June 11, 2007

Heathrow 2.0: Pact Shakes Airport

London Heathrow is gearing up for a massive reorganization next year, when on March 27 British Airways will move into the new $8.6 billion Terminal 5, and the rest of the airport's terminals remake themselves into airline alliance hubs.

The airport reshuffling is scheduled to begin three days before the Open Skies deal between the United States and the European Union goes into effect, which could radically change competition on U.S.-Heathrow routes. Currently restricted to BA, Virgin Atlantic, American Airlines and United Airlines, the Open Skies agreement allows others to launch transatlantic Heathrow service.

Delta, Continental, Northwest airlines and BMI British Midland all want to do so, but much will depend on whether they can secure takeoff and landing slots at Heathrow. This will present no challenge for BMI, which owns 12 percent of the slots at the airport, but for prospective new entrants, it is an acute problem. Only 3 percent of Heathrow's potential slots are unallocated, all of them at times unattractive for transatlantic schedules.

New entrants therefore are obliged to buy expensive slots from incumbent carriers. "It is difficult to get hold of slots that will make a meaningful schedule," a senior executive for a U.S. airline told BTN. "The prices for the good ones are astronomical. Pairs are going for up to $50 million."

Some carriers are predicting the volume of new transatlantic service from Heathrow will be limited, as will its pricing impact. BMI said published business class fares to the United States from Heathrow are currently 49 percent higher than from Frankfurt or Amsterdam. "I don't think pricing will plummet, but it will get more competitive," said the same U.S. airline executive.

The other complicating factor is whether passengers will want to fly to Heathrow at all when there are three other nearby airports serving the United States. With 67 million passengers per year using facilities designed to accommodate 45 million, Heathrow long has been bursting at the seams, but since the thwarted bomb plot of Aug. 10, 2006, the situation has deteriorated. Increased screening of passengers has frequently created security lines that take 60 to 90 minutes to pass through. BAA, the airport's operator, admits the service is "intolerable" and deterring passengers. The vice president of corporate travel at one major financial services company told BTN her travelers have begun using Eos Airlines at London Stansted.

"Heathrow is horrible," the executive said. "I never thought we would get our people flying from Stansted, but now we are."

BAA has hired 500 security officers and increased screening facilities by 25 percent since Aug. 10. BAA claimed clearing security now takes less than 10 minutes 90 percent of the time. "It has improved, but there is still a problem at peak times," said Mike Carrivick, CEO of the U.K. Board of Airline Representatives. "There is no doubt Heathrow has lost a degree of transfer traffic because of its unattractiveness." BAA warned delays could rise again during the peak summer leisure season.

Congestion should be eased with the opening of T5, which is five times larger than BA's current main base at Heathrow, T4. T5 is equipped to dispatch 30 million passengers per year, and its baggage carousels can handle 12,000 bags per hour. Passengers are being promised an easier journey from curbside or train platform to departure gate. "They will move forward through the building in a logical manner, eliminating the types of confusing doubling back and cross-flow queues in the old T1 and T4 buildings," said BA commercial director Robert Boyle.

BA will switch 90 percent of its operations to T5. The remaining routes—Australia, Barcelona, Helsinki, Lisbon, Madrid and Nice—will be housed in T3, which will become the terminal for partners in the Oneworld alliance. SkyTeam will take T4 and Star Alliance T1. BAA is waiting to learn whether it can close T2 and build a new terminal on the site called Heathrow East, which eventually also would house traffic from T1. If Heathrow East does get the go-ahead, by 2012 most passengers at Heathrow will use terminals not open today.

Alliance carriers also plan tighter cooperation to take advantage of Open Skies, including BMI and United filing an application with the U.S. Department of Transportation to operate a merged transatlantic service from the airport, and Delta—without a Heathrow presence—negotiating to use Air France's Heathrow slot to provide transatlantic service, with Air France and possibly other SkyTeam carriers as codeshare partners.

"We already have antitrust immunity with Air France. Now we want a four-way joint venture with KLM and Northwest," said Armin Venencie, U.K. sales director for Delta. "Open Skies has signaled a change in the climate on antitrust immunity." SkyTeam may try to extend the joint venture to include Alitalia and Czech Airlines.

By Amon Cohen
Read the rest of this article's at the source: Business Travel News

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