From enplaned.********.com
http://enplaned.********.com/2005/11...-pry-open.html
Tentative EU-US Deal Would Pry Open Heathrow
Reuters breaking news. Here's our quick-and-dirty.
Key point:
The deal, if approved, would allow every EU and American-based airline to fly between every city in Europe and the United States. The deal would effectively remove fiercely protected competition barriers to London's Heathrow airport, Europe's foremost gateway for international business travel.
But still things on which the deal could founder:
Europe still wants to see if a crucial side issue -- the U.S. proposal to dismantle some limits on foreign investment in domestic carriers -- is finalized and whether it would truly facilitate greater investment opportunities in American commercial aviation companies and greater access to the biggest cities.
So no one should count their chickens. This ain't over.
We've always been cynical about the attitude of Europe (and especially the UK) towards these things. Restricting US airline access into Heathrow (LHR) has always been an article of faith for the UK govt because British Airways (BA) and Virgin Atlantic simply benefit too much from the restrictions. Between them, BA and Virgin control far more than 50% of the key NYC - London market, for instance. In fact, BA's share is above 40%, if we recall correctly.
The stated desire of the Europeans for access to the US market (such as the right to own a greater proportion of US carriers) is also something we find inexplicable. The US airline business is, empirically, a bad investment. So do the Europeans really want these rights, or is it simply a way of preventing full Open Skies by asking for something that they know the US govt can't give?
(It's worth noting that we fully support the elimination of all ownership restrictions on airlines globally, not that we think that will happen any time soon).
But let's be optimistic. Who wins and who loses? Single greatest winner is Michael Bishop and British Midland Airways (BD), which owns the second largest number of slots at LHR but can't use them to the US and so uses them mostly for money-losing European routes. Pre-9/11 Bishop bet big that he'd get LHR-US rights and ordered four A330-200s, aircraft that BD's struggled to use profitably ever since after that bet failed (insert comment about counting chickens before they're hatched). BD will be sitting pretty now.
Biggest loser might be Virgin Atlantic. Virgin has a great onboard product, but at the end of the day we think the biggest reason why it's successful across the Atlantic is that it doesn't face much competition. Virgin might well be forced into a defensive merger with the LHR operations of BD (with, perhaps, the BD's low cost operation, bmibaby, spun out). Richard Branson has certainly discussed a Virgin-BD merger before. The combination of the two in an open LHR would be extremely powerful, and be a key member of Star, assuming BD stayed in that alliance.
For BA and AA it's a mixed bag. Losing the competitive restrictions means they'll face more competition. However, if they can trade that for anti-trust immunity, it finally gives oneworld what Star and SkyTeam have, and that's worth something.
For Continental (CO), Newark (EWR) to LHR is the single biggest hole in its network and one it will want to fill as soon as possible. The rub is paying for slots. Getting the right to fly to LHR is one thing, buying LHR slots so you can actually do so is another. LHR slots are very expensive, we've heard figures like 10 million pounds sterling per slot pair. Painful given the financial circumstances of the US industry, but for CO, likely something it will want to pay (though it will do its best to force slots to be given to it, something we think will probably not work). CO is already the dominant airline in the NYC area, LHR access would cement that. There's no reason why CO shouldn't eventually be one of the top two or three airlines in the NYC to London market. Just think of all those I-bankers going out to Newark to fly to LHR...
To a lesser extent the other non-LHR incumbent US carriers would face the issue of paying up for LHR slots. Hard to see any of them not doing so, ultimately. LHR is such an important source of traffic from which CO, Delta, Northwest and US Airways have been blocked. You'd figure they'd all pay up for at least some slots to access LHR from their main hubs. LHR could look very different in a year or two, if open skies really happens. Slots now used for other purposes will be shifted to the Atlantic. We suspect most of those slots are currently being used for European routes (certainly likely to be true for BD slots). So European traffic will move to other London airports--that benefits Ryanair, easyJet and friends.
It's also potentially bad news for MaxJet, the new transAtlantic entrant (there's also EOS, but we think EOS is much less likely to survive than MaxJet: selling business class for an economy fare -- Maxjet's business plan -- seems more viable to us than selling first class for a business class fare -- EOS -- especially from London Stansted, which is hardly the preferred London airport). There's going to be a lot more capacity to the US from LHR in the future, if this happens. That will drive down pricing. In particular, if CO enters NYC-London, and British Midland tries to force its way in, then we're going to see a real jump in capacity in this market, with lots of deals. None of that is beneficial for a new entrant whose primary value proposition is price. We're not saying it's a fatal blow, but it's not a good thing.
Oh, this one will be fun to watch