The "Open Skies" Deal Remains Cloudy... But Airlines Are Enjoying a Huge Turnaround

by Martin Denholm

The "Open Skies" Deal Remains Cloudy... But Airlines Are Enjoying a Huge Turnaround

by Martin Denholm, Senior Editor

Friday, June 25, 2010

The skies between the United States and Europe are about to become more open.

(As long as there isn't a gigantic ash cloud hovering around, of course!)

Transport ministers from the United States and European Union have expanded their "Open Skies" agreement, which was originally signed in 2007 and took effect in 2008. In short...

  • The deal allows for greater joint US-EU airline ownership.
  • As the name suggests, it "opened the skies" up to more transatlantic competition, allowing any airline to fly between the United States and EU. Certain routes were limited to specific airlines.
  • The deal is projected to be worth 12 billion euros ($14.7 billion) and 80,000 jobs.

Right now, though, the ownership playing field is uneven, with European airlines only allowed to own 25% of American airlines. By contrast, U.S. carriers can own up to a 49.9% stake in their European peers...

The expanded deal should see the balance redressed, but ministers haven't decided on exactly how the limits should be amended.

Still, this is good news for an industry that remains under pressure from higher oil prices and is arguably in need of further consolidation. Or so you might think.

Congress could scupper the deal, as it needs to approve new laws on foreign ownership of U.S. airlines. And the ultimate goal of removing the restrictions entirely looks to be a long way off.

The Airline Industry's $5.3 Billion Swing to Profit

Elsewhere in the global aviation industry, there is brighter news.

As recently as March, the International Air Transport Association (IATA) projected a total loss of $2.8 billion for the world's airlines this year. But in a major reversal, the group now foresees profits of $2.5 billion.

So what the heck has happened over the past three months to warrant such a dramatic turnaround?

According to IATA managing-director, Giovanni Bisignani, "The global economy is recovering... much more quickly than could have been anticipated." In fact, the group originally thought it would take the industry three years to claw back the massive $81 billion in revenue that it lost in 2009.

Leading the way is Asia, where projected GDP growth of 7% this year is filtering through to airlines (it should be noted that this figure doesn't include Japan).

By contrast, Europe is lagging, where the IATA estimates a loss of $2.8 billion for the continent's carriers in 2010 - revised higher from losses of $2.2 billion. However, it's worth remembering that the Icelandic volcanic ash cloud that sat over much of Europe for several weeks in April and crippled air travel led to losses of $1.8 billion for airlines.

So despite the brutal 2009, volcanic ash, and ongoing industrial action problems at British Airways, the airline industry is showing surprising resilience. And when even this bruised and battered industry is on the road to recovery, you know at least something is going right!

Best regards,

Martin Denholm

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