Open Skies rewrites rules

Proposed EU-US agreement could redefine Europe's airline industry, but access to congested Heathrow Airport is an issue

A new Open Skies era of increased opportunities for competition and innovation in the transatlantic market could irrevocably alter the European airline industry.

Should the text of the first-ever comprehensive European Union/US air transport agreement remain largely unchanged, the industry fall-out through the proposed granting of new rights for EU airlines to enter the US market could lead to massive structural change much nearer to home.

There will be the obvious potentially losers - certainly for the four airlines, British Airways, Virgin Atlantic, American Airlines and United Airlines - that ply the highly lucrative routes between London Heathrow and the USA and which will be forced to cede to other carriers at the UK hub.

BA, furious about the proposal that would threaten its pre-eminent position in a transatlantic market that accounts for half its profits, will be lobbying its government hard to drive Europe to push for a deal giving EU carriers far greater access to the US market when transport ministers meet to discuss the tabled proposal on 22 March.

BA chairman Martin Broughton has dismissed the latest draft agreement, insisting it features only "minuscule concessions dressed up as significant breakthroughs" and primarily serves US interests.

EU member states such as Ireland and Spain that lack bilateral agreements with the USA could, however, find themselves with far wider horizons.

Aer Lingus already plans to launch new services in the Irish-US market, where it has 48% market share, and a more liberalised regime would provide it with significant opportunities to expand its long-haul network by providing non-stop services to additional destinations in the USA and increasing frequencies on routes flown.

Aer Lingus has already said it will expand its widebody fleet by 50% to add to its seven Airbus A330s on long-haul services to four US cities and Dubai, so if Open Skies becomes a reality, expect to see fleet order deals announced in time for the 28 October scheduled entry-into-force of the agreement. One senior airframer executive confides: "We have a fair few deals tied up in Open Skies with the airlines who would obviously benefit."

UK carrier BMI is also set to become a beneficiary. Already a Heathrow operator, it could creatively manage its slots to increase its long-haul services, retaining only the most profitable short-haul destinations served by that airport. Air France-KLM, meanwhile, is applauding the move and eyeing the enhanced potential to expand its SkyTeam alliance network.

US State Department official John Byerly, who negotiated the deal, predicts a wave of pent-up European consolidation among carriers. Under the existing regime these would put their international operating rights in legal jeopardy.

"BA, for example, could acquire Iberia, or Virgin could establish direct subsidiaries in other EU member states, and those British-controlled airlines could operate wholly outside the UK to the USA. Perhaps EasyJet will initiate low-cost, no-frills, point-to-point transatlantic services from a new set of European gateways. It could do so under the November 2005 agreement [an air transport accord that stalled when the USA failed to relax its foreign ownership rules]. The decision belongs to the airline, not to government regulators," he says.

The obvious beneficiaries of the Open Skies regime will become more attractive and that may affect the conclusion of certain corporate manoeuvres such as a potential new Ryanair bid for Aer Lingus should the European Commission probe clear it to do so.

This is all conjecture, however, and several industry realities provide a restraining influence. First, how much growth in the transatlantic market is there? Figures for 2006 from the Association of European Airlines underline the importance of North Atlantic traffic for its mainline members whose transatlantic operations help them to cancel out losses on their short-haul operations. But since the terrorist events of 9/11, growth has been lacklustre.

There is also a big question mark over current infrastructure. UK airports operator BAA will face massive challenges from an expected new wave of airlines wishing to serve capacity-constrained Heathrow. BAA director of operations Donal Dowds says the airport would struggle to cope: "The bilateral agreement, if and when it comes, will undoubtedly generate an appetite to get into Heathrow, but it won't give a solution, so access to slots will be a challenge."

Then there is likely resistance from the USA. One industry source says: "This is a near capitulation by the USA, and I say that as someone who thinks the USA needed to give a lot. The Fly America provisions and the wet-leasing provisions open this deal to Congressional sniping and log-rolling, and the Democrats, after having effectively killed the ownership and control provisions of the November 2005 compromise, will probably want to flex their muscles."

Even if it became a reality Martin Coleman, a competition lawyer with Norton Rose, says Open Skies will not signal a Big Bang in airline consolidation. "This does not open the door for the creation of global airlines, but you can see from the existing airline alliances where the potential is. Short term, however, there's not much potential for radical change," he says.

Source: Flight International