Open Skies Agreement Drives Change

April 18, 2007
The issue of foreign ownership of U.S. airlines was only partially resolved in the recent bilateral aviation agreement between the U.S. and European Union.

The issue of foreign ownership of U.S. airlines was only partially resolved in the recent bilateral aviation agreement between the U.S. and European Union. While the foreign investment limit of 25% of voting stock remains, E.U. investors can own more than 49.9% of combined voting and non-voting stock. That easing of restrictions may not be sufficient to save the job of Virgin America’s CEO Fred Reid. Despite assurances Virgin had made major structural changes that would not require his removal, it has had to appeal to the U.S. Department of Transportation to reconsider requiring his transition out of the role or at least extending his consulting role to allow the newly formed group to develop a competitive toe hold.

Waiting in the wings is Ryanair, the Ireland-based low-cost carrier. It wants to establish service between the U.S. and E.U. now that the first phase of the open skies agreement has been approved.

Some long-awaited pairings within the E.U. may be free to go forward as well. Lufthansa is closely watching Iberia and Alitalia but says it its avoiding a rush to buy as it watches the open skies agreement. Any acquisition must make economic sense for Lufthansa, the carrier says.

British carrier bmi (formerly British Midlands) is also a subject of takeover rumors. Among possible suitors are British Airways and Virgin. Virgin has already stated a BA takeover of bmi would be bad for the industry. Meanwhile, bmi and U.S.-based United Airlines are seeking transatlantic antitrust immunity. A similar request five years ago was put on hold in the absence of an open skies agreement. The competitive situation has not changed in that time, says bmi, and the main carriers in the market segment have similar shares of the market today. It wants the antitrust immunity to start on March 30, 2008, when the open skies agreement is slated to take effect.

The U.S.-E.U. agreement is only one air services agreement that is moving forward. American Airlines has applied to the U.S. Department of Transportation (DOT) to operate daily flights from Chicago’s O’Hare airport to Buenos Aires now that an expanded U.S.-Argentina services agreement has been signed.

And in China, U.S. DOT Secretary Mary Peters said China is seeking an open skies agreement with the U.S. similar to the U.S.-E.U. agreement. Peters expects an agreement by May that could be implemented as early as the end of the calendar year. An agreement in 2004 has allowed expansion of cargo services, including the recent opening of a UPS hub in Shanghai and a FedEx hub in Guangzhou. In that same period, roughly 2003 to 2006, China-U.S. air cargo volumes have increased from 270,000 tons to 400,000 tons.

Chinese airlines are jockeying for position as Air China and Shanghai Airlines have committed to the Star Alliance and China Southern Airline joined the Sky Team. Hainan Airlines is expected to align with the oneworld alliance. Chinese entry into U.S. markets won’t be easy as the airlines lag U.S. airlines in many key areas, including size, financial clout, marketing expertise and management experience, so it could be easier for U.S. companies to expand in China than for their Chinese counterparts to expand in the U.S. In this instance, expanded cargo service is likely to precede increased passenger service.

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