Memorandum by Continental Airlines, Inc
(AS 15)
AIR SERVICE AGREEMENTS BETWEEN THE UNITED
KINGDOM AND THE UNITED STATES
1. INTRODUCTION
1.1 Continental Airlines, Inc ("Continental")
appreciates the opportunity to participate in the Transport Sub-Committee's
inquiry into Air Service Agreements between the United Kingdom
and the United States. Continental is celebrating its fifteenth
year of service between the UK and the US this month, and Continental
seeks to offer additional competition by operating its own flights
between London Heathrow and its US hubs at New York/Newark, Houston
and Cleveland. Continental today operates non-stop flights between
London Gatwick and New York/Newark, Cleveland and Houston and
between Birmingham, Manchester and Glasgow and New York/Newark,
as well as offering codeshare services on transatlantic flights
operated by Virgin Atlantic, where the two carriers compete with
one another, and on intra-UK flights operated by British Midland.
At present, Continental is precluded from operating its own flights
at London Heathrow, and the UK travelling and shipping public
has been deprived of the important benefits of the competition
Continental would bring to London Heathrow with its own flights.
1.2 Continued failure to resolve negotiations
over the bilateral air service agreement between the United Kingdom
and the United States to expand service at London Heathrow adversely
affects the economy of the United Kingdom, the position of the
United Kingdom as a leading gateway for Europe-US air passengers
and the passenger and freight air transportation industry as well
as adversely affecting consumers. So long as London Heathrow is
dominated by British Airways and its alliance partners, these
airlines will be able to reduce capacity for low-fare passengers,
raise further the prices for business travel, which are already
high, and constrain competition for London Heathrow-US passengers.
Providing entry at London Heathrow for only one other alliance,
such as the Star Alliance, would offer no solution to the problems
raised by dominance at London Heathrow but instead create a second
set of airlines with sufficient market power at London Heathrow
to constrain capacity and ensure high prices.
1.3 The only effective solution that will
retain London Heathrow's status as a leading gateway for Europe-US
traffic, expand trade and tourism between the UK and the US to
the benefit of both economies and benefit consumers and the air
transport industry is effective entry at London Heathrow for additional
US airlines such as Continental on critical UK-US routes. Continental
can offer the benefits of effective London Heathrow-US competition
if it is able to operate flights at convenient times between London
Heathrow and New York/Newark, Houston and Cleveland to match the
service patterns offered by the dominant alliances and compete
for connecting traffic through Continental's US hubs. To do so,
Continental requires suitable time slots and facilities at London
Heathrow. Continental would not presume to advise the UK how such
slots and facilities can be made available to Continental given
European slot allocation regulations and the infeasibility of
buying sufficient, suitable London Heathrow slots from the dominant
airlines at London Heathrow to compete effectively with them.
Without slots and facilities for effective new competitive entry
at London Heathrow, conclusion of a new UK-US agreement permitting
the implementation of alliance agreements as well as new entry,
provision of important benefits to the UK economy, preservation
of London Heathrow's status as a primary gateway and enhancements
to air transport consumer welfare cannot occur.
2. FIRST TERM
OF REFERENCE
To consider the impact of a continued failure
to resolve the negotiations over the bilateral air services agreement
between the United Kingdom and the United States on the economy
of the United Kingdom, on the position of the United Kingdom as
the leading gateway for air passengers between Europe and the
United States, and on the passenger and freight air transport
industry.
2.1 Continued failure to resolve the negotiations
between the UK and US on a new bilateral air service agreement
would perpetuate substantial harm to consumers denied the benefits
of expanded competition at London Heathrow and preclude the growth
in the UK economy that new London Heathrow operations would stimulate.
At present, London Heathrow is closed to new US competitors such
as Continental that can introduce valuable new London Heathrow
operations to benefit consumers, increase competition in the passenger
transport industry and expand UK-US trade and tourism. Thus, a
new bilateral air service agreement opening London Heathrow to
new entrant US airlines such as Continental will have a highly
positive impact on the United Kingdom. UK consumers and UK businesses
with trade and tourism involving the US will enjoy the important
new benefits that will flow from increased competition and choice
in air service between London Heathrow and the United States.
2.2 The UK travelling and shipping public
urgently needs more London Heathrow operations by newly entrant
US airlines at the most important US gateway for UK-US service,
New York/Newark, to inject new participants into the competitive
mix for London Heathrow-US traffic and produce the greatest public
benefits from vigorous airline competition. The London-New York/Newark
route, encompassing Heathrow/Gatwick-JFK/Newark flights, is the
largest intercontinental route in the world and is far and away
the most important UK-US route. Since the number of US scheduled
passenger airlines that can operate London Heathrow flights is
strictly limited to two under the current UK-US bilateral air
service agreement, the introduction of new competition on the
London Heathrow-New York/Newark route and the benefits it will
produce for UK consumers and the UK economy cannot occur without
changing the UK-US agreement to allow such flights by Continental.
Since Continental is the largest airline at New York/Newark and
the only airline with a New York/Newark hub, operated through
Newark International Airport, now the largest airport in the New
York/Newark region, only Continental can offer the effective competition
critical to consumers on the London Heathrow-New York/Newark route.
2.3 London Heathrow is dominated by British
Airways and its alliance partners, particularly American, the
largest US operator at London Heathrow. As a result, these airlines
have been highly successful in restricting the level of competition
between London Heathrow and the US, particularly for high-yield
business passengers, and limiting the availability of lower fares
and more carrier options for these UK passengers. Indeed, British
Airways and American are already reducing the number of seats
offered on their flights, which will undermine price competition
and adversely affect London Heathrow's status as a primary gateway.
The formidable force of British Airways and American on London
Heathrow-US routes has a ripple effect on air service throughout
the world, directly and through alliances, and reduces the strength
of airline competition between the UK and points throughout the
world. British Airways and American are members of the global
oneworld alliance, which enables British Airways and American
to use London Heathrow as a staging ground for dominating routes
between London and the rest of the world.[43]
2.4 British Midland is the second-largest
carrier at London Heathrow, and its alliance with United, the
second-largest US operator at London Heathrow, and their participation
in the Star Alliance, the largest global airline alliance, would
also stifle competition at London Heathrow absent significant
new entry by carriers such as Continental.[44]
Harm to UK consumers, UK-/US trade and tourism and the pre-eminence
of London Heathrow as a Europe-US gateway could all be adversely
affected if two major alliances—oneworld and Star—dominate
the London Heathrow gateway.
2.5 The British Airways/American oneworld and
British Midland/United Star alliances require an effective counterbalance
to protect UK consumers and UK trade and tourism interests against
the highly anticompetitive impact of these combinations, which
are currently unchallenged by new US airline operations at London
Heathrow such as those proposed by Continental. Unless and until
such new competition is introduced at London Heathrow, the pernicious
effects of highly restricted competition there will continue to
be felt by airline consumers throughout the United Kingdom.
2.6 All UK-US routes except for routes between
London and the US are already open to any UK or US airline. This
liberalization of the UK-US air service relationship has enabled
Continental to provide more US service at more UK cities on a
year-round basis than any other airline. Continental's service
between Birmingham, Manchester and Glasgow and points in the US
has produced important benefits for consumers, UK-US trade and
the UK economy as a whole. Expanding this liberalization of the
UK-US air service agreement to include London Heathrow and Gatwick
will increase the public benefits of liberalization in the UK
exponentially. Although new entry at London Heathrow is of primary
importance, carriers such as Continental that have long served
London Gatwick must also be permitted to continue their existing
services at London Gatwick and add frequencies in the future to
meet demand.
2.7 Changes in the current UK-US bilateral
air service agreement should also make possible the first London
Heathrow flights at US gateways such as Continental's Houston
and Cleveland hubs to expand competition through these US gateways
for passengers travelling between London Heathrow and points throughout
the United States.
2.8 Unless London Heathrow is opened to
new US airline operations, the future of London Heathrow as a
leading gateway for Europe-US traffic will remain in doubt and
face increasing jeopardy. Other European countries such as Belgium,
Germany, Italy, the Netherlands and Switzerland have reached "open-skies"
agreements with the US that have eliminated entry restrictions.
The competitive advantages of these "open-skies" gateways
will continue to grow as the options made possible by free competition
in "open-skies" countries eclipse the historic dominance
of London Heathrow as a connecting point for Europe-US traffic.
If London Heathrow slips from its position as a leading gateway
for Europe-US air passengers, London Heathrow will attract substantially
fewer passengers and shippers and the UK will lose the economic
stimulation and benefits of this traffic.
3. SECOND TERM
OF REFERENCE
To consider, in particular, the benefits and disadvantages
for regions of the United Kingdom and for the nation as a whole
of granting increased numbers of Fifth Freedom Rights both in
the United States and Europe
3.1 Codeshare alliances have enabled airlines
to extend their networks efficiently by placing their codes on
flights operated by their partner airlines rather than by operating
their own flights. These efficiencies are particularly important
on flights operated between points where the airline itself has
little or no identity of its own and little opportunity to maximise
utilization of its capacity, such as UK-third country routes for
US airlines. Given the relative efficiency of codesharing, Fifth
Freedom Rights are less important than they were in the past.
Nonetheless, open Fifth Freedom Rights can potentially encourage
new service options between UK airports and points in third countries,
particularly on unserved or underserved routes, and Fifth Freedom
Rights are a critical component of US "open-skies" agreements
and considered essential for approval of codesharing at airports
dominated by alliances or for grants of antitrust immunity.
3.2 New competition between London Heathrow
and the primary US gateways for new entrants such as Continental
will produce far greater benefits for UK consumers and UK trade
and tourism than Fifth Freedom Rights, however. Thus, the UK should
focus on achieving an agreement with the US that opens London
Heathrow to flights by new US competitors.
4. THIRD TERM
OF REFERENCE
Consider the steps which might be taken now and
in the future, including for example changes to infrastructure
and to arrangements for granting slots to air transport providers,
to resolve the impasse in negotiations between the United States
and the United Kingdom, as well as the role of the European Union
in future negotiations with the United States over air service
agreements
4.1 Resolving the impasse between the UK and
the US will require substantial London Heathrow operations by
new-entrant US airlines such as Continental, which must have ample
London Heathrow slots and facilities available at suitable times
to compete with the dominant operations of the British Airways/American
oneworld and British Midland/United Star alliances. Until such
slots and facilities are in fact made available, the UK travelling
and shipping public will be deprived of the benefits of enhanced
competition and these alliance partners will be unable to codeshare
or expand their US operations.
4.2 Slots without airport facilities at
congested airports such as London Heathrow would be meaningless.
New US airlines operating at London Heathrow will require terminal
space, ticket counters, back offices, baggage facilities, service
offices, transfer desks, airport lounges, piers, office space
and storage areas in prime locations to compete with the premier
facilities used by the British Airways/American oneworld and British
Midland/United Star alliances at London Heathrow.
4.3 The European Union's role in future
negotiations with the US over air service agreements does not
affect the fundamental necessity to expand London Heathrow-US
service, given the anticompetitive impact of dominant airline
alliances at London Heathrow, as both European and US officials
have recognised. A UK-US agreement including the right to operate
London Heathrow-US flights is the critical first step for Continental
to add competitive options at London Heathrow for UK travellers
and shippers. Equally critical, however, is Continental's ability
to secure competitive slots and facilities, and the benefits of
expanded competition at London Heathrow cannot be realised, and
UK-US alliances cannot be implemented, until effective entry is
in fact accomplished. The "open-skies" agreements effective
between the US and European countries, except for the UK, France,
Ireland and Spain, are expanding opportunities for airlines and
consumers throughout Europe, bypassing London, so the time is
ripe for opening London Heathrow to new competition.
5. CONCLUSION
5.1 Continental welcomes the Transport Sub-Committee's
inquiry aimed at resolving the impasse in negotiations between
the UK and the US on a new air service agreement. Opening London
Heathrow to flights by more airlines must be the guiding principle
of these negotiations to ensure the greatest benefits for UK consumers
and trade and tourism interests and preservation of London Heathrow's
role as a primary European gateway.
14 April 2000
43 The other oneworld members at London Heathrow are
Cathay Pacific, Finnair, Iberia and Qantas, and Aer Lingus will
join oneworld shortly. Back
44
The other Star Alliance members at London Heathrow are Air Canada,
Air New Zealand, All Nippon Airways, Austrian, Lufthansa, SAS,
Singapore Airlines, Thai Airways and Varig. Back
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