Long haul to open skies

When talks on transatlantic flights reopen this week the language will be colourful, says Ian Griffiths

On Wednesday morning around 30 people will file into a room at the Department of Transport's offices in Marsham Street and begin to talk about aeroplanes. More specifically, they will talk about the planes that fly between Britain and the United States. To be absolutely precise, they will be discussing a new bilateral agreement setting out the terms and conditions under which air travel between the two countries is conducted.

These discussions have been taking place intermittently since 1978 when the current air agreement was signed. It is called Bermuda 2 and is something of a sore point with the US. The Americans regard it as a heinous impediment to free trade and are desperate to replace it with an open skies agreement which is liberal, equitable and, just by chance no doubt, more beneficial to the US.

The prime source of US disquiet is the restrictions at Heathrow airport which allow the US just two carriers: United and American Airlines. Heathrow is a jewel in the aviation crown. It is the fourth largest airport in the world but, more importantly, it offers more flights to more overseas destinations than any of its peers.

Heathrow is the hub of connections to the lucrative transatlantic routes. As the most westerly airport of any significance this side of the Atlantic, it is the natural connecting point for travellers from Europe and the Near East who do not have direct connections to the US. Around 9 million passengers a year travel between Heathrow and the US. Many of those are the much sought-after premium fare travellers who are the lifeblood of the airline industry.

It is not surprising then that Heathrow is the airport of choice for any carrier with transatlantic ambitions. Neither is it surprising that the British Government has been reluctant to grant a free-for-all at Heathrow. That is partly self interest and partly a reflection of the capacity constraints that rule out suitable additional take-off and landing slots for all the carriers that want to provide transatlantic routes.

For years the Americans have been trying to prise open Heathrow and for years the British have kept it firmly shut. But now, for the first time, there is an incentive for Britain to contemplate a more relaxed approach. That incentive is the proposed alliance between British Airways and American Airlines. If it is approved it will create perhaps the most powerful airline grouping in the world. In particular it will have an awesome presence over the Atlantic with a 60 per cent share of the London-US market. That dominance has unnerved rival carriers at Heathrow - United and Virgin Atlantic. Some US carriers have identified an opportunity to secure some advantage from the proposed alliance and weighed in with their opposition.

The concerns raised against the BA/American alliance are numerous and indicate the shrewdness of the deal being proposed. Unfortunately those concerns reflect both the hopes and fears of the various airlines, making it difficult to divine where the real problems lie. The confusion is compounded by the clear linkage between the alliance and issues of open skies and competition.

It therefore falls to David Coltman, senior vice president of marketing at United Airlines, to address these issues objectively. He speaks for the largest airline in the world. United is making a lot of money, investing heavily in a new fleet, improving its service and securing a bigger share of the high-yield end of the business. It has its own alliance with Lufthansa, which means itcan say with sincerity that it is not afraid of competition.

"Our starting point is that alliances should happen and will happen because that is what the consumer wants," Coltman says. "But consumers want them to be competitive not monopolistic." Coltman argues that the combination of Heathrow's geographical position and its capacity constraints create a potential monopoly.

"Our view is that if the alliance is allowed to go ahead without any restrictions you will create a monopoly in the London market with the benefits of competition going east of the Channel where there will be a battle to feed customers into Heathrow," Coltman says. "We are saying by all means let the alliance go ahead but you have to make sure there are significant concessions to create competition at Heathrow."

Those concessions involve surrendering slots and providing facilities. United and other airlines insist that BA and American must be forced to give up prime transatlantic slots to satisfy the demands of incumbent and incoming airlines. But slots are just one part of the process. United points out the importance of securing facilities, particularly for premium passengers, which are an essential part of improving overall customer service.

BA and American have argued in public that they are not prepared to give up slots. However, with the deal still being scrutinised by the British competition authorities, there is a distinct sense that concessions, ultimately, will be made.

Coltman says the allocation of slots among airlines will be critical. With five US carriers limbering up to enter Heathrow, and both Virgin and United looking to increase their slots, there will be plenty of demand but not a great deal of supply. It has been argued that preference should be given to new entrants but Coltman cautions against such a simplistic approach.

"You can divide and rule simply by having a whole lot of carriers each with a small share," he says. "We know that once you have above 30 per cent of the slots you are in a virtuous circle which should bring you maybe 34 per cent of the traffic. If you have a 10 per cent share and you are clever you can get 7-8 per cent of the traffic. If you do not have the presence and the spread of slots then you do not have the ability to market to a sophisticated consumer."

United has cannily resisted the temptation to set out what it wants in the way of additional slots, leaving BA to guess what these may be. However, Coltman paints an aggressive picture of what United would like to do at Heathrow.

He says: "We would like to have the capability to create a competitive hub structure in London. We would like to have a dedicated facility for us and our alliance partners. We would like the ability to increase our transatlantic service as we gain more feed from Europe. We would like to be a serious competitor to BA and we believe that on a number of routes we can be very effective against BA/American. I believe we would have little difficulty in so doing but we need the facilities and the slots."

This will be music to the ears of US negotiators sitting opposite their British counterparts in Marsham Street this week. The theory of open skies is that it liberalises the aviation market, encourages competition and benefits the consumer.

The theory is fine but the BA/American deal somewhat clouds the picture. The negotiations are bound to be complex and, with so many vested interests at stake, it will be difficult to find consensus among the airlines which are allowed to act as observers at the talks.

Virgin, for instance, would prefer the BA deal to be decoupled from the open skies discussion. The US carriers want access to Heathrow but they do not want in the process to create a BA/American monster that can never be tamed. BA, whose ambitions to dance with a new partner are the catalyst for progress on a new aviation agreement, wants the deal but not at a price which undermines its basic commercial logic.

Quite what will emerge, then, from the Marsham Street conference is uncertain. That the two sides are still talking is encouraging. However, with the regulatory authorities in the US still to have their say on the BA/American alliance and the UK authorities still undecided on how to respond, a definitive agreement is unlikely to be concluded this week.

One thing is certain; there cannot be open skies while Heathrow remains closed. Without open skies there can be no BA/American deal. Without a BA/American deal there is no impetus to open Heathrow.

Marsham Street may not be a glamourous location but the language will no doubt be disproportionately colourful.

What the airlines want

BA/American Approval of proposed alliance.

Virgin Segregation of BA/American deal from open

skies.

Cabotage - the right of British airlines to pick up and transport passengers within US.

No compromise on fifth freedom rights which allow US airlines to pick up passengers in Britain and carry them to a country other than the US.

Increase in stake British airlines can hold in a US carrier.

Competitive regime.

United Open skies using the "US template" ie no

cabotage for British carriers in the US but fifth freedom right for US in the UK. Sufficient slots and facilities to compete with BA/American.

USAir Independence from BA which owns

25 per cent.

Access to Heathrow.

Other US Access to Heathrow.