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Clearing the Transatlantic Air

Prepared by: Lee Hudson Teslik
April 9, 2007

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For transatlantic jetsetters, the days when Paris meant Air France and Alitalia carried Americans off on Roman holiday may soon be a thing of past. An “open skies” pact between the United States and European Union, recently agreed upon (IHT) by EU ministers, is set to obliterate long-standing restrictions on Europe’s national airlines. Should U.S. officials sign the deal later this month, as expected, an intense period (Economist) of reshuffling and consolidation among European airlines may result.

One of the most significant (BBC) of the pact’s provisions allows any EU airline to fly from any European city to any U.S. city, and vice versa. Current requirements limit airlines to transatlantic flights from their home country—restricting the bulk of operations for many European airlines to one or two main cities. Analysts say the deal would most benefit (Bloomberg) the major European and American carriers that stand to gain access to London’s Heathrow airport, Europe’s main gateway to the United States. This increased access would, in turn, spike competition for transatlantic air carriers and reduce fares across the board.

The pact could also prompt a flurry of airline mergers. Currently, if one European airline buys another, it risks losing the U.S. landing rights of the company it purchased. Fears about landing rights unraveled (AeroWorld) a proposed 2000 merger between British Airways and the Dutch carrier KLM. Anticipation that these restrictions might be lifted kicked off a wave of merger rumors involving many of Europe’s smaller airlines. One of the first carriers snapped up could be Spain’s Iberia—the U.S. private investment firm Texas Pacific Group is reportedly considering a $4.5 billion bid (Spiegel) for the airline. The Economist says Austrian Airlines, Scandanavia’s SAS, and Poland’s LOT are also logical takeover targets.

This would all be good news for continental European airlines, particularly those without preexisting open-skies arrangements with the United States (sixteen of the twenty-seven EU countries currently have such agreements). But the deal has its enemies. British air carriers, for instance, bristle at possible encroachments (MarketWatch) on Heathrow, their most profitable turf. On the American end, officials refused to lift (EiTB) a regulation forbidding European airlines from owning more than 25 percent of any American air carrier. Critics slammed (WSJ) U.S. legislators for holding out on this issue, and more generally for refusing to agree to a more sweeping program of liberalizations.

Still, grudgingly or not, the deal’s main players are preparing for a limited version of the agreement to go through. Virgin Atlantic—one of two British carriers currently operating full transatlantic service out of Heathrow, and thus one of the airlines with the most to lose from the deal—says it hopes to capitalize by launching operations in several continental European cities. Virgin is also hoping to make inroads on the U.S. market with its new venture, Virgin America. “It’s a good day (BBC) for the traveler,” said Virgin’s chairman Richard Branson. Commendably upbeat, though he didn’t say it was a good day for Virgin.

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