Despite three years of intense talks with the UK, US open skies negotiators admit they are no further forward. The lack of progress is a major setback in the US Administration's declared goal for open skies agreements around the globe. But talks continue elsewhere, albeit with a more softly, softly approach.

Three years almost to the day after American Airlines and British Airways announced their plans for an alliance, hopes of an open skies agreement between the USA and the UK have met an almost total impasse. The sense of frustration at the US State Department is tangible.

Officially, talks between the two countries are "postponed", but no new date has been fixed following two postponements in June and July and the two sides are as far apart as they were three years ago. There is a framework for a phased-in open skies agreement, but US officials warn that time - if not patience - is rapidly running out. That may just be the USA's way of trying to pressurise the UK and to lend a sense of urgency to an issue that has dragged on far longer than anyone anticipated. But there is also a sense of hand wringing and a "what else can we try?" desperation.

The irony is obvious. The UK is supposed to share a special relationship with the USA - surely this should have been the easiest and most cordial of agreements? But, of course, the UK has in its pockets leverage that other countries were not able to bring to the open skies bargaining table. The Bermuda II air agreement largely gives the UK all the access that it needs, while protecting that prized international gateway, London's Heathrow Airport.

The carrot that the USA is usually able to dangle before a prospective new open skies partner - an immunised alliance for the country's flagship carrier with a US partner airline - is more of a sticking point in this particular case. The problem here, of course, is that the antitrust immunity award would be bestowed upon the American/BA alliance. And the sheer power and dominance that such an alliance would wield over the Atlantic market makes that notion palatable to almost no-one except American and BA. A loud and highly public campaign against such an immunised alliance, voiced with particular success in Washington DC by American's competitors, has left serious doubts about what could be offered to the carriers. Consequently, and not surprisingly, BA has become far less enthusiastic about an open skies deal.

Deadlines in peril

It is understood that BA is determined to block any movement towards an open skies agreement unless it is first guaranteed antitrust immunity for the alliance with American that has stalled the most recent attempts to renew negotiations. US negotiators understand this desire and are trying to use it to bring people back to the table sooner rather than later. "We have all along said that we want to get an agreement this year," says David Marchick, deputy assistant secretary for transportation at the US State Department and chief negotiator for open skies. "But if the British still want to do the AA-BA alliance, then that regulatory process will take some time and we are in peril. We are within days of not achieving that and of meeting mutually agreed deadlines."

But while negotiations appear to have reached stalemate, a new voice has come to the fore. British Midland is putting pressure on the UK Government to get a deal done so that it can get a foot in the US market. The airline is producing some convincing figures that illustrate how UK business travellers pay "way over the odds" for flights to a number of key US cities when compared to flights from other European cities. "While competition exists to attract leisure travellers, the cost of business class tickets from Heathrow to the USA are still exorbitantly high," says British Midland chairman Sir Michael Bishop.

"The UK Government has made it clear that it sees competition as a priority to encourage enterprise and efficiency and give the best prospects of a better deal for all consumers. This commitment is to be welcomed and we look forward to it bringing about the necessary changes to introduce transatlantic services and bring down fares."

British Midland gives several examples of business fares that are substantially higher from Heathrow to the USA than from other European cities. They include Heathrow to New York, where the lowest return business fare is £2,814 ($4,403) compared with £1,485 from Amsterdam and £1,309 from Frankfurt. London to Seattle is £4,988 compared with £2,329 from Amsterdam and £1,879 from Frankfurt.

British Midland is believed to be disappointed that there is not more support for an open skies deal from Virgin Atlantic, one of four carriers with access from Heathrow to the USA under Bermuda II. While Virgin has campaigned fiercely against the AA-BA alliance, its line on open skies has turned into a call for seventh freedom rights in the USA - regarded by some as a red herring.

But pressure may also come from the financial sector. Some analysts point out that, while on paper the oneworld alliance that includes American and BA could be the most powerful, much depends on the outcome of any open skies agreement. "Without regulatory relief, an alliance's power cannot be fully harvested," says a report on global airline alliances by Merrill Lynch's Candace Browning. In a rating of the four major global alliances, Merrill Lynch rates the Star Alliance highest with 71.3 points and oneworld second with 69.4 points. "In the regulatory category, oneworld scores the lowest. But if the AA-BA portion of oneworld were approved, its score would jump to 73.1 (Star's score would fall to 69.4), making it by far the most powerful alliance," it says.

The US State Department, meanwhile, sidesteps the thorny issue of antitrust immunity. "Our concern has never been whether there is an alliance between a US and a UK carrier. It has always been about whether we can open up the market. The alliance is a secondary issue," says Marchick. That does not address the overriding concern of BA about being assured an immunised alliance, but it does address what some observers believe to be the real point of open skies - greater competition and, therefore, better deals for the consumer. Such idealism may be lost in the realities of turf protectionism, but the US State Department makes it clear that the door is still open if the UK has the will. The USA remains hopeful that a phased-in deal might be worked out in which its chief aims would be to win access to Heathrow for Delta Air Lines and Continental Airlines within 18-20 months of the agreement being signed.

Argentina talks

Meanwhile, the USA continues in its quest to secure open skies deals around the world, although officials admit the approach is somewhat different from the early heady days when Department of Transportation (DoT) representatives marched around the globe with what almost amounted to a blueprint document requiring only a signature and a handshake. The USA now has 23 open skies deals in place. Most significant have been the phased-in arrangements with France and Japan.

Outside of the UK, however, other major objectives include Argentina and Brazil. Talks are expected to resume with the Argentinians in Washington DC on 27 July. Negotiators walked away from talks earlier this year after it became clear that Argentina was not committed to the idea of open skies. There are several reasons behind Argentina's resistance. First, Aerolineas Argentina enjoys exclusivity on key routes to the USA, specifically Miami, New York and Los Angeles. These rights do not expire until November next year and Buenos Aires is reluctant to allow in new US competition for as long as it does not have to - especially given the current difficult economic situation.

Second, Argentina's number two airline, LAPA, which is the only other local carrier capable of launching US service, has no interest in open skies. But most important of all, perhaps, has been pressure from American Airlines, which has bought a stake in Aerolineas, to resist an open skies agreement. It is understood that talks at a high level between the DoT and American have cleared the way for open skies to resume in July.

US negotiators regard Argentina as a "major piece of the pie missing from the open skies table". In particular, they are seeking access to Argentina for Delta and Continental as part of a phased-in deal that would also allow American and Aerolineas codeshare rights.

Another strategically important target is Brazil. Again, given this year's economic turmoils in that region, an open skies deal may not be palatable, but the USA would like to progress at least towards a cargo agreement with the South American country. Similarly, it would also like a cargo agreement with Hong Kong. Such deals may be a long time coming, but US negotiators have adopted a more flexible approach to potential open skies partners recently. They say they now spend more time explaining the open skies concept and are willing to discuss creative, individually-tailored solutions rather than simply lay down a US-dictated document. If Washington is to clinch a new bilateral with the UK, meanwhile, its negotiators will need to be extra accommodating. Because time - for what has become one of the USA's toughest open skies deals yet - is definitely running out.

Source: Airline Business