The sky's the limit
21 January 2002
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Aviation in-house lawyers are, at long last, beginning to see a chink of light emerging through the clouds in the dispute between the UK and US about 'open skies'. There are only four airlines that are allowed to cross the Atlantic from Heathrow - British Airways (BA), American Airlines (AA), United Airlines and Virgin Atlantic - but a new deal could see the most valuable route in the world open up to all-comers, providing, of course, they can get into the overcrowded airport.
After 15 years of tentative talks, there appears to be signs that the UK Government is on the verge of acceding to US demands for an open skies deal that would allow US airlines to fly into Heathrow. In return, they would expect the BA/AA alliance to be granted antitrust immunity.
Open skies is the legal issue that will shape the future of the aviation industry, but as Harbottle & Lewis head of aviation Dermot Scully says, it is one that squarely resides in the hands of the politicians.
"The legal issues won't be resolved until the political issues are resolved," he says. "The talks have been rumbling on for a long time and every now and again people talk about a breakthrough. But I must say, I'm a bit dubious because there's such a vested interest in the US aviation industry in keeping things the way they are."
Barlow Lyde & Gilbert aviation partner Richard Gimblett says: "It's an issue of direct concern to all transatlantic carriers and all those that want to operate those routes. The approval of BA/AA is intimately tied up with the open skies agreement, which ultimately will affect all aviation practitioners, but largely as a background matter."
Given the political sensitivities, it is not surprising that BA lawyers are tight-lipped about the proposed tie-up with AA. "We're in the middle of a complex process and we've made our submissions to the various regulatory authorities, but we feel that it's not in our interests to start getting into a war of words over the detail," says head of legal at BA Stephen Walsh.
All the other major UK airlines are pushing their own agendas in light of the talks. For example, bmi British Midland is looking for a liberalisation of the present bilateral agreement, Bermuda II, and is seeking clearance for its own alliance with United Airlines from competition authorities on both sides of the Atlantic.
"Obviously, as we're not a current player in the market, the actual competition effects of us being in an alliance with United are pretty minimal," says Tim Bye, legal director at bmi. "All that we're talking about is being able to add a few flights out of Heathrow in conjunction with United, because that's the only way we could enter the market." But he says that such clearance would not be granted in the US without a corresponding open skies agreement.
Last year, bmi threatened to make a formal complaint to the European Commission on the grounds that Bermuda II was anti-competitive. According to Bye, it was a means of "pressuring further political movement and getting a change as quickly as possible".
The airline has been a fierce advocate of the benefits of free competition at Heathrow and has been campaigning for three years for deregulation of the treaty. It argues that the reason for the success of the 'low cost, no frills' carriers has been the creation of open skies on the Continent. Sir Michael Bishop, chairman of bmi, says: "It's totally unacceptable that within the European Union all major airports are free to trade openly with the US, yet the UK - which is by far the biggest market - still remains shackled by an outdated agreement going back to the 1970s."
Equally as vociferous - but coming at the issue from the opposite point of view - is Sir Richard Branson. Virgin's head of legal Hugh Ford acts on the issue on a day-to-day basis and says his boss is "passionate" about the dispute.
Virgin is not against open skies per se, but it is dead against a deal on the terms being bashed out at the moment. Ford, who left BA for Virgin last year, argues that the UK has always held out against the US model of open skies, which does not allow 'cabotage' rights - for example, reserving internal flights to US carriers - and a relaxation of the strict rules restricting foreign ownership.
Ford says: "Virgin has always advocated that Bermuda II should be done away with because its day has come, but it needs to be replaced with a full open skies agreement and certainly not the US model combined with an alliance as anti-competitive as AA/BA."
Virgin argues that BA and AA control "over 60 per cent of the Heathrow-US market, 100 per cent on several key routes and around 70 per cent of peak-time slots used for North Atlantic services".
Ford argues: "We don't think this alliance should be approved. It will lead to a reduction in competition and effectively end up with BA and AA colluding to use an overwhelmingly dominant position to destroy competition, which will lead to higher prices and a reduction of services."
The Virgin argument has been bolstered during the past few weeks by reports from the US Justice Department and Congress's official watchdog the General Accounting Office, which both take unenthusiastic views of the alliance. The Justice Department agreed that such a deal would be anti-competitive and recommended a divesture of 126 BA take-off and landing slots at Heathrow before it would approve any deal.
It is a problem of "open skies and closed airports", says Richard Venables, head of the aviation and travel department at Lane & Partners, who has been advising one of the leading airlines objecting to the alliance.
He points out that the Justice Department report is significant because the recommendation to lose 126 slots is considerably less than the 216 slots it named as the regulatory price for the deal three years ago. "But I've difficulties in seeing what has changed and the difficulty of airlines getting into Heathrow has got worse rather than better over that period," he says. "From the US point of view, there seems nothing much to be gained from open skies unless they can have assurances on access into Heathrow."
On this side of the Atlantic, BA is perceived to be in a hurry to progress talks to beat a ruling by the European Court of Justice. The European Commission issued a legal challenge arguing that Brussels should have the power to negotiate all open skies deals throughout the EU. The Advocate General is expected to publish his legal opinion by the end of the month.
Barlow's Gimblett says: "It doesn't provide a big window for talks. From the UK's point of view, this is the leverage needed to get BA/AA through, because in the past the US has refused to grant antitrust immunity to any transatlantic alliance without a corresponding 'open skies' agreement."
For obvious reasons, BA wants its own Government as a representative in the talks instead of Brussels' bureaucrats. "What the aviation industry in Europe needs is mergers and the commission's view would be that these sorts of deals prevent mergers because all they do is enshrine the existing bilateral structure of the aviation industry," says Gimblett. This view has been strengthened in the wake of the 11 September terror attacks that have left some European carriers perilously close to bankruptcy.
"Effectively, there are still a series of bilateral agreements, and to exercise the rights, airlines have got to be owned and effectively controlled by the designated member state so it really precludes pan-European mergers," Gimblett says. The US has pursued a successful policy of picking off the Europeans one by one - and so far eleven European Union member states have agreed their own open skies deals with the US.
By contrast, the lawyer argues that the EU would like to negotiate a global air service agreement with a common aviation agreement facilitating the merger of EU and US airlines.
Venables says that what the Americans have been able to do is negotiate their open skies deals in advance of Europe. "They've been able to go to each member state and say 'We'll give you open skies'. But all [for example] Holland gets is the right to fly one international airline from Holland to any point in the US, but not within. But the US gets the right for all their airlines to fly to Heathrow and they do it with everyone else and so they have a European network." Venables cannot see any "realistic prospect" of UK carriers flying in the US. "And so you do begin to wonder, what's in it for British aviation?"