Can 'open skies' really take off?

The prize for U.S. airlines is a chunk of the business from London's Heathrow

By CNN's Graham Jones

LONDON, England (CNN) -- British and U.S. government officials resumed long-standing talks this week on negotiating an "open skies" accord on free-for-all flying across the Atlantic.

Negotiators from the U.S. Department of Transportation met senior British Department of Transport civil servants on Monday in London with eagerness for a deal upped by a downturn in airlines' fortunes since September 11.

An agreement during full talks scheduled for November would allow U.S. carriers much more access into London's No.1 airport at Heathrow, more consumer choice and, hopefully for the public, lower fares.

It would also almost certainly mean success for British Airways in its bid for a giant link-up with American Airlines for which it has being trying to win approval since 1996.

A BA-American partnership would create the most powerful force on North Atlantic air routes -- and overtake deals being made between Lufthansa and United Airlines and between Air France and Delta Air Lines.

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The Air France-Delta alliance was cemented last Friday when France and the U.S. agreed to liberalise transatlantic services.

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Keenness for such deals by airlines both sides of the Atlantic has been sharpened by the suicide jet attacks on New York and Washington which brought a sudden drop in revenues and job lay-offs.

BA's CEO Rod Eddington said at the weekend that traffic was down on key transatlantic routes by 30 percent.

But experts are divided on the likelihood of a UK-U.S. "open skies" pact taking off.

The push by Britain to clinch the U.S. deal comes as the European Commission bids to cut out bilateral accords between individual European countries and Washington.

It wants to be the sole negotiator with the U.S. for international airline agreements on behalf of member states.

Eight European countries have been taken to court by the EC over transatlantic air traffic agreements they have with the U.S. -- the EU says they breach competition rules.

The European Court in Luxembourg is expected to rule in the spring in favour of the EU -- hence Britain's eagerness to get a deal now.

At the moment flights between Britain and the U.S. are controlled under the Bermuda agreement of 1977.

What it means today is that only four airlines -- two on each side -- are allowed to use London's Heathrow for transatlantic routes.

Right now British Airways, Virgin Atlantic, American and United have control of the most lucrative airline market in the world.

There are more air services to the U.S. from the UK than any other European nation and 40 percent of European passengers fly to the U.S. via the UK.

To some extent British Airways may seem foolhardy to want to dilute its dominance at Heathrow.

But experts say there are so few flight slots at Heathrow that the other U.S. big boys like Continental, Delta and Northwest will not be able to mount major challenge. The airlines themselves admit they fear the same thing.

The prize for BA is antitrust immunity in the U.S. which would allow it and Dallas-based American to operate as a single company on transatlantic routes.

Rivals fear British Airways could increase its transatlantic dominance

The two companies would be able to share revenues and profits as well as co-ordinating networks, schedules, pricing and code-sharing (selling seats on each other's planes with their own flight codes).

A BA partnership with American would give the duo a 60 percent stranglehold of UK-U.S. traffic.

Rivals say that together, American Airlines and British Airways have market shares exceeding 50 percent on seven U.S.-Heathrow routes that account for two-thirds of all U.S.-Heathrow traffic.

They says the two airlines also operate monopoly services on at least nine U.S.-London and 16 U.S.-UK routes.

In June three U.S. carriers -- Delta, Continental Airlines and Northwest Airlines -- wrote to U.S. Transportation Secretary Norman Mineta to warn against a collapse of competition on transatlantic routes if the UK-U.S. open skies deal went through.

They warned that the proposed BA-AA alliance would create "the most powerful and anti-competitive alliance in international aviation history."

Unless the U.S. took "decisive" steps to ensure "significant" access at Heathrow, they said, "open skies between the U.S. and UK will damage competition and harm U.S. consumers."

Two other players, the UK's third biggest airline BMI British Midland and the U.S.'s United meanwhile called for anti-trust immunity at the same time and on the same terms of what was granted to BA and American.

The U.S. insists that an "open skies" deal is a pre-condition for granting anti-trust immunity.

It happened in the 1990s with Germany (Lufthansa-United alliance) and the Netherlands (KLM-Northwest) and now after last week's talks is due to happen with France (Air France-Delta).

BA meanwhile clearly reckons that a UK-U.S. "open skies" agreement would beat anything the EU negotiated on its behalf.

The key question would be how much capacity at Heathrow BA would have to give up.

What is clear is that Britain and the U.S. have different ideas of what "open skies" means.

For the British government, according to its own sources, it does mean opening up airports and slots with no restrictions on access or airline ownership.

But to Washington it means rather less than that.

Says Rod Learmount, Operations Editor of Britain's Flight International: "America's definition of open skies is that we can come in and do what we like, we want access via Britain to the rest of the EU -- you can't have access to the U.S. internal market."

Among strict U.S. controls are its "Fly America Act" under which federal servants and all service personnel must fly by U.S. airlines and America's insistence the maximum stake overseas airlines can have in U.S. carriers is 25 percent.

On these and cabotage -- reserving internal flights to U.S. carriers -- the U.S. government has so far failed to budge, saying domestic legislation would be required and Congress would be unlikely to surrender American commercial advantage.

There are also restrictions on "fifth freedom rights" (as they are called under the original 1944 Chicago convention on global civil aviation) for cargo flights.

Charter airlines, who want improved access to the U.S. and the chance to run two-stop flights to the U.S. and the Caribbean, are also seeking freer access.

In December 2000 the then UK Transport Secretary John Prescott said: "U.S. protection of its domestic market is not compatible with full liberalisation and we will continue to impress upon the U.S. the benefits of full competition."

A British Airways spokesman told CNN: "We have long been an exponent of a new 'open skies' air services agreement which allows viable access to the U.S. hinterland for UK carriers through codesharing and an immunised alliance.

"We remain committed to open skies between the UK and U.S. as long as it is achieved on a fair and equal basis and that includes the granting of anti-trust immunity for our alliance with American Airlines.

"We are working closely with the regulatory authorities to gain the necessary approvals for our alliance and help create a positive climate for open skies between the United States and United Kingdom, giving passengers a far greater choice of carriers."

Says Learmount: "These bilateral talks have been going on for the last 15 years and at a pretty high level.

"In the last 15 years what America sees as open skies has been America's position.

"The problem is that the British definition on open skies is completely different.

"The talks are getting nowhere. Nothing will happen."