On March 27, London's Heathrow Airport opened its new, state-of-the-art Terminal 5 — an upgrade long overdue for what has been considered one of the world's least favorite airports. But opening day did nothing to improve the travel hub's image, as computer and baggage foul-ups caused countless delays and cancellations. And even when flights finally began running normally, more than a week later, British Airways announced it would not move its long-haul services to Terminal 5 until June — a delay of more than a month.
Enjoying a smoother debut, the long-gestating Open Skies Agreement went into effect on March 29. And while British Airways was moving some flights into the Terminal 5, a number of other carriers were moving into the space BA left behind, eager to grab some transatlantic business.
The rush for Heathrow slots is just one of the consequences of the aviation agreement between the European Union and the United States called Open Skies. The deal permits EU and American airlines to operate to and from all of each other's airports for transatlantic flights, replacing a regimen of bilateral deals between countries and carriers.
According to Jacques Barrot, vice president of the European Commission in charge of transport, the agreement encompasses about 60 percent of the world's air traffic and could create some 80,000 jobs, split between the EU and the U.S.; a reduction in airline ticket costs for both individual and business travelers that “could be worth up to 12 billion euros in economic benefits” over five years; and the possibility that transatlantic passenger numbers will increase by 26 million within five years.
But challenges remain. The price of jet fuel in mid-April was up 70 percent from the same time in 2006, so the hoped-for savings in airfare will not come in the near future. And the agreement that took effect in March is part of a broader deal. Phase 2, which would expand rights and routes for European carriers in the U.S., is proving far tougher to negotiate, and could wipe out the whole accord.
Wait and See
With so much promised by Open Skies advocates, when will travel managers, meeting planners, and individual consumers see the benefits?
A poll of members of the Association of Corporate Travel Executives, taken by ACTE exclusively for Beyond Borders, shows that most are in a wait-and-see mode. Sixty-two percent of respondents said they want to see how Open Skies works before making changes to their corporate travel programs. Twenty-one percent believe it will provide great benefits to business travelers, while 12 percent think it will provide more travel options but will have no effect on airfares. Only 8 percent were ready to start negotiating with other carriers.
The lukewarm response doesn't surprise ACTE President Richard Crum, who in his professional life is president of AirPlus International North America. “The discussion about Open Skies goes back a long way, so there's a little fatigue about the issue — and a question about what it really means. And with the economic slowdown, people are more concerned with controlling their programs as things stand now.”
But Kevin McGuire, president of the National Business Travel Association, is optimistic. “We're talking about additional routes and competing airlines, with the possibility of a reduction in price in business and economy class, and improved service levels,” says McGuire, travel manager, intercollegiate athletics, for the University of Texas at Austin.
The Heathrow Grab
“It's the most important business airport in Europe,” says Patrick Murphy, a partner with airline industry consultants Gerchick-Murphy Associates, Washington, D.C. “So the most obvious impact on business travel is the opening up of service in and out of Heathrow.” Those flights previously were governed by the Bermuda 2 agreement, which allowed only British Airways, Virgin Atlantic, American, and United to fly between Heathrow and the U.S.
But even with Open Skies in place, getting in to Heathrow remains a challenge. Slots are scarce and incumbent carriers have grandfathered rights to their places. Carriers like Aer Lingus and Alitalia, in fact, have begun selling some of their Heathrow slots at a premium. while airlines like Delta, Continental, and Northwest gain access through slot exchanges with alliance partners. (At press time in late April, Delta and Northwest were awaiting regulatory approval of a merger deal they had announced on April 14.)
Northwest, through its partnership with KLM, now flies into Heathrow from Minneapolis-St. Paul and will add flights from Detroit and Seattle. Delta, partnering with Air France, is flying into Heathrow from New York and Atlanta (while Air France is operating daily between Los Angeles and Heathrow). Continental plans flights from Newark and Houston.
“In terms of corporate customers, Heathrow is key,” says Dale Eastlund, director, Carlson-Wagonlit Travel Air Solutions. “Many corporations have offices near Heathrow. Now you're seeing a more competitive landscape. Airlines may become more aggressive with pricing when negotiatingwith these customers,” McGuire notes.
A New Airline in the Mix
While the moniker OpenSkies implies that British Airways' new subsidiary is closely tied to the Open Skies agreement, it is meant to be more than that, says Managing Director Dale Moss. Set to offer premium service, the airline's so-far single plane, a Boeing 757, was reconfigured with nearly half its 160 seats eliminated. A second jet will be ready this summer. The retrofitted jets will have a three-class, 82-seat configuration. “Biz” class has 24 seats that convert into six-foot flat beds, “Prem+” class will offer 28 seats, and “Economy” will have 30 seats. OpenSkies will start slowly, with service between New York and Paris. Other European destinations — Moss mentions Brussels, Frankfurt, Munich, Barcelona, Madrid, Milan, Zurich, and Geneva as possibilities — will be added as more jets join the fleet.
Hoping for a Fare War
Cindy Heston, worldwide travel manager for Thomson, a video technology company headquartered in Paris, says she's “already seen some improvement in pricing” that she believes is related to Open Skies. “More competition is simply a good thing,” says Heston, who heads an office that handles both meeting and transient business travel for 30,000 employees around the globe.
Look at the history of airline deregulation for an idea of how Open Skies might affect pricing, says ACTE's Crum. According to the Air Transport Association of America, the inflation-adjusted cost of domestic air travel has dropped by 50 percent since deregulation, from 8 cents per mile to 4 cents per mile today, in 1978 dollars. “When you have less regulation and few entry barriers, you are going to see an overall reduction in prices,” says Crum.
But not right away. “I don't think you'll see a lot of pricing issues resolved until all the competition is in place,” says NBTA's McGuire, which could be years away.
On May 15, negotiations started on Phase 2 of Open Skies, which would go into effect in 2010. Under consideration are issues relating to “cabotage” rights in the U.S., allowing EU carriers to pick up passengers in the U.S. before going on to other destinations in the country. U.S. airlines already have these rights in the EU.
Even more controversial is a requirement that U.S. laws on airline ownership and control be relaxed. Currently foreign investors are prohibited from owning more than 25 percent of the voting rights of an American carrier.
About Phase 2, Kevin Mitchell, chairman of the Business Travel Coalition, says, “I'm pessimistic. If it was going to be easy, the thing would have been done in one package.” In fact, if no “substantial” progress is made with Phase 2 by November 2010, the EU can suspend certain rights granted to U.S. airlines in Phase 1.
In Mitchell's view, the carriers are, like the travel managers in the ACTE poll, taking a wait-and-see attitude on Open Skies. He points to British Airways and its OpenSkies subsidiary as an example. “They're flying from DeGaulle [in Paris] to JFK, but they're only operating with two aircraft. It's sort of a trial balloon. I don't see a path forward on cabotage and foreign ownership, particularly in an election year,” says Mitchell. “Look at issues likeand NAFTA. I can't see the Democrats switching gears and being more pro-foreign-ownership.”
And without the liberalization of foreign ownership rules, the entire agreement could be at risk. Virgin Atlantic's Richard Branson has called the Open Skies agreement a “damp squib” and said Virgin will wait at least two years to see what happens with Phase 2 before launching new routes between the U.S. and Europe.
British Airways officials have also been quoted saying that the U.K. would withdraw from the deal unless Phase 2 is adopted. “BA has been the most vocal about this,” says Mitchell. “They feel like negotiators gave away Heathrow for some Pan-European benefit. So they are going to hold everyone's feet to the fire [on Phase 2].”
But even if Phase 2 is never completed, Patrick Murphy believes Phase 1 will survive. “If this turns out to be a typical aviation dispute, I could see, in a worst-case scenario, that everything will just freeze in place a couple of years from now.
“If you listen to BA, this is a game of chicken. But I think by the time Phase 1 has been in effect for a couple of years, there will have been so much invested in new services, aircraft, and gates, that no one is going to want to see it all go away.”
In the end, “it's going to take a long time” to see what the overall impact of Open Skies will be, says Murphy. “Domestic deregulation occurred 30 years ago and the consequences are still unfolding.”
Guide to New Routes
“The most interesting route proposed so far is Air France with its service from Heathrow to Los Angeles,” says Patrick Murphy, partner, Gerchick-Murphy Associates, Washington, D.C. “It may be slow in building, but you'll see a lot of European carriers go into each other's markets to fly into the U.S.”
Other new routes:
- Aer Lingus will fly from Dublin to San Francisco, Orlando, and Washington Dulles.
- Delta Air Lines added service to Heathrow from New York's JFK International Airport; to Lyon, France, from JFK; and to Paris from Salt Lake City and JFK.
- United is flying between Denver and Heathrow.
- Continental is flying to Heathrow from Newark and Houston.
- KLM added service between Amsterdam and Dallas-Fort Worth.
- Northwest is flying to Heathrow from Detroit, Minneapolis, and Seattle.
- US Airways added flights between Heathrow and Philadelphia.
- As early as 2010, Ryanair plans to offer transatlantic flights from European airports such as London's Stansted, Dublin, and Frankfurt-Hahn to secondary markets in the U.S. such as Providence, R.I., and Baltimore-Washington International.
- British Airways launched a new airline, “OpenSkies,” flying between New York and DeGaulle Airport in Paris.
More Choice Down Under
Also signed into effect in March, but receiving rather less press, was the U.S.-Australia Open Skies agreement. The Australia-Los Angeles route has long been the monopoly of United and Qantas. Now, a number of airlines are expected to add U.S.-Australia service, including V Australia (a low-cost Australian carrier partially owned by Richard Branson), which hopes to be operating routes by the end of the year. Australian and U.S. officials say the added competition should result in lower fares; however, with jet fuel still at record prices, airfares are likely headed only one way — up.