'Open skies' fares cut in doubt

Business class and leisure travellers expecting air fares between London Heathrow and the US market to fall dramatically as a result of the "open skies" deal could be disappointed.

There will be more choice as new entrants add routes and frequencies but as the dust settles from Thursday's decision by the European Union to back the deal with the US, doubts are being raised about some claims.

Business-class fares are one example. The scale of the cuts suggested in recent days of up to 50 per cent are unlikely to be realised for most passengers, as few pay the full-rate fares used in the comparisons.

Chris Avery, aviation analyst at JPMorgan, the US investment bank, said: "Lobbyists tend to fixate on 'rack rate' flexible business fares from London Heathrow, which almost no one pays. Like new aircraft sticker prices or hotel rack rates, they bear very little relationship with actual corporate fares after discounts.

"We do not anticipate an immediate fare war," he said. "Despite popular perception, Heathrow/US fares are competitive. We saw a £200 all-in round-trip fare Heathrow/New York recently on ba.com."

Mr Avery said the expected US new entrants to Heathrow such as Continental Airlines, Delta Air Lines, Northwest Airlines and US Airways would put downward pressure on business-class fares from the summer of 2008. British Airways and Virgin Atlantic, the UK incumbents on Heathrow/US routes, would be unlikely to be able to leave corporate fares unchanged.

"At this stage, average cuts here of 5 to 10 per cent look credible to us, which might represent a similar cut to BA's profits then."

That figure is in line with those provided by the UK Civil Aviation Authority, which prepared a study for the government on the probable economic and consumer impact of an "open skies" deal. It said: "UK passengers flying to the US for business purposes are paying around £700 one-way [including taxes and charges]. We would expect reductions of up to 10 per cent over the next five years.

"Similarly, for UK passengers flying for leisure purposes we estimate that they are paying £215 one-way and we would expect similar reductions over the period of around 10 per cent."

Willie Walsh, BA chief executive, insists the London/US market is already competitive and that initially much of the extra capacity coming into Heathrow will be transferred from other airports rather than being incremental capacity.

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"In the short term, you will see a transfer of capacity from airports outside Heathrow and probably outside London into the London market. I do not think you would see a significant increase in the total capacity available in the market.

"The fares that are already available are very competitive. When British Airways sells London-New York return for £199 all inclusive, I do not believe you are going to see a significant discount in that fare. I do not believe that you will see a radical change to the pricing structure in the market," he told MPs last week.

Figures used by the European Commission before the vote for the scale of benefits on both sides of the Atlantic included the claim that 26m passengers could be added over five years and that the economic benefits could be worth up to €12bn over a five-year period.

The report prepared for the commission by management consultants Booz Allen Hamilton and Campbell Hill Aviation Group represented data for the fully liberalised open aviation area sought by the EU originally.

"The passenger numbers and economic benefits are vastly exaggerated," said one aviation economist. They depend on the second-stage negotiations for an open aviation area, which leading US congressmen are ruling out, and include removing limits on foreign ownership and control of airlines and on foreign carriers gaining cabotage in the US market.

"Perhaps an extra 2-4m passengers is possible from open skies, but 26m is ludicrous," he added.