Page last updated at 17:55 GMT, Thursday, 21 February 2008

The Transatlantic price war

By Pierre Peron
BBC Money Programme

Ryanair plane on a runway
Ryanair has taken the EU short haul market by storm

The new Open Skies agreement between the European Union and the United States, which is to come into effect on 30 March, will end decades of strict regulation of transatlantic flights.

Under the agreement, any European or American airline will be allowed to fly from anywhere in Europe to anywhere in the US.

The most expensive real estate in the world isn't in Manhattan or Tokyo, it's the space in the business class cabin
Travel writer Simon Calder

It will cancel out the privileges for long-established carriers such as British Airways, which is one of only four airlines currently enjoying the right to fly the lucrative London Heathrow to US routes.

The question is whether increased competition from the Open Skies policy will create a price war similar to that which followed the deregulation of European airspace in the 1990s.

That move ushered in the era of Ryanair and Easyjet and transformed short-haul air travel in Europe

Who will benefit?

The different nature of transatlantic aviation means that the benefits to the 50,000 people who fly daily from the UK to the US will be less evident, at least in the short term.

British Airways planes
1944: Chicago Convention sets framework for civil aviation
1946: Bermuda deal regulates flying between US, UK
1977: Bermuda II keeps rule that only 2 UK, 2 US carriers can fly out of Heathrow
2007: Open Skies agreement deregulates transatlantic travel, opens the EU market to US
2010: Open Skies II deadline to open the American domestic market to EU airlines

In economy, the basic cost for an airline to fly a passenger to the US is a bit more than 200.

If you add taxes to that, it is clear that off-peak fares cannot drop any lower than they already are unless the price of oil falls.

Where competition can make a difference is in peak-time transatlantic fares, which are currently 700 or more.

With Air France, Delta, Northwest, and Continental Airlines launching new routes within days of Open Skies coming into effect, the prices of economy tickets during the summer and Christmas holidays should drop.

Bob Schumacher, senior director at Continental, looks forward to challenging the Heathrow old guard.

"We can finally take them on their own turf," he says. "They've been living in a protected commercial environment for many years and at long last we can fly our flag next to theirs and the customer can choose."

Business class competition

The real action, however, will be at the front of the cabin in business class.

Continental hopes to benefit from the changes

This is where the majority of profits are made.

British Airways and Virgin Atlantic have been able to charge more than 4,000 return in business class between Heathrow and JFK.

As travel writer Simon Calder points out, "the most expensive real estate in the world isn't in Manhattan or Tokyo, it's the space in the business class cabin."

That is a stupendous amount of cash helped by the fact that much of the competition is excluded."

That competition has already begun in the form of several start-up airlines launching business-only services from Luton and Stansted to New York.

But Willie Walsh, the boss of British Airways, is not worried:.

"We've seen one of these all-premium carriers [Maxjet] already go into bankruptcy," he says.

"I haven't seen the latest financial figures for EOS and Silverjet, but I know from press reports that I've read that they are not profitable at this stage.

"So it's a difficult market for them and it's difficult because it's a competitive market."

US rivals

But with Open Skies, BA will face much stronger opposition from Air France and the American giants Continental and Delta.

As a result, business travellers can expect the airlines to vie for them by offering more choice, lower prices, and improvements in service such as the new Virgin Atlantic VIP check-in at Heathrow.

In response, BA will be launching a new business-only route to New York from London City Airport, as well as a service competing with Air France on their own turf: Paris to New York.

Long-haul budget carriers

The flurry of activity at Heathrow will also provide opportunities for budget carriers such as Zoom Airlines.

It caused a stir last summer by launching flights from Gatwick to New York for just 129 one-way.

Thanks to Open Skies, Zoom will be able to fly to cheaper regional airports in the US. It will be using spare take-off slots, left behind by airlines moving to Heathrow, in order to launch budget flights to Fort Lauderdale and San Diego this spring.

That is reminiscent of the strategies of no-frills airlines within Europe.

Indeed, Simon Calder predicts that "from the traveller's point of view, the real excitement over Open Skies is some way away. It's going to be when someone like Michael O'Leary from Ryanair gets involved."

The Money Programme: Plane Crazy: The Transatlantic Price War? BBC2 at 1900 on Friday 22 February.

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