Open Skies – Impacts & Outlooks Spring Meeting Los Angeles, California March 20, 2008
strategic transportation & tourism solutions
Presented by: Jon F. Ash President InterVISTAS-ga Consulting Inc. 1615 L Street, NW, Suite 910 Washington, DC 20036 jon_ash@intervistas.us 2
Outline
Background Bilateral “Open Skies” Evolution of Negotiations Market Responds Second Stage-Outlook
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Background strategic transportation & tourism solutions
History of Bilateral Agreements In 1944, Chicago Convention created to provide a framework where international civil air transport could develop. Multilateralism rejected by British. Subsequent bilateral agreements ensured the viability of national carriers; regulated capacity, number of carrier designations, routings, pricing, etc. Consumers were not the ultimate beneficiary.
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Types of Bilateral Agreements that have evolved over the years Bermuda I (1946) U.S. and the U.K. Bermuda II (1977) U.S. and the U.K. Open Skies (1992) First one between U.S. and Netherlands (many countries added later) MALIAT multilateral (2001) U.S., Singapore, Brunei, Chile, New Zealand – predecessor to U.S.-EU Open Skies 4
Bilateral Open Skies strategic transportation & tourism solutions
The U.S. currently has 91 Open Skies partners ƒ Prior to Negotiations, The U.S. had 77 agreements ƒ *33 agreements includes separate agreements with all member states Europe 33 agreements North, Central, South America 14 agreements including Canada, Chile, Peru, Jamaica, Costa Rica, etc.
including EU member states*, Switzerland, Ukraine, etc.
Africa 20 agreements
Asia/Pacific 24 agreements including Korea, New Zealand, UAE, Thailand, Pakistan, Singapore, India, etc.
including Egypt, Ethiopia, Senegal, Namibia, etc.
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The U.S. had Open Skies agreements with many European Countries—Pre U.S.-EU Major countries such as UK, Ireland, Spain and Greece were operating under controlled regimes. Carriers from “Open Skies” partner countries are allowed to participate in antitrust immunity relationships.
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Barriers to moving beyond bilateral “Open Skies” Nationality clause Restrictions on foreign ownership and control of domestic carriers Right of establishment 7th Freedom rights Cabotage Fly America Wet Leasing Civil Reserve Air Fleet (US) Some of these would require significant U.S. legislative change
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Evolution of Negotiations strategic transportation & tourism solutions
Real world barriers. Why did the U.S. and EU look to begin negotiations? European Court ruled that individual bilateral “Open Skies” agreements with US violated the Treaty of Rome nationality clause. Markets including UK, Spain, Ireland and Greece were not “Open Skies” partners Carriers from both sides continued to disagree with restrictions at London Heathrow, Shannon Stop rule, etc. Brussels (the Commission) wanted to control the aviation regulatory environment.
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First Stage Agreement In June 2004, the EU Council of Transport Ministers rejected the proposed first stage agreement as “imbalanced” The Council directed the Commission to return to the negotiating table to rectify the “imbalance.”
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Changes between 2004 and 2007 Agreements
Language on ownership Franchising capabilities Wet Leasing Agreement to begin Phase II negotiations Pressure of ECJ ruling prompted the Commission to deliver an agreement.
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Practical Impacts of Agreement Opens London Heathrow to all Carriers
Slots selling for $25 million/pair
CREATE “CARRIER OF THE COMMUNITY”
Carriers may now operate what was formerly 7th freedom services.
Eliminates Treaty of Rome violation (ECJ decision)
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Market Responds strategic transportation & tourism solutions
Current U.S. nonstop gateways to Europe by Departures ƒ
75% of all departures are from 8 airports with more than 20 average daily departures
Airport
ADD*
JFK
86
EWR
62
ORD
39
ATL
30
IAD
29
PHL
24
BOS
22
LAX
20
SEA PDX
MSP
BOS BDL EWR PHL
DTW SFO
CVG
DEN
LAS
CLE
ORD
SLC
JFK
BWI
IAD RDU
LAX
CLT
MEM PHX DFW
ATL SFB
IAH +20 ADD
8-19 ADD
1-7 ADD
Source: OAG June 2008, Fifth Freedom Operations not included ADD is Average Daily Departures
TPA RSW
MCO MIA
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Current European nonstop gateways to the United States by Departures ƒ
52% of all departures are from 4 airports with more than 25 average daily departures
KEF
ARN BFS
SNN
Airport
ADD*
LHR
92
CDG
46
FRA
43
AMS
37
HEL
OSL
OPO LIS
+20 ADD
EDI CPH GLA MAN DUB BHX STN AMSDUS HAM TXL WAW BRS CGN KRK LGW LHR FRA BRU PRG STR MUC CDG VIE ZRH BUD GVA MXP VCE PSA NCE MAD
BCN
OTP
FCO ATH
8-20 ADD
1-7 ADD
Source: OAG June 2008, Fifth Freedom Operations not included ADD is Average Daily Departures
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U.S. – North Atlantic Passengers 2007 Passengers (000)
% of Total
U.S. - United Kingdom U.S. - Germany U.S. - France U.S. - Netherlands U.S. - Italy U.S. - Ireland U.S. - Spain U.S. - Switzerland U.S. - Belgium U.S. - Other Europe
17,218 9,323 6,242 4,665 2,895 2,075 1,926 1,568 775 4,405
33.7% 18.2% 12.2% 9.1% 5.7% 4.1% 3.8% 3.1% 1.5% 8.6%
0.7% 6.6% (1.8)% 2.8% 8.4% 6.4% 15.2% 10.9% 6.7% 10.8%
Total U.S. - Europe
51,092
100.0%
3.9%
Market
2006-2007 Growth Rate
Source: U.S. DOT T-100, YE Comparisons of September 2007
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U.S. – Europe Nonstop Structure Carrier
Seats/Week Each Way
% Share
% Change from 2006
Delta
85,380
11.7%
11.5%
British Airways
78,139
10.7%
2.4%
Lufthansa
73,148
10.0%
8.0%
Continental
64,249
8.8%
3.4%
American
60,398
8.3%
0.3%
United
50,792
7.0%
6.2%
Air France
48,098
6.6%
0.6%
Virgin Atlantic
44,767
6.1%
-0.1%
Northwest
41,776
5.7%
28.6%
US Airways
34,370
4.7%
0.0%
Other
149,330
20.4%
-1.0%
Total
730,447
100%
4.2% 18
Source: OAG June 2007/2008, Does not include transatlantic service to Russia, Middle East, Israel, North Africa
U.S. – Europe Frequency Comparisons Frequencies by Alliance Grouping
50%
2007 Frequencies 2008 Frequencies
Percentage
40%
38%
41%
30% 20% 10%
27% 22%
26%
21% 13%
12%
0%
Other Source: OAG June 2007/2008, Does not include transatlantic service to Russia, Middle East, Israel, North Africa
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Most changes have taken place in the U.S. – London market. Luton
Stansted
Heathrow City
Gatwick
Many carriers that could only serve Gatwick have announced new Heathrow service Some carriers have retained limited service at Gatwick Slots at Heathrow costly (most were traded among code-share partners) Stansted growing its role as a favorable gateway to the banking district in London British Airways has announced new services between City Airport and New York.
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Notable changes after deal comes into force. Air Carrier
Route Detroit and Minneapolis service to Heathrow, and entry to Seattle – London Heathrow market. London Heathrow – Los Angeles nonstop market (partnership with Delta) New York – Paris Orly with Air France as a partner Announced plans to serve New York from Brussels and Paris –”Open Skies” Announced that it will cease all Gatwick Operations in 2008 and shift all flights to Heathrow Entering Denver – London Heathrow market
Note: Some Routes may have been available prior to agreement but are in fact a competitive response to overall rights becoming available
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As expected, service at London Gatwick has decreased ‌
Carriers Seats
Source: OAG June 2007/2008
Flights
ATL CLE CLT CVG TPA
Same
Same
Same
DTW PHL
Same
Less
Same
IAH
Less
Less
Less
EWR
Same
Less
Less
JFK
More
Less
Less
MCO
More
More
More
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…while London Heathrow has increased.
SEA LHR SFO LAX DEN
MSP
Carriers
Seats
Flights
ATL DFW IAH MSP RDU
New
New
New
DEN EWR JFK LAX PHL SEA
More
More
More
BOS BWI MIA PHX SFO
Same
Same
Same
IAD
Same
More
More
DTW
Same
More
Same
ORD
Same
Less
Less
PHX ORD DFW IAH
DTW
ATL
EWR BOS PHL JFK IAD BWI RDU
MIA
Source: OAG June 2007/2008
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Heathrow will be more competitive. 2008 Year-Over-Year Comparisons -38%
Gatwick -35% 22%
Heathrow
25%
Seats Frequencies
46%
Other
19% 8%
Total London 9%
-60%
-40%
-20%
0%
20%
40%
Source: OAG June 2007/2008, Other includes Stansted, City and Luton Airports
60%
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Most Heathrow growth has been from U.S. New Entrants. New Heathrow-U.S. Nonstop Frequencies by Type of Carrier 12.0
Avg. Daily Departures
10.0
No new flights from any UK new entrants have been announced as of today.
11.0
8.0
SkyTeam Alliance previously had 0% LHR Market Share
6.0 4.0
3.4
2.0
2.9 1.0
0.0 US New Entrants
UK Incumbents
US Incumbents
Other
Source: OAG June 2007/2008
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For the most part, drastic changes in the market have not materialized… Air Carriers
Action Delaying start of UK – US scheduled nonstop services from Heathrow No major Transatlantic low-fare announcement has been made yet Only certain unique markets have provided an opportunity for 7th freedom service Recently announced plans to delay 7th freedom operations from Europe No application yet for Antitrust Immunity As expected, carrier added three new U.S. gateways after “Shannon Stop Rule” phase-out. 26
Partnerships on the transatlantic continue to evolve. Smaller alliance members could be acquired by larger carriers:
BA Æ Iberia Lufthansa ÆSwiss, Austrian Air France ÆAlitalia
New types of marketing and investment alliances could develop further
Aer Lingus & JetBlue Lufthansa & JetBlue 27
European majors may seek a role in potential U.S. airline mergers.
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Second Stage-Outlook strategic transportation & tourism solutions
Second Stage Negotiations begin in May 2008 in Slovenia. Priority Items for discussions Further liberalization of traffic rights Additional foreign investment opportunities Effect of environmental measures and infrastructure constraints on traffic rights Further access to Government-financed air transportation (FLY-America) Provision of aircraft with crew (Wet-leasing)
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What other issues are tied to the Second Stage and beyond? “What-if scenarios” Current agreement reads: “if no second stage agreement has been reached by the Parties within twelve months of the start of the review, each Party reserves the right thereafter to suspend rights specified in this Agreement .”
Additional parties to the multilateral regime
Switzerland, Canada, New Zealand, Singapore, Morocco
Joint Committee established to oversee rights in current agreement
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strategic transportation & tourism solutions