Airlines Declare Open Season on 'Open Skies'

Continental files for Heathrow service following Europe's initial approval of the 'open skies' deal.
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Continental

(CAL) - Get Report

moved quickly Thursday to test whether the open skies across the Atlantic are really going to be open.

A key component of the open skies agreement, approved Thursday by all 27 members of the European Commission, says access to London's Heathrow Airport will increase. So Continental filed with the U.S. Department of Transportation to begin Houston-Heathrow service.

The carrier said it wants to begin Heathrow flights before summer 2008 and to retain its flights to London Gatwick from its hubs in Cleveland, Houston and Newark. "The open skies agreement will allow us to give our customers the convenience of choosing between Heathrow and Gatwick for their Londontravel plans," said CEO Larry Kellner, in a prepared statement.

Continental said it filed immediately upon learning of the EC vote, which supports an agreement reached March 3 by negotiators for the U.S. and the EU. The EC agreed to delay implementation until March 30, 2008, about five months past the planned date of Oct. 28.

The delay, which requires U.S. approval, provides the British government with extra time before it opens Heathrow to more carriers. A new Heathrow terminal will open in March.

The deal has backing from U.S. airlines, which see various benefits. "This open skies agreement paves the way for much-desired increased service between the United States and Europe," said James May, CEO of the Air Transport Association, in a prepared statement. "It has the potential to provide enormous benefits to our respective customers and economies."

Currently, the only U.S. carriers serving Heathrow are

American

(AMR)

and

United

(UAUA)

, so other U.S. airlines can be expected to follow Continental's lead. "I expect all of them to begin competing vigorously to obtain sufficient slots for their anticipated Heathrow operations," says Dan Kasper, managing director of consulting firm LECG.

Of course, it remains to be seen exactly what is meant by increased access to Heathrow. Theoretically, carriers will have the right to obtain Heathrow slots, but neither the cost of the slots nor the level of availability has been defined. Frankfurt International Airport is already open to all -- but try getting slots there for flights this summer.

Global Alliances, European Consolidation

In addition to Heathrow access, the EU-U.S. agreement promises that regulators will show increased receptiveness to global alliances and that U.S. carriers can serve any European city.

For

Northwest

(NWACQ)

, the deal could mean full antitrust immunity for its SkyTeam airline alliance.

Since 1993, Northwest and KLM have been allowed to discuss pricing, scheduling and marketing for their trans-Atlantic flights. But In 2004,

Air France

(SYMBOL)

acquired KLM. Air France and

Delta

(DALRQ)

have immunity on trans-Atlantic flights, but the Department of Transportation denied Northwest's request to have its immunity include Air France and Delta.

"Northwest looks forward to working with its partners and applying with the Department of Transportation for expansion of its antitrust immunized alliance," says Andrea Fischer Newman, Northwest's senior vice president of government affairs. "The DOT has said that the new U.S.-EU agreement would satisfy key regulatory concerns to allowing the expanded alliance to proceed."

The agreement also contemplates that the U.S. will loosen restrictions that limit foreign ownership of its airlines to no more than 25% of the voting shares, even though the Bush administration failed to win support for such a change earlier this year. The agreement notes that some rights could be suspended in 2010 if more concessions do not occur.

Various additional impacts are likely. The agreement could spur European consolidation, said Cathay Financial analyst Susan Donofrio, in a recent report. There has been speculation, for instance, that British Airways may bid for the Spanish carrier Iberia. Donofrio said such bids may occur because "maintaining strict national borders will no longer be necessary to maintain bilateral route rights with the US."

Donofrio also suggested that Great Britain signed on to the agreement only after the DOT's tentative approval Tuesday of Virgin Atlantic's application to fly in the U.S. That approval "helps bring the U.K. to the table," she wrote.