Heathrow welcomes new flights

— -- Come Sunday, there's going to be a surge of new competition at London's Heathrow Airport.

After decades of fruitless talks, public posturing, backroom maneuvering and half measures that fell short of completely deregulating air service between the USA and Europe, the era of Open Skies dawns.

Every U.S. airline gains the right to fly to any destination in Europe without requesting government authorization — and every European carrier has the right to serve any U.S. city it wishes to serve.

But the 2007 Open Skies deal between the U.S. government and the European Union is mostly about opening up competition at Heathrow, one of the world's busiest, and until now, competitively restricted airports.

Previously, only American amr, United uaua, British Airways and Virgin Atlantic were allowed to fly between the USA and Heathrow. Now, four more U.S. carriers are preparing to land at the congested, delay-prone airport. Delta dal, Northwest nwa, Continental cal and US Airways lcc plan new service there from eight U.S. airports, including three that now have no Heathrow flights.

In addition, Air France is launching the first non-stop service between Heathrow and the USA by a carrier that is neither British nor American. Its new Heathrow-Los Angeles route will be part of its new trans-Atlantic joint venture with Delta.

Incumbents ramp up

The incumbent carriers at Heathrow are beefing up, too. American and BA are moving their Dallas/Fort Worth flights, long restricted to Gatwick Airport, to Heathrow. American also is moving its Raleigh-Durham flight to Heathrow. United is launching Denver-Heathrow service. Virgin has started a new Chicago route and added a sixth daily New York flight.

If more slots — time-specific landing and takeoff rights needed to operate at Heathrow — were available, "The rush would have been bigger," says Glen Hauenstein, Delta's executive vice president of network planning and revenue management.

Delta got its essential Heathrow slots for new service from New York and Atlanta, and wants more, he says. But the USA's No. 3 carrier will let demand catch up with 7,100 additional seats a week being added to the U.S.-Heathrow market — and for slot prices to come down — before it buys more. Recently, prime-time Heathrow slots have been selling for around $50 million, and carriers need two slots for each flight.

Delta already has more trans-Atlantic service than any U.S. carrier. But until now, it had been locked out of competing for the huge number of high-fare-paying business travelers who fly via Heathrow.

Not only do more than a third of the 51 million U.S.-Europe air travelers annually use Heathrow, they pay more than the average U.S.-Europe traveler to do so.

"For us at Delta, being the largest carrier at (John F.) Kennedy Airport in New York, it was a huge hole in our pocket not to be able to serve the single biggest and most important travel market out of New York," Hauenstein says.

Fares rising anyway

The economics of supply and demand say that consumers will benefit from the increase in flying and in service options.

But the financial benefits for consumers will be partially masked by recent big increases in airfares due to higher jet-fuel prices, says veteran consultant Jon Ash, who advises U.S. and foreign carriers on their international expansions.

"Still, there will be fares in the U.S.-Heathrow market this summer that will be lower than they otherwise would have been," says Ash, president of InterVistas-ga2, in Washington, D.C.

Ash estimates that there will be 25% more flights between the USA and Heathrow this summer than last, and that there will be 22% more seats available for sale.

That will be offset by a 35% reduction in flights and a 38% reduction in seats between the USA and Gatwick, London's more distant, No. 2 airport. But the number of flights to Stansted, London's No. 3 airport, and to the No. 4 airport, Luton, will rise 19%, and the number of seats into those airports will rise 46%. The overall result, Ash predicts, will be an 8% increase in seats and a 9% increase in flights between the USA and greater London.

Financial impact limited

What's good news for consumers and the new carriers in the Heathrow market isn't quite so good for the four incumbent carriers. BA, with about 50% of the market and more than 40% of the available landing and takeoff slots at Heathrow, has the most to lose from increased competition there. But Ash says a financial bloodbath for the carriers serving Heathrow isn't likely.

In terms of average fare paid, the routes to Heathrow are the most expensive between the USA and Europe. There's room for airlines to give a little on pricing without putting themselves into the red, he says.

That gap will narrow but won't go away. "London is still London. It'll still be the most popular destination and departure point for people flying between the U.S. and Europe," Ash says.

Growth at Heathrow will continue to be severely limited. Its two runways are all but maxxed-out, so U.S. carriers must buy existing slots for new flights.

A hurdle ahead

For all the excitement surrounding Open Skies and the arrival of new competition at Heathrow, there's a huge problem on the horizon.

To reach agreement on Open Skies, U.S. and EU negotiators last year adopted a phased approach. Both sides have the option of canceling Phase I if Phase II negotiations that begin in May in Slovenia don't achieve their key goals within a year.

British and EU government officials — as well as executives from both BA and Virgin Atlantic — already are threatening to do that.

Hauenstein suggests that's a negotiating tactic. But Ash says, "The Europeans … are pretty serious about getting some significant concessions from the U.S. side out of the next round."

Congress has been strongly opposed to European desire for a more thorough form of deregulation that, in effect, would give Europeans the right to take bigger stakes in U.S. carriers. Current law limits foreign ownership of U.S. airlines to 49% of total equity and 25% of stock voting rights. Congress also has long opposed European aims to win the right to compete within the U.S. domestic market.