AMR's Open Skies Surprise

The heavily debated trans-Atlantic Open Skies agreement offers something for everyone, even the carrier that's widely seen as having the most to lose, AMR's(AMR:NYSE) American Airlines.

The pact, unanimously approved last month by the European Commission, goes into effect March 30, 2008. The arrangement is meant to lift a variety of restrictions on flights between Europe and the U.S. and it opens every city on the continent, and London, to unrestricted air service.

Not only that, but Open Skies promises increased regulatory receptiveness to global alliances and encourages the U.S. to alter ownership limitations.

Already, four U.S. carriers have publicly identified preferred pieces of the pie. Continental(CAL:NYSE) filed with the Transportation Department for a Heathrow-Houston route. United(UAUA:NASDAQ) and British Midland Airways filed for antitrust immunity to operate jointly across the Atlantic.

Northwest(NWACQ:BB) and KLM indicated they will likely file to expand their antitrust immunity to include Air France(AKH:NYSE), which now owns KLM, and Air France partner Delta(DALRQ:BB). And Delta has said it wants to serve Heathrow from Atlanta and New York.

Meanwhile, American, the leading U.S. airline at London's Heathrow, hasn't said much at all. With 16 daily departures and 19% of the traffic from Heathrow to the U.S., American could be hurt by increased competition. At the same time, if an era of Heathrow slot trading is now underway, American is starting with a good hand.

Although it took no position on the Open Skies agreement, American could benefit, says Don Casey, the company's managing director for international planning. For one thing, the agreement permits code-share flights in previously restricted European markets. Casey says American is talking with its European partners, including Aer Lingus, British Airways (BAB:NYSE), Iberia and Malev Hungarian Airlines.

"Open Skies creates a potential opportunity to deepen our cooperation with those carriers," he says.

For example, American currently flies from Miami to Madrid, where it code shares with Iberia on flights to four additional cities. Open Skies lifted restrictions, because the U.S. and Spain previously lacked a bilateral agreement. Under the new deal, "we could code share on more flights to more markets," Casey says. "The current impediments would all go by the wayside."

Casey declined to say whether American and British Airways will seek antitrust immunity across the Atlantic. But in every case, Open Skies between involved countries has been a prerequisite for securing immunity, so the pair would have a strong case to make.

Merrill Lynch analyst Mike Linenberg says such a move would be "a big positive, in our view, for American." He made his comments during a recent investor conference call. Merrill Lynch has a financial relationship with American that includes providing investment banking services.

Twice before, American and British Airways sought immunity, most recently in 2001. The Transportation Department said it would go along only if American would provide 16 pairs of Heathrow slots to competitors. American declined.

The same year, United applied for antitrust immunity with British Midland. The DOT said the pair, with fewer Heathrow slots than American and British Airways, should reapply when the U.S. and the U.K. had Open Skies.

That reapplication was filed April 2. Approval would permit United and British Midland "to make more efficient use of those slots," said consultant Dan Kasper of LECG. "They could negotiate coordinated fares and generate more revenue."

Always highly prized, Heathrow slots are more so today. Previously, a bilateral treaty limited Heathrow access to a few carriers. The restriction is gone, but the supply remains limited.

There are three ways to get slots, Kasper notes. One is from a new entrant slot pool, which is difficult. As always, carriers can buy slots on the open market, but bargain hunters need not apply. The third source, alliance partners, may be the most promising.

As Delta CEO Jerry Grinstein said on a conference call last month, alliance partner Air France could maximize the value of its slots by trading up from routes to France. "I don't see Air France flying from Heathrow to New York, but I think they would be happy with their code on our flights," he said.



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