Skirmishing in the Open Skies

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That's about to change. The jostling for slots began in Oct. when Delta Airlines (DAL) and Air France-KLM—already partners in the SkyTeam alliance—announced a landmark deal to share costs and revenues on transatlantic routes (BusinessWeek.com, 10/22/07). Under the agreement, Air France will give three of its slots at Heathrow to Delta to use for flights to New York and Atlanta, while the French carrier will start a new service between London and Los Angeles. More recently, Continental (CAL), Northwest (NWA), and US Airways (LCC) announced they plan to launch direct flights from the U.S. to Heathrow as well.

That means one of the world's busiest airports is set to get a lot more crowded. And some analysts are questioning whether in the face of worsening economic conditions there will be enough demand to fill the 22% of additional seats on U.S. routes from Heathrow likely to be added this summer. "The EU-U.S. Open Skies' agreement makes the transatlantic market particularly vulnerable to irrational capacity increases," analysts at Dublin-based Davy Research warned in a recent note to investors.

Moreover, that extra capacity will eat into BA's market share at Heathrow. Analysts at NCB say BA's share of prime slots at Heathrow will fall by 7% this summer. And the airline's dominance could be further eroded if, as many analysts expect, a sizeable chunk of the slots at Heathrow currently being used for short-haul routes, such as those held by British Midland (BMI), Aer Lingus (AERL.I), Iberia (IBL.DE), and SAS (SAS.ST), are sold to transatlantic carriers.

Lufthansa, with its 30% stake in BMI, has the inside edge to acquire slots from the midsize British carrier. BMI is already the second-biggest player at Heathrow after BA, with 11% of all slots, so its coveted capacity could be a big boost to Lufthansa.

Still, buying additional slots won't come cheap. In December, Alitalia (AZPIA.MI), which is currently in merger talks with Air France-KLM (BusinessWeek.com, 12/11/07) sold nearly a quarter of its Heathrow slots in three separate deals for a total of $137 million. Alitalia has not disclosed the identity of the buyers, but analysts say Continental Airlines, US Airways, and BA each likely snapped up a pair of slots.

With the cost of slots sky-high, cash-strapped U.S. carriers will find it tough to build up bigger stakes at Heathrow. Instead, United and American are currently trying to boost their cachet—and margins—by upgrading their premium cabins to better compete with BA and Virgin (BusinessWeek.com, 1/7/08).

Realigning Alliances

As the battle wears on, analysts expect to see the Open Skies treaty provoke a major restructuring of the big global airline alliances, SkyTeam, OneWorld, and Star Alliance. Air France-KLM, for instance, has already supplied its SkyTeam alliance member Continental with two slot pairs at Heathrow, while KLM has offered three to SkyTeam partner Northwest. Next up is likely to be a deal among Star Alliance members Lufthansa, United, and BMI. Still to be sorted out is the somewhat awkward relationship between longtime OneWorld alliance partners-cum-rivals BA and American.

Brokerage NCB reckons in the near future there will be three "supersized" joint ventures dominating Heathrow. "Global connectivity will become an increasingly important selling point," NCB says. "These carriers will compete aggressively for transatlantic premium transfer traffic, which is second only to premium point-to-point traffic in the profitability stakes." This dogflight has just barely begun.

Capell is a senior writer in BusinessWeek's London bureau .