Open skies deal will cut air fares to US by more than a third
David Robertson, Business Correspondent The Times
23.3.2007
http://www.timesonline.co.uk/tol/life_and_style/travel/article1555839.ece
Air fares to the United States may fall by up to 40 per cent as a result of a landmark decision by the European Union to allow more companies to operate out of Heathrow.
Yesterday European transport ministers endorsed an agreement hammered out between EU negotiators and the US that aims to liberalise transatlantic air travel. The key measure will open Heathrow, the world’s busiest international airport, to all airlines by next March. Only British Airways, Virgin Atlantic, American Airlines and United Airlines are allowed to operate the lucrative transatlantic routes at present.
Heathrow accounts for 40 per cent of flights between Europe and the US and carriers such as bmi, Lufthansa and Delta are keen to start flying from the airport. Yesterday Continental applied for permission to fly from Houston to Heathrow by the middle of next year.
Analysts believe that this will reduce ticket prices dramatically, particularly for business class customers. The Civil Aviation Authority estimates that it costs about 40 per cent more to fly business class from Heathrow compared with other European cities. In some cases the premium is even higher. A BA business class flight to New York costs £4,384, but a KLM flight from Schiphol, Amsterdam, is only £1,589.
Economy passengers are estimated to pay 10 per cent more because of the Heathrow rules, but with prices already low new competition is likely to focus on improved services. BA is responding to the threat of greater competition by upgrading its economy-class cabins. The company is investing £28 million on new inflight entertainment systems that allow passengers to select up to 100 movies on demand.
Nick van den Brul, an aviation analyst, said: “You cannot fly in the face of competition theory and prices will inevitably come down. It is the premium classes that will see the biggest changes.”
BA, which earns about 60 per cent of its profits from transatlantic flights, insisted that it would not be hurt by “open skies”. Willie Walsh, the chief executive, said: “I don’t think it will have any impact on us because Heathrow is already very competitive.”
However, BA expressed disappointment that the EU had not secured a better deal from the US. Under “open skies”, European airlines will not be able to buy American carriers or operate flights within the continental US until 2010.
Other changes in the “open skies” agreement include allowing carriers such as Virgin Atlantic to fly to the US from any European city. The current rules allow only British airlines to fly from Britain and French airlines to fly from France.
This could open the door for the Irish Ryanair, Europe’s largest low-cost carrier, to launch a budget service from Stansted or Manchester to the US.
Virgin Atlantic announced that it would launch new routes to the US from Amsterdam, Paris, Frankfurt, Milan and Madrid, adding: “It’s a good day for the traveller.”
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Europe backs open skies deal with America
Transatlantic travel expected to soar 50% and passengers to save £7.7bn as transport ministers give unanimous approval to remove restrictions
David Gow in Brussels and Dan Milmo
Friday March 23, 2007
The Guardian
http://www.guardian.co.uk/Business/story/0,,2040924,00.html
Transatlantic air travel will increase by 50% and passengers will save €15bn (£7.7bn) on fares by 2013, EU governments and the European commission claimed yesterday after transport ministers unanimously approved a landmark open skies aviation deal with the US.
Hailing the removal of all "arcane" restrictions on EU-US routes, Douglas Alexander, transport secretary, said the deal to allow European and American airlines to fly to any destination in Europe and the US would bring British consumers benefits of £250m per year. British Airways denied that a price war will break out, with Britain's BMI among the airlines planning to launch rival US flights from Heathrow.
The government won a concession that it will take effect five months later than planned, on March 31 next year and after the opening of Heathrow Terminal 5.
Mr Alexander also claimed to have won commitments from the Bush administration that US restrictions on ownership of American airlines and on internal flights would be acted upon in a second stage of talks. However, US officials later refused to guarantee that ownership and internal flight restrictions will be dropped. To give those talks extra bite, individual EU governments can remove US airlines' traffic rights within Europe if a deal allowing European airlines to win majority control of American rivals - and operate within the US - is not won by the end of 2010.
"I hope this will not be necessary but this sends a very clear signal to the US that we are serious," Mr Alexander said. The "open skies" agreement limits EU investors to 25% of the voting equity and/or 49.9% of total non-voting equity in a US airline - and vice versa.
John Byerly, the lead US negotiator, said he expected US approval of the five month hiatus but stopped short of pledging changes in ownership and internal flight rules. "We're going to work in absolute good faith and constructively on a second-stage agreement, to build on what we've accomplished thus far," he said.
Jacques Barrot, EU transport commissioner, said the agreement would create 80,000 jobs and insisted that approval meant that the EU entered the next stage of negotiations in a strong position.
He added that it would trigger a new wave of mergers within the European aviation industry as near-bankrupt Alitalia seeks a partner and Lufthansa, the German carrier, was linked with Spain's Iberia.
Willie Walsh, chief executive of BA, dismissed as "rubbish" claims that the airline's transatlantic business class fares - a significant generator of company profits - will tumble. He said: "I don't agree with that at all. We have very competitive business class fares. If BMI can charge over £5,200 to fly from Manchester to Chicago, I don't think that gives you any signal of what would happen to business class fares."
Tim Bye, deputy chief executive of BMI, said the "gulf" in price between BA's business class service and that of other European carriers will be under pressure.
However, analysts warned that economy fares are more likely to resist price pressure because they are so heavily subsidised by business class passengers.
Mr Walsh added that BA would be interested in taking over or merging with a US carrier if a second stage deal lifts ownership barriers: "In an open aviation area there is an definitely an opportunity - that's the big prize."
The BA boss rejected concerns that US authorities will call Europe's bluff over second stage talks, adding that he expected US carriers to lose their Heathrow landing rights if a further deal is not struck.
FAQ Implications
What does open skies mean?
From March next year, EU airlines will be able to fly to any destination in America and US carriers to any European destination, ending the current closed shop. It also means Heathrow's Atlantic gateway will be open to all US and European carriers.
Will it mean cheaper transatlantic travel?
Experts say it will lead to competition and therefore lower prices in business class, but they warn that flying economy is already cheap. BA believes predictions of a pricing bloodbath are "widely overstated".
Will British Airways and Virgin Atlantic lose their Heathrow slots?
No, but the Heathrow-JFK route, one of the most profitable in the world, will not be limited to the current four carriers - BA, Virgin, American Airlines and United Airlines. Heathrow is 98.5% full, but the open skies deal will prompt other airlines to make multi-million pound bids for take-off and landing slots.
Will it lead to airline consolidation?
Some deals will become more likely.
At present BA cannot buy Spanish rival Iberia because a Spanish-US treaty rules that only Spanish-owned carriers can fly from Madrid to New York. Open Skies changes that.