q Skies Open in One Year, Then What? – Cranky Flier

Skies Open in One Year, Then What?

Government Regulation

As I mentioned yesterday, the airline world is abuzz about the newly agreed-upon Open Skies deal between the US and the European Union (EU). The agreement takes effect in March 2008, but what exactly does it mean?

EU-based airlines can fly from any EU airport to any US airport

EU-based airlines can fly from any US airport to any other country (if that other country approves)

EU-based airlines can NOT fly between any two airports in the US (also know as cabotage)

EU-based companies will continue to only be able to own up to 25% of the voting shares of a US-based airline

US-based airlines can fly from any US airport to any EU airport

US-based airlines can fly from any EU airport to any other country (if that other country approves)

US-based airlines can fly between any two airports in the EU

US-based companies can own up to 49% of EU-based airlines

As you can see, the US was unwilling to give on foreign ownership of US airlines and on cabotage. As part of this deal, a second round of negotiations to address these issues must start within 60 days of the signing on April 30. If a deal can’t be reached on changing these rules by 2010, EU countries can petition the EU to repeal some of the open skies provisions. Hopefully by that point, a new administration in the US will lead to liberalized rules that move toward true open skies.

Now, those are the details, but let’s talk about what could actually happen because of this.

Bye, Bye Bermuda II

The biggest sticking point for the EU in the past has been access to Heathrow airport in London. I went over the insane Bermuda II rules that have governed US – UK travel for years here, but fortunately that agreement will disappear when this one goes into effect. This means Heathrow will be open for flights to the US from any airline in the EU or US. Of course, it’s still a congested airport and obtaining slots won’t be easy, but it’s possible.

Continental has already applied for authority to fly from Houston/Intercontinental to Heathrow in addition to all the Gatwick service they already have. I expect this to be the first of many applications from US airlines.

Delta (DL) is probably kicking themselves right now, because they spent a bunch of money on obtaining the soon-to-be irrelevant New York – London authority from United (UA) just last year. My friend Eric Olesen, former PlaneBusiness BB moderator and longtime industry pundit, did some math and put the high cost into perspective:

Just for fun, I did some math against what DL paid last year for UA’s NYC-LON authority. The sale price was $13M plus $2M per year assuming open skies didn’t materialize.

Based on just the $13M price, a November 16, 2006 startup, and a potential March 1, 2008 implementation for Open Skies, DL will have held the rights for a whopping 15.5 months, or approximately *$28,000 per day* just for the rights to serve London 465 days earlier than they could have under the new deal.

Better yet, UA effectively re-enters the market either [through codesharing on bmi flights] or on their own, wiping out whatever value there was for DL having eliminated them as a potential competitor.

Ouch. Now, I looked and the agreement actually goes into effect on March 30 (not March 1), so it’s slightly cheaper than that, but still . . . ouch.

I’d be surprised to see United go back in on their own, but bmi seems like a given to me. They are really one of the biggest winners here. The UK-based Star Alliance member has a good number of Heathrow slots but they haven’t been able to fly from there to the US in the past thanks to Bermuda II. I bet that Star Alliance members will be happy to see them in Heathrow – JFK and probably other markets as well.

BA/AA, Hooray?

Then there’s British Airways. They clearly aren’t happy that their little exclusive club is being disbanded, but they could be big winners here in the end. British Airways and American Airlines have been trying to set up a full partnership for years. Heathrow restrictions being lifted means that this should now be able to sail through. That should mean that you can earn AAdvantage miles when you fly BA over the Pond and vice versa. There should also be full codesharing. It should make oneworld a much stronger alliance and could result in a lot of new flights between the two countries.

British Airways has even suggested they’d want to fly from New York to the West Coast on their own metal. As I mentioned above, that’s not allowed yet but it is part of the next round of negotiations. I actually wouldn’t be surprised to see this if they have planes sitting on the ground in New York for a long time right now. It may not make sense to fly those planes beyond New York before returning to London if you can’t carry US passengers, but if you can it changes the story. Still, I don’t think they’re that enthusiastic about flying domestic flights. I think they just want to keep the pressure on the US to further liberalize or they’ll plan on trying to take back their Heathrow exclusivity in 2010.

The End of the Shannon Stop

For years, Ireland has had an obnoxious rule that made airlines serving Dublin have the same number of flights to Shannon. This meant that some airlines would make a stop in Shannon instead of having two separate flights because there was rarely enough demand for two separate flights. That just inconvenienced people who wanted to fly to the much more desirable market of Dublin and has artificially kept the number of flights lower than you would expect. The rule has been relaxed over the years, but this agreement will mean the end of the rule entirely.

Aer Lingus celebrated the announcement by announcing new service to San Francisco, Orlando, and Washington/Dulles. These start this year so it has nothing to do with the elimination of the rule, but I did notice that while they did specifically call out Dublin – San Francisco, the other markets didn’t mention the destination in Ireland. Maybe Shannon will be on the roster until the rule is phased out next March.

Fly United From London to Paris

Now that US airlines can fly within Europe, will we see more of it? I highly doubt it. You may remember seeing United 727s flying around Europe for a short time and of course Pan Am ran the German domestic flights to Berlin back in the day as well. Those flights just don’t make sense for US carriers anymore, and it probably won’t happen. If it does, it probably won’t last long.

Volez Virgin Atlantic de Paris à New York

I don’t speak French, but I’ve been told by my friends that the heading makes sense. Virgin Atlantic says they want to start flying to the US from cities throughout Europe now. I wouldn’t be surprised to see them make New York a hub from which they’ll fly to big European cities. It could be interesting. Other EU airlines could do this as well if they’d like, but I’m not sure anyone else would be as interested as Virgin seems to be.

Bottom Line

There is no bottom line here. This is a big deal, and I only wish it went further with respect to foreign ownership and cabotage in the US. Hopefully we’ll get there and then it will truly be an open skies agreement. You know that every airline has its planners hunkered down right now trying to figure out what makes sense for them in this new agreement. I’d expect a flurry of announcements over the next few months in anticipation of the official effective date of March 30, 2008.

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5 comments on “Skies Open in One Year, Then What?

  1. I remember flying Delta FRAnfurt to PRAgue as well as FRA-ATHens in the 90’s. Czech republic wasn’t part of EU but Greece was. How come this was allowed ?

  2. IIRC, those were legacy rights from when they bought Pan Am’s European network. This goes all the way back to WWII. After the war, the Allies had basically dismantled any German air operation. That didn’t mean there wasn’t demand, however. So Pan Am operated what they called IGS, Internal German Service. Those rights are probably still there, but nobody wants to use them anymore.

    If anyone has more info on whether this is right or not, I’d appreciate the comment.

  3. As time went on, PA got a few fifth-freedom rights to places like THR, WAW, VIE, ZAG, PRG, BUD and ATH, but that’s entirely separate from IGS.

    IGS’s main existance was due to the fact that Lufthansa was prohibited from flying into Berlin after the war. So, IGS’s route structure was intended to provide domestic service on routes out of TXL to HAM, FRA, MUC, NUE, and STR, but they also had some point-to-point service in markets not involving TXL at one end or the other. IGS’s role died along with the fall of the Berlin Wall and the subsequent reunification.

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