Open skies to lead to airline expansion but may threaten smaller airports

LONDON (AFX) - The 'open skies' aviation deal, which was last week unanimously backed by European Union ministers, could lead to a spate of airline acquisitions and new route launches but may threaten the future of Britain's smaller regional airports.

A recent European Commission study claimed the accord would lower air fares and increase annual EU-US traffic by 26 mln passengers to about 73 mln over five years.

And while the deal will challenge British Airways' (BA) dominance at Heathrow Airport -- Europe's busiest hub -- the accord has been welcomed by other British carriers who see a raft of opportunities coming about as a result of the agreement.

Under the newly agreed plan, all EU-based airlines will be allowed to fly from any city within the EU to any city in the US, and vice-versa. However, while US carriers will get free access to European airports, EU carriers will not be allowed the same rights on domestic routes within the US.

Virgin Atlantic, the UK carrier controlled by billionaire Richard Branson, said the deal was good for the consumer, adding that it would aid its expansion plans and create hundreds of new jobs.

"Consumers should benefit from fully open skies between the EU and US by 2010. Virgin Atlantic is actively looking at expanding in Europe, offering flights from key European hubs such as Paris, Frankfurt, Amsterdam, and Madrid to New York," Virgin Atlantic said in a statement immediately after the terms of the deal were unveiled. "Such a move would create 500 jobs and operations would begin within two years."

Irish flag carrier Aer Lingus Group PLC, meanwhile, hailed the deal as a positive development for Irish aviation and has since confirmed plans to kick off three new long-haul services to the US before the end of the year.

San Francisco, Orlando and Washington Dulles will become new Aer Lingus destinations, with services from Dublin to San Francisco expected to start in October. The expansion will increase Aer Lingus' US destinations from four to seven and is likely to lead to significantly increased traffic between Ireland and the US.

Business-class-only carrier Silverjet is also eyeing expansion on the back of the deal.

"Silverjet has identified 51 routes that it could operate on, including routes from the European aviation area to the US," a Silverjet spokesman said in a statement. "However, no specific route plans beyond the introduction of a second plane on the London Luton-New York Newark route have been announced."

Bmi, the UK's third-largest airline which is second only to BA in terms of Heathrow slot ownership, said the agreement would act as "a prelude to global liberalisation of air transport."

The airline's chief executive Nigel Turner said he was delighted that the deal would lead to the "long-overdue scrapping" of the Bermuda II agreement, which has limited the number of airlines permitted to fly between Heathrow and the US to four.

As it stands, United Airlines, American Airlines, BA and Virgin Atlantic are allowed to fly routes between the US and Heathrow, which is the world's busiest airport by passenger numbers. This, however, will change when the new agreement takes effect in March 2008.

As such, Turner said he expects to announce details of bmi's first US services from Heathrow shortly. This expansion is likely to start with three flights a day, possibly to Chicago, Charlotte, North Carolina or New York.

Furthermore, bmi plans to buy another three Airbus A330 planes to service the routes, with the airline looking to add further US routes in the future.

According to bmi, the cost of business-class services would fall significantly if there were more airlines competing on UK-US routes. Business class flights to the US from other European destinations are up to 50 pct cheaper than the equivalent trips from Heathrow, because of greater competition.

Last week's decision has led to press speculation that Virgin Atlantic would renew its interest in acquiring bmi. However, a bmi spokesperson told AFX News in an email statement that "bmi is not for sale regardless of what line Virgin keeps trotting out."

Earlier, Virgin spokesman Paul Charles said: "We've always said that Virgin Atlantic, together with bmi, would be a natural combination and bring many benefits to consumers. It is up to bmi to decide on its future structure and strategy. In the meantime, Virgin Atlantic continues to watch developments involving several airlines in the industry worldwide."

However, Douglas McNeill, a transport sector equity analyst at stockbroker Corporate Synergy, believes bmi is likely to be snapped up sooner rather than later.

"Bmi says it's not for sale but it's a far more attractive asset now than it was a week ago and the price will have therefore gone up," McNeill told AFX News. "Bmi is a relatively small player but on a long-term basis I think it's likely that it will change hands."

BA also played down reports that last week's agreement would prompt it to bid for Spain's Iberia Lineas Aereas de Espana SA.

"We enjoy a very good relationship with Iberia, and there has been no change to that," a BA spokeswoman said. "The aviation treaty won't make any difference."

Corporate Synergy's McNeill is sceptical about BA's interest but claims the British carrier would likely make a move for the airline if a competitor showed a serious interest in Iberia.

"I doubt [BA chief executive] Willie Walsh will want the hassle of acquiring an integrated Iberia anytime soon," said McNeill.

"That could always change if someone else makes a bid but I think BA would be relaxed if a private equity house makes a bid. Ultimately though, I doubt Walsh would want to see Iberia fall into the hands of a competitor."

The Independent on Sunday newspaper yesterday reported that private equity firm Texas Pacific is also stalking Iberia, while Spain's El Pais newspaper said that Germany's Deutsche Lufthansa and a Spanish asset management company had all expressed interest in Iberia.

Despite the positivity surrounding 'open skies', some UK government officials are said to be concerned that airlines such as bmi will switch their Heathrow take-off and landing slots from routes serving UK regions to US routes in search of higher revenues.

They believe this could threaten the economies of regions such as the north east of England and Northern Ireland by reducing direct and transfer traffic.

Bmi's Turner has already said he expects to switch domestic routes to the US when the open skies deal comes into effect next spring.

"Inevitably there will be some reduction in short-haul flying," Turner said, adding that increases to air passenger duty would mean UK-based regional routes would be the most likely to be re-allocated.

He did, however, maintain that the airline's strategy was "to maximise" its slot portfolio at Heathrow "whilst taking into account areas of future growth in the existing route network."

Corporate Synergy's McNeill believes some smaller UK airports could suffer as a result of 'open skies' but doesn't see it being a major issue.

"I think there's plenty of supply in the airline market these days and if bmi moves out of those [smaller] markets then I think you will find other carriers - particularly low-cost carriers moving in," said McNeill. "The vulnerable places are the relatively economically inactive spots such as the north east, Northern Ireland and possibly some of the west coast Scottish routes as well as some of the smaller English airports around the Midlands."

BA is also planning to shuffle its routes by moving the three US destinations now served from Gatwick to Heathrow. The first, next summer, will be its twice-daily flight to Houston, with services to Dallas and Austin set to follow.

BA has slammed the phase one deal, which, as written, is valid for two years. A second phase of the treaty will be voted on in 2010 but should all parties not agree on the second phase, the skies would be 'closed' once again.

The second phase includes one of the more contentious sticking points in the open skies debate -- easing US regulations on foreign ownership of domestic airlines.

"With the EU having given away their most valuable negotiating asset -- Heathrow -- the UK government must stand by its pledge to withdraw traffic rights if the US does not deliver further liberalisation by 2010. Nothing short of an Open Aviation Area by 2010 will be acceptable and we want talks on the second stage to achieve this to start immediately," said Walsh.

"This means delivering a true open aviation area under which airlines from both sides would have free access to each others' market without restrictions and where it will be possible for a US airline to be 100 pct owned by investors from the EU and vice versa," he added.

In the face of BA's stinging criticism of the deal, Downing Street defended the accord, saying it was "the best possible deal at this stage".

A spokeswoman for UK Prime Minister Tony Blair said the deal would benefit UK consumers.

"The prime minister has been concerned that we get the best possible deal at this first stage and believe that that is what we have got," she said.

"It's a good deal for UK interests as a whole. Passengers will benefit from increased competition, lower fares and more convenient services."

She rejected criticism from the Transport & General Workers' union which said the EU had caved in to US pressure and Britain had been forced to "make the best of a bad deal".

"We would reject that position and what we have got today is a very clear timetable which sets out the direction for getting to the full aviation area," she said.

Date posted: 27-Mar-07