New Round of Open Skies Negotiations Set to Begin Between Europe and America

Only four airlines from Britain and America - BA, Virgin Atlantic, American Airlines and United - may currently run transatlantic flights from London's Heathrow Airport.

Much disagreement centres on landing rights. Mergers among Europe's airlines have been stymied by the rights enjoyed—and jealously guarded—by flag carriers at their national airports. These are governed by bilateral deals and determine which airline can fly to where. The merger between Air France and KLM, concluded in 2004, was structured in such a way that the Dutch flag carrier retained landing rights negotiated with America. BA's attempt to link up with KLM in 2000 foundered over the issue of landing rights (which America had threatened to cancel at some of its airports if a deal went ahead). The Americans may be prepared to give some ground on landing rights in the upcoming talks, but they will want something in return.

America has long harboured ambitions to open London's Heathrow airport to more of its airlines, the subject of an acrimonious 30-year dispute between London and Washington. Only four airlines from Britain and America—BA, Virgin Atlantic, American Airlines and United—may currently run transatlantic flights from this important European hub. BA and Virgin fear that they will lose this valuable perk without gaining much in return from America. A full-blooded alliance between BA and American was blocked in 2002 after American regulators demanded that they give up some slots at Heathrow.

Britain is likely to do what it can to block a deal that sharply curtails the privileges enjoyed by its airlines at Heathrow. A possible compromise could see the airport opened to other airlines for transatlantic travel. But if the incumbents are allowed to keep the slots they already have at an airport already too crowded to permit further flights, those changes will prove little more than symbolic.

America's struggling carriers could do with the boost to business that increased transatlantic travel would bring, and an injection of foreign capital would do them no harm

A further, more fundamental impediment to full liberalisation is that it would require America to lift the foreign-ownership rules that apply to its airlines—overseas investors may not command more than 25% of the voting rights. These restrictions (along with the matter of landing rights) have prevented large and successful airlines (such as BA) from making cross-border acquisitions that could bring economies of scale. They have also starved America's struggling airlines of foreign capital.

As a trade matter, the ownership rules can be altered only with the approval of Congress. And American politicians are in no mood to contemplate the loss of prestige, or the perceived security threat, which would result from the foreign takeover of a leading American carrier. Some in Congress also worry that, given the travails of America's airlines of late, foreign bidders would be able to pick them up at low prices.

As a gesture before next week's meeting, the Bush administration recently promised to relax the rules on foreign ownership as far as it can without Congress's approval: it will countenance a foreign chief executive or other top managers for an American airline, and hence a measure of foreign control. But this is a small concession, and ownership regulations are not even set to figure in the discussions in Washington.

Given the persistent difficulties over the foreign ownership of airlines, fully open skies would seem to be a long way over the horizon. America's struggling carriers could do with the boost to business that increased transatlantic travel would bring, and an injection of foreign capital would do them no harm. And don't forget consumers, as negotiators so often seem to; they would surely benefit from increased competition on routes between the world's two largest aviation markets. If no substantial deal is reached, airlines and passengers will remain in thrall to a system predicated on the strategic considerations of the 1940s.


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