'Open skies'

This week will see the biggest shake-up of transatlantic air travel in decades as the new EU-US 'open skies' deal comes into force on Saturday.

The open skies treaty, which took over 18 months to negotiate, aims to liberalise transatlantic air travel by increasing competition. Under the deal, any US and EU based airline will be able to operate to and from any airport, thus ending the traditional hold many national carriers have on their key domestic airports. 

However, the deal favours the United States:

• While US carriers will be able to fly within Europe and to other destinations beyond, EU airlines will usually have to begin and end flights at a single destination.
• Ownership of US airlines will remain restricted: foreign companies may acquire up to 49% of general stock in a US carrier, but voting shares will still be limited to 25% and key management posts restricted to US citizens, whereas foreign ownership in EU airlines is limited to 49% without voting restrictions.

UK impact

The United Kingdom, which takes 40% of all EU-US traffic, will be the most affected by the new regulation.  Transatlantic flights from Heathrow airport are currently restricted to four airlines: British Airways and Virgin Atlantic as well as United and American Airlines.  BA, concerned about the potential loss of its Heathrow monopoly -- it makes 60% of its operating profit from US routes and controls 40% of Heathrow's take-off and landing slots -- successfully delayed the introduction of open skies until after the opening of the new Terminal 5, of which the airline has exclusive use.

By contrast, Virgin hopes to compensate for the greater competition by offering transatlantic flights form other European airports, including Paris. 

Extra competition?

Although some carriers will be able to switch some of their intra-European Heathrow slots to transatlantic services and share them with US alliance partners, a significant boost in competition is unlikely in the short term.  While flexibility of operations and competition will increase, fares are unlikely to fall in the short term -- especially given soaring fuel prices -- although aggressive carriers such as BMI may be tempted to offer significant reductions.

Similarly, while access to busy airports may in theory be increased, this will depend upon obtaining take-off and landing slots. At Heathrow, these are scarce and expensive to acquire.

Moreover, the transatlantic market is saturated and growth is slow, still affected by fears of terrorism and increased security restrictions on in-bound US travellers. Growing pressure from the Green lobby may also depress future demand, if fares rise to meet demand for emissions curbs.

Most importantly for the EU, the ending of restrictive bilateral air service agreements will allow EU airlines to merge without losing access to the US market. This could encourage a much-needed consolidation of the EU airline industry, with the likely emergence of three main airlines: British Airways, Lufthansa and Air France-KLM.