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British Air Unveils New Service

A subsidiary airline will fly between the U.S. and the European Union, while bypassing Britain.
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In a dramatic example of increased globalization,

British Airways

says it will launch a subsidiary airline to fly between the U.S. and the European Union, while bypassing Britain itself.

The carrier, to be called "OpenSkies," will begin service in June with flights to Brussels and Paris from a New York area airport, either Kennedy or Newark Liberty.

The move reflects broad changes that are sweeping through the airline industry but that generally offer financial benefits from increased international travel. However, some experts question OpenSkies' prospects, particularly because it begins service as the economy is slowing. In a memo to employees, British Airways said it expects OpenSkies to be profitable in the third year of operation.

OpenSkies' creation was enabled by the namesake open skies agreement between the U.S. and the E.U. that was signed last April. Among its provisions, the agreement allows European airlines to fly between any E.U. airport and the U.S. beginning March 30.

Simultaneously, it opens London Heathrow, British Airways' primary hub, to increased competition, including flights by the four U.S. legacy carriers who were previously shut out.

OpenSkies will start with a single Boeing 757. A second aircraft and new destinations will be added later in 2008. The plan is to operate six 757s by the end of 2009.

In the employee memo, British Airways said future destinations may include Amsterdam, Frankfurt, Madrid and Milan. It said it will select the New York airport offering the best schedule following a review of slot availability "with airports at both ends." OpenSkies will code-share with British Airways.

The carrier will operate in the premium market, carrying just 82 passengers in three classes, about 100 fewer passengers than most airlines carry in the same aircraft. Luxuries will include lie-flat seats and roomy accommodations.

"By naming the airline OpenSkies, we're celebrating the first major step in 60 years toward a liberalized U.S./E.U. aviation market," said CEO Willie Walsh in a prepared statement. "It also signals our determination to lobby for further liberalization in this market when talks between the E.U. and U.S. take place later this year."

British Airways is taking on a big challenge, says FTN Midwest Securities analyst Mike Derchin, because it will operate both ends of its flights in third countries. Although the open skies agreement allows third-country flying, "the reality is you won't necessarily see a lot of it, because if you don't have a feed or a market presence, it's difficult to see how you could make a go of it," Derchin says.

To be sure, British Airways is one of the world's best known airlines, and it clearly has a strong presence in the New York area. Additionally, the carrier may feel be feeling the pinch at its Heathrow hub, where yields are falling.

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Heathrow "is a market that has been under pressure," said Tom Horton, CFO of

AMR

(AMR)

, the parent of American, at an October investor conference. "More capacity in Heathrow is not a good thing."

Nevertheless, British Airways "has become a very London-centric airline," said

Delta

(DAL) - Get Delta Air Lines, Inc. Report

Executive Vice President Glen Hauenstein on an October conference call. "It has turned away from being a long-haul carrier to being a London carrier."

The premium market presents its own set of challenges. Revenue has been growing, with premium traffic over the north Atlantic up a relatively strong 4.5% in October, according to the International Air Traffic Association.

But "the outlook is more challenging for 2008," IATA says. "In particular, a slowdown in U.S. economic growth and volatility in the financial services sector (a key customer for premium traffic) could constrain demand and yield growth in 2008 and increase competition."

The next stage of open skies talks is set for May 15 in Slovenia. There is no specific topic on the agenda, said a Transportation Department spokesman.

For its part, IATA wants "to modernize the archaic U.S. ownership rules" that limit foreign ownership of U.S. carriers to 49% of the stock and 25% of the voting shares, says IATA spokesman Steve Lott. "Not only are those rules unique to aviation, but also most other countries don't have such restrictive rules."

Foreign carriers also want the right to compete for contracts to carry U.S. government employees. They want aviation to be governed by multilateral treaties between regions rather than bilateral treaties between countries, and they want "beyond rights" between the U.S. and E.U., so that foreign carriers could fly past the airport where they first land.