Skirmishing in the Open Skies

As transatlantic carriers jockey for gates—and market share—at Heathrow, British Airways' OpenSkies airline plans to skip the crowded airport altogether

by Kerry Capell

The new Open Skies agreement between the European Union and the U.S. won't come into effect until Mar. 31. But the high-stakes battle for lucrative transatlantic air passenger traffic is already heating up.

British Airways (BAY.L) has just fired the biggest salvo to date, announcing plans to launch a new airline serving the U.S. directly from Continental Europe. By flying from the Continent to the U.S. without stopping over at London's crowded Heathrow airport, BA aims to claw back some of the business it may lose when American and European rivals add competing flights to Britain from the U.S.

Ferrying Premium Passengers Past Heathrow

The BA carrier, set to be called OpenSkies, takes its name from the treaty to liberalize air travel that will allow operators from either side of the Atlantic to fly anywhere within the EU and the U.S. (BusinessWeek.com, 3/21/07) Pending regulatory approval, OpenSkies will launch daily flights from New York (from either JFK or Newark) to Brussels or Paris Charles de Gaulle in June, 2008, using one Boeing (BA) 757 from its existing fleet. (A second aircraft will be added by yearend to fly to the other destination.) In the future, OpenSkies plans to fly to other business centers, including Amsterdam, Frankfurt, Milan, Madrid, Zurich, and Geneva.

While European rivals such as Air France KLM (AKH) and Deutsche Lufthansa (LHAG.DE), concentrate on developing their existing Continental hubs, BA aims instead to challenge them in their own backyards. Hoping to capture a bigger chunk of premium transatlantic passengers, the airline will reserve more than 70% of the 82 seats on each OpenSkies flight for business and premium economy passengers.

No wonder. BA likely will get two-thirds of its estimated $1.3 billion in 2008 profits and 40% of its $17 billion in revenues from transatlantic and premium traffic, reckon analysts at Dublin-based brokerage NCB. Notes Peter Morris, chief economist at London-based aviation consultancy Ascend: "This is about BA taking advantage of its reputation and distribution network in the U.S. to focus on premium service."

BA chief executive Willie Walsh says the unusual choice for the new venture's name is intended to keep up the pressure on the European Commission and the U.S. government, who are set to open up talks on the second phase of the treaty before 2010. BA is one of the most vocal proponents of relaxing foreign ownership rules in the U.S., which currently prevent non-American carriers from having more than a 25% voting stake in U.S. airlines. The name, says Walsh, "signals our determination to lobby for further liberalization in this market."

Transatlantic Traffic Jam

It also signals the importance to BA of finding new sources of revenue beyond Heathrow, Europe's biggest and most profitable hub to the U.S., as rival European and U.S. airlines scramble to secure capacity there. BA is currently the airport's biggest carrier, controlling 42% of the airport's takeoff and landing slots. And as of now, only BA, American Airlines (AMR), UAL's United Airlines (UAUA), and Virgin Atlantic Airways operate nonstop services to the U.S. from Heathrow.