to expand to other airports like Stansted.'
But at least one major charter carrier dismisses the rather cavalier assumption that they will move to Stansted when their Gatwick slots are needed. 'We won't move,' says Roger Burnell, the managing director of Britannia, matter-of-factly. Britannia has a significant year-round presence at Gatwick, and Burnell says his carrier's hard-won slots are guaranteed by grandfather rights - end of story. 'No scheduled airline is going to push us out of Gatwick,' he says.
However it is the Terminal 5 issue that best reflects UK concerns that in the not-so-distant future London's traditional status as the gateway to Europe for travellers from North America could be imperilled, a view recently echoed by US DOT secretary Federico Peña. 'It's posturing now, but in time it is likely to happen,' says Price. 'Heathrow,' adds United's Brewer, 'is not as efficient as a connector; it will get so full that people will find cheaper alternatives.' At present 30 per cent of BA's Heathrow traffic is connecting.
The problem for the US is not necessarily the capacity restraints, or the fact that the UK simply does not need much more than it already has from the US, but a bilateral that will not permit other US carriers into Heathrow to compete. Says a US official: 'We are arguing the bilateral's limitations. Our carriers will fend for themselves within the limits of the slot allocation process as other do. Our carriers who are there do pretty well.'
Virgin, meanwhile, is backing US congressional statements to force the UK government into building more capacity at Heathrow, environmental lobby be damned. But John Major's government faces an election in the next 12 months and, with US presidential elections coming up as well, the Clinton administration is in no position to ruffle any feathers. Though high level contacts exist, it is doubtful there will be much movement in US-UK liberalisation in the near future.
Things could change drastically in the next two years, however. The key element to watch: the stability of the BA/USAir alliance. 'Things would happen very quickly if BA suddenly wanted a new partner,' says a US transportation official, while laughing at the prospect of the US finally gaining the negotiating leverage with which to get into Heathrow. 'Things could change overnight.'
Source: Airline Business
