A Flight Plan Through Open Skies

The new U.S.-EU air transport pact is likely to lift passengers and some carriers. BusinessWeek.com maps out who it helps—and who hits turbulence

by Kerry Capell

The air transport agreement will remove many rules on Europe and the U.S. will be lifted. But does it favor U.S. airlines?

On Mar. 22, European Union transport ministers approved a deal to liberalize air travel between the European Union and the U.S. The so-called Open Skies air transport agreement will remove restrictive rules on flights across the Atlantic and end three decades of fierce political wrangling between Europe and the U.S.

Despite the apparent progress, the issue is still highly contentious and complicated. Proponents of the deal say it will increase competition in a market currently worth $18 billion, drive down fares, create new jobs, and boost economic growth. But there remain critics on both sides of the Atlantic. Europeans charge that the treaty is biased in favor of the U.S., and both Europeans and Americans complain about the lack of clarity on legal restrictions to foreign ownership of U.S.-based airlines.

With so much confusion surrounding what is expected to become the most important aviation treaty in history, BusinessWeek.com attempts to explain the issues surrounding the debate:

What does Open Skies do?

Pretty much what it promises: It opens up the skies over the Atlantic to competition. The pact will replace existing bilateral treaties between individual European governments and Washington beginning in October. Under these previous treaties, European airlines have only been able to offer services between their home country and the U.S., a market that, in total, is currently worth $18 billion. Now under Open Skies European carriers can operate flights from any EU country to the U.S., although they will not be able to fly point to point within the U.S. In contrast, U.S. carriers will be able to fly between any cities within the EU.

The agreement also opens up Heathrow airport, which accounts for 40% of all transatlantic traffic, to a greater number of airlines. Under the Bermuda II Treaty between the U.S. and Britain, only four carriers are allowed to operate direct flights between Heathrow and the U.S.: British Airways (BAB), Virgin Atlantic, AMR's American Airlines (AMR), and UAL's United Airlines (UAUA). Now, with passage of the treaty, any U.S. or European airline able to pony up the cash for a slot at Heathrow can launch services between Heathrow and the U.S.

What is the impact of Open Skies?

According to the EU, the new treaty will boost transatlantic passenger numbers by 26 million, create 80,000 jobs, and provide $16 billion of economic benefits within five years. For consumers, increased competition will translate into more choices and lower fares, especially for business class. With strong demand for business and premium class travel between the world's two biggest financial centers, London and New York, and limited competition, fares have only gone in one direction—up. You only have to compare current peak business class ticket prices between London and New York (estimated cost: $8,000) with flights between London and Bangkok (estimated cost $7,600)—despite being twice the distance, the fare between London and Asia is cheaper, thanks to greater competition.

Some analysts say it might even lead to the launch of transatlantic services from no-frills airlines, although both Ryanair (RYAAY) and Southwest Airline (LUV), the biggest discounter in the U.S., have previously denied any interest in flying overseas.

Which airlines will benefit from Open Skies the most?

Pretty much every airline except BA and Virgin will benefit. Britain's BMI, which flies between Britain and Europe and owns several slots at Heathrow, is one of the biggest winners. Now it will be able to launch services to more lucrative long-haul routes in the U.S.