Flying the Liberal Skies

Flying Under the EU Flag. The most significant rule change will allow any EU carrier to fly to the United States from any EU airport (and any U.S. airline to any EU airport). Currently, transatlantic flights must originate in the carrier's home country (e.g., Alitalia may only fly from Italy, Iberia from Spain, etc.). In a globalizing economy, this rule has become increasingly burdensome. For example, Air France and KLM have merged, but its flights from France may only be marked Air France, while Netherlands flights may only be KLM. This will also help airlines that have truly transcended their national boundaries to become "European" airlines, particularly Virgin Atlantic, which has hubs in several non-British European cities; Virgin Atlantic service to the United States from Paris appears likely. Moreover, this could spur a round of European mergers, since flag carriers will not lose their transatlantic rights when bought out by another national carrier; Lufthansa and British Airways are frequently mentioned as European airlines looking to buy, and Iberia as one ripe for a takeover.

How this will affect competition on various routes depends on how tightly regulated each route was and the strength of the national airline. London's Heathrow Airport, where regulations restricted what airlines could fly to the United States, could see an explosion of new routes. Likewise for countries with national carriers that are considered weak: other airlines may well be looking to encroach on struggling Alitalia's profitable Italy-U.S. routes. On the other hand, the incumbent aviation treaty between Germany and the United States was already very liberal, so there may not be much change in routes to and from German cities. In other airports where one carrier is firmly entrenched, it seems unlikely that loosening restrictions would budge them. For example, it is hard to imagine many carriers being able to match KLM's service to Amsterdam.

Opportunity to increase international capacity is not the only way for carriers to benefit from Open Skies. More options for codeshares and joint-service routes are available. By combining forces with their transatlantic allies, airlines can offer a wider variety of destinations, unencumbered by international treaty.

All About Heathrow. Overwhelmingly, the story of Open Skies is a story of Heathrow. Although just one of London's five airports, it is the continent's largest and handles the most international traffic of any airport in the world. It is important as a global connector to other major cities and as a gateway to a major financial center. This puts it in very high demand and its slots—permission to take off and land—are limited. The incumbent aviation treaty that the United States has with the United Kingdom restricts which airlines may fly between Heathrow and the United States to United, American, British Airways, and Virgin Atlantic; other carriers must use one of the other London airports, depriving them of servicing the attractive international connections Heathrow offers to points across the globe. Kuwait Airways and Air India, which stop in London on their routes between their home countries and the United States, are also allowed to fly U.S.-Heathrow passengers due to specifically negotiated agreements. With London's status as a major financial and business center, business rates between the United States and Heathrow are notoriously inflated, often matching those seen for routes twice as long. Consequently, these routes are very profitable. A significant portion of British Airways' profits come from its protected transatlantic routes—and it could be the biggest loser from the new treaty. Indeed, objections from U.K. authorities pushed back the agreement's start date several months (to March 30, 2008) to allow Heathrow's new terminal to open first, in a bid to lessen British Airways' losses.

Open Skies will allow any U.S. or EU airline to fly between Heathrow and the United States, provided it can procure slots. Continental and Delta have already announced plans to add Heathrow service from their respective hubs of Houston and Atlanta. Finding slots will not be easy, however, as they are hard to come by and very expensive to buy. Some may turn to European alliance partners, who may be happy to eschew some of their own Heathrow flights—often hurt by low-cost rivals anyway—to be able to codeshare on more profitable transatlantic routes.

One further concession U.S. carriers secured is the right to fly nondomestic routes within the European Union, also known as cabotage. While it seems unlikely that any U.S. carriers would enter a European market already full of entrenched national carriers and low-fare startups, it would allow them to offer continuing service to further cities after a transatlantic journey, e.g., a flight to Lisbon with continuing service to Madrid.

An Unequal Agreement? The major point for dissenters of Open Skies is that EU airlines did not receive similar cabotage rights within the United States. For example, Air France can fly to New York with continuing service to Los Angeles, but it may not pick up further passengers in New York. Nominally, the language is the same, since U.S. carriers may not fly routes within one European country. Realistically, however, preventing U.S. carriers from flying within one small European country is quite different from preventing EU airlines from flying routes within the much larger United States.

Furthermore, the EU wanted a loosening of U.S. airline ownership regulations. Currently, U.S. airlines can be only 25% foreign-owned and must be controlled by American citizens. U.S. officials consider the rule an issue of national defense, as the military can use civilian aircraft in times of emergency. Most recently, the law has been used to delay the startup of Virgin America, an American version of the global Virgin brand of airlines. The regulation has long been a thorn in the side of the Europeans, and the inability to come to an agreement to loosen ownership rules is a major disappointment for them. EU regulators insist that ownership rules will be on the table during future liberalization negotiations.

The announcement of the treaty also came at a time when the European Union has been discussing bringing airlines into its carbon-trading scheme. Environmentalists fear a setback to that goal, as well as the harm to the environment caused by an increased number of aircraft crisscrossing the Atlantic.

Changes on the Horizon. Besides the aforementioned Heathrow flights, several airlines have started announcing their plans for more liberal Atlantic service. Ireland's Aer Lingus will start adding new U.S. cities to its route map. U.S.-Irish aviation treaties have included mandatory stopovers in the western Ireland outpost of Shannon, a holdover from when it was the first airport across the Atlantic and aircraft needed to refuel. These uneconomical stops will be phased out completely in time for Open Skies to go into effect. Britain's bmi, a carrier that flies several U.S. routes but has long been shut out of Heathrow, announced a deal with United to jointly operate several transatlantic routes, pending approval by antitrust authorities. Even low-fare carriers are talking about moving into the transatlantic market; Ryan Air's CEO has mentioned he would like to offer ultra-low fares to U.S. cities.

The liberalization movement may not end with Europe. Following the success of the European Open Skies negotiations, U.S. authorities are looking to begin similar negotiations with China.