EU set to fight US over air subsidies

A trade war between Europe and the United States over airline subsidies is brewing as EU ministers prepare to give extra powers to Brussels to fight Washington.

A meeting of European transport ministers next week is set to approve a deal allowing Loyola de Palacio, the European Transport Commissioner, to negotiate air deals on behalf of all EU countries. Until now deals have been struck on a country-by-country basis, which has favourednational "flag carriers" such as British Airways, Air France and KLM.

This arrangement was to be broken by the Open Skies agreement negotiated between the UK and US governments. However, the European Court of Justice ruled Open Skies was illegal.

The fresh deal, to be agreed at a meeting on 5 June, will allow the EU to negotiate with the US for all European landing rights, but let individual countries strike bilateral deals elsewhere.

A cautious Department of Transport official said there was a "better than 50:50 chance" that a deal would be agreed, but aviation industry sources are far more confident.

Giving the EU these powers will allow the European Commission to challenge the massive subsidies given to US airlines.

European airlines met last Friday to see what could be done about what they see as unfair competition.

Andrew Cahn, head of government affairs at British Airways, said: "We feel quite bitter that the US has chosen to provide a massive amount of aid for its airlines - the latest $3.5bn (£2.1bn) package coming on top of the $15bn of assistance given after 9/11."

They will press for the European Trade Commissioner, Pascal Lamy, to take up the cudgels. "This is predatory pricing by the US," said an aviation executive. "Trade retaliation is a blunt instrument, but they should use it."

Meanwhile emergency measures designed to protect Europe's airlines from the aftershocks of the Iraq war, terrorism and Sars could be grounded. The European Commission last month pledged to drop so-called "use it or lose it" regulations, which strip airlines of their rights to airport slots if they are not used 80 per cent of the time.

But industry sources are worried that the September deadline for approving the slots policy could be missed. This would lead to airlines being stripped of under-used slots.

A spokeswoman for British Airways said the airline had cut capacity by 5-6 per cent since March.

She warned that the recent cancellation of flights to Kenya, on the advice of the Government, meant that BA could fall below the 80 per cent rule on some of its slots.

The changes to the "use it or lose it" rules are tagged onto wider reforms of the European aviation industry.

Critically, they include controversial plans to ban airport slot trading, against the wishes of the British Government.

Some industry sources believe the European Commission has deliberately bolted on the "use it or lose it" proposals to the reforms in an attempt to steamroll a ban on slot trading though European Parliament.