Judgment opens door to EU airline mergers

Open Skies: European Court of Justice declares bilateral air traffic deals and ownership rules illegal

A landmark European Court judgment yesterday brought predictions of a wave of airline mergers that could halve the number of national carriers in the EU and pave the way for cheaper fares on transatlantic services.

The European Court of Justice ruled that eight EU member states, including the UK, had breached European law by signing agreements with the US over landing rights. The court also ruled that clauses restricting the ownership and control of national airlines were incompatible with Community law. This opens up the possibility of UK carriers being permitted to take over other EU carriers and start serving US destinations from Continental airports and vice-versa.

The judgement is a victory for the European Commission, which has long argued that it should negotiate all deals between the EU and the US on a multi-lateral basis, and was hailed as an "historic" step towards an European-wide "open skies" deal. But it leaves national governments open to new court action from those denied slots and national flag carriers in legal limbo.

Although the European Court did not rule that Brussels should be given powers to talk to Washington, it did say that the current bilateral deals struck by member states with the US are illegal because they restrict takeoff and landing slots to airlines from the host country. Under European law member states cannot discriminate against companies from other EU countries. At present the UK bars French and German carriers from flying to the US from British airports and vice versa.

The EU Transport Commissioner Loyola de Palacio described it as an "historic judgment" which will have "positive consequences for the European aviation sector" by helping bring about a full "open skies" deal. "We can see that there are 12 flag carriers [in Europe] with this global international vocation. Perhaps we won't be able to keep all 12," Ms de Palacio said.

"The logical trend on the market will mean that there will have to be a reduction in the number of airlines with a global vocation. I don't know whether there will be six, seven or five, the market will decide that," she added.

Sir Richard Branson, the chairman of Virgin Atlantic, said the ruling presented an "historic opportunity" to negotiate a true open skies deal with the US. "This decision will forever change the landscape of the US and Europe's aviation industry," he said.

British Airways also welcomed the ruling. Andrew Cahn, director of government affairs at BA, said: "This is good news because it will give the EU the muscle to negotiate more liberal arrangements with the US. I also see it leading to ... consolidation across Europe."

The judgment appears to dash bmi British Midland's hopes of a UK-US "mini-deal" that would allow it to start services from Heathrow to the US – a market controlled at present by just four carriers. But Tim Bye, bmi's general counsel and government affairs director, insisted that this was just "wishful thinking" by those who wanted to preserve the status quo. He said bmi expected the Government to continue to press for liberalisation of the restrictive US-UK agreement, Bermuda 2.

Ms de Palacio called on member states to give her the mandate to strike a single aviation trade pact with the US, making it possible for an EU airline to fly from any European city to a series of US airports. But analysts said that national governments may prefer instead to rework their bilateral deals with the US in a way that stops discrimination against other EU carriers.