US/EU Open Skies: Benefits and Drawbacks

The much-anticipated US/EU open skies agreement was approved in Europe today. The agreement has been heralded as a triumph of cooperation between the two sides of the Atlantic which will bring increased competition to transatlantic routes and lower fares to passengers. The big winners in this agreement are EU carriers (aside from British Airways) because most of them have excess long-haul aircraft that they can readily deploy to new routes to the US. American carriers are also winners, but to a lesser extent because they will probably take less advantage of the agreement than their European counterparts. The first important thing the agreement does is opening up Heathrow to competition. American, United, Virgin Atlantic, and British Airways are the only airlines currently allowed to fly to the United States from London's prized and popular Heathrow Airport. Now, the airport is open to any EU or US carrier that wants to fly to the US, provided that carrier is able to obtain slots at Heathrow. British Airways, in particular, has lobbied intensely for a rejection of the agreement because it threatens British Airways' monopoly on many routes to and from London Heathrow which has enabled the carrier to maintain high fares on many of its routes. However, the agreement will do much more than open up Heathrow. The second thing the agreement will do is that it will enable any US carrier to serve any route to the EU and any EU carrier to serve any route to the United States. This will open competition on more international routes and likely increase traffic and lower fares simultaneously.

But some EU carriers are in a most advantageous position to take advantage of the agreement. This is because these EU carriers have more flexibility with their international fleets. For most US carriers, the bulk of their long-haul aircraft are already committed to other routes. And many US carriers are finding that they have an insufficient number of long-haul aircraft in their fleets and on order for future international expansion. Because of that, US carriers will have more difficulty accessing new markets, including those recently opened to them through open skies, and those carriers which lack planes will probably try to lease them, causing long-haul aircraft lease rates to soar. While some of these US carriers may pull aircraft from their current commitments because opportunities in Europe are more lucrative, it will be difficult for them to do so without giving up market share on another route. Some carriers may be willing to replace large widebody aircraft with smaller narrowbody aircraft on some Latin America or Hawaii routes and shift those aircraft to Europe routes, but other carriers may not want to make that tradeoff. The US carriers most likely to benefit from open skies are American, United, and Delta. American and United both have 777 and 767 aircraft that they can spare, although they may have to make some minor cuts on some routes in order to free up those aircraft. These two carriers have the loyalty of many business travelers who fly overseas, and they have the best chance of attracting customers for new European routes of any US carrier. Delta also has plenty of 767 aircraft that it can use for international flights, but in order to use those, it would need to shift some of its 767s from flying domestic routes to international routes, something that Delta needs to do with caution to avoid giving too much of an opportunity for low-cost carriers, such as AirTran, to encroach on their market. The airlines that lose, Northwest, Continental, and US Airways, have the same handicap, a lack of long-haul aircraft, which prevent them from fully utilizing the open skies agreement. Northwest has most of its long-haul fleet tied up in lucrative Asian routes, Continental has been overstretched for some time, due to its lack of 777 aircraft, and has many of its long-haul aircraft flying on attractive routes to Latin America, and US Airways, which only started service to Europe less than ten years ago, is unlikely to utilize open skies significantly because they too lack sufficient aircraft, and would rather let their Star Alliance partner United do most of the flying on European routes. The best way those three carriers can utilize this agreement is to use 757 aircraft which can barely make the transatlantic hop, but which would be great for serving point-to-point routes since they are smaller than widebody 767 and 777 aircraft. But even for American, United, and Delta, finding ways to make the agreement work will be a challenge. These three will need to find ways to shuffle their long-haul aircraft in order to free up aircraft for Europe flights, and they probably won't find a way to please all parties. These carriers will likely focus on developing their hub-to-point routes further, instead of developing point-to-point routes. Already US carriers have announced that most of their new Europe services will be comprised of additional flights from hubs. This will improve connectivity for passengers and lower costs but, it could put them at a competitive disadvantage if business travelers choose European carriers that offer nonstop service. The flights that aren't opened from hubs, will probably be opened from focus cites. Delta, for example, has expressed an interest in starting nonstop Europe flights from Boston, an important Delta focus city. Focus city flights will probably be more convenient to business travelers, but might be more difficult to market to leisure or other types of travelers, increasing the risk of failure for airlines that start them. However, EU carriers seem intent on starting new point-to-point flights.

Virgin Atlantic, once a staunch opponent to open skies, has now resigned itself to making the best of the situation, and the airline recently announced that it is considering adding flights from European business centers to major US cities. Virgin Atlantic, like many EU carriers, has many new long-haul aircraft on order, and needs to find new routes for them all. As a result, they will benefit more from the agreement than US carriers which don't have many or any spare long-haul aircraft currently in their fleets or on order. Other EU carriers, including Lufthansa and Air France, which each have dozens of long-haul aircraft, some of which are underutilized, will also find point-to-point opportunities to the United States. EU carriers are exploring nonstop service opportunities from markets in their respective countries, but also from other lucrative markets. The notion of a state airline being the only option for travelers to and from a given nation is over. In some cases, the new service that EU carriers add will be the only nonstop service between two markets. Aer Lingus announced today that it will serve three new destinations in the United States, enabling travelers in San Francisco, Orlando, and Washington D.C. to fly to Dublin nonstop, something they cannot do currently. These new point-to-point routes will command higher fares, as business travelers seek convenience over cost. Moreover, they are even more attractive to business travelers because EU carriers typically have higher service standards than US carriers, enabling business travelers to be more comfortable in the air. This commitment to serving more point-to-point routes, combined with the greater comfort levels that most EU carriers offer, will make EU carriers more attractive for travelers than US carriers overall. For these reasons, EU carriers are likely to profit off of the open skies pact more than US carriers, but some US carriers, such as American and United, have the capability to profit enormously from the agreement because of their current competitive position. Expect more route announcements in the days and weeks to come, as airlines scramble to take advantage of the most lucrative opportunities that open skies offers.