Access to US air cargo market hangs on BA/KLM merger

The fate of British Airways' planned merger with KLM could be decided during negotiations early next month over a US/UK 'open skies' air agreement.

The talks could also settle the fate of several small and medium-sized British cargo airlines which are looking for an agreement that will allow their planes to operate freely in the giant American market. But with so much at stake in the blockbuster BA/KLM merger, which would create the world's biggest airline by revenue, there are growing fears the British government will sacrifice the interests of the cargo carriers to placate Washington.

The US has warned that if BA takes over KLM, it will strip the Dutch airline of its unrestricted traffic rights to the US, and of its anti-trust immunity for an alliance with US carrier Northwest Airlines, unless London signs up to an 'open skies' accord by year's end. The threat has shortened the odds on a mini deal that would allow two more American airlines to fly into Heathrow and pave the way for British Midland's transatlantic debut.

But the odds on a parallel 'open skies' cargo deal are rapidly lengthening, threatening to lock British carriers out the US market, accounting for roughly 40% of the global air freight revenues, for many more years.

Britain's air cargo industry has always played second fiddle to the higher profile passenger business, prompting the main carriers to join forces in the British Cargo Airline Alliance (BCAA) in 1988 in order to raise their profile. Its four members - Air Foyle at Luton airport, Coventry-based Atlantic Airlines, Heavy Lift which operates out of Stansted and Channel Express from Bournemouth - account for over 90% of the UK's total independent air freight capacity with a fleet of around 75 planes, working in the charter market or flying for airlines like BA, KLM, DHL and the Post Office. They provide 4,000 direct and indirect jobs.

The BCAA has raised the industry's profile in Whitehall, but it is a midget compared to the top US players, especially FedEx, the world's biggest air freight carrier, whose use of top Washington lobbyists has ensured that cargo got equal billing with passengers in the 40-odd 'open skies' accords signed by the US.

It is a real David and Goliath battle:while FedEx mulls whether to buy a freighter version of Airbus's planned A3XX double-decker superjumbo, Atlantic Airlines is cock a hoop at picking up two secondhand Lockheed Electras.

The BCAA has honed its wish list to a single key demand: total freedom for British cargo carriers to hire their planes and crews - so-called wet leasing - to American airlines, both on domestic and international flights.

The US currently forbids its airlines to wetlease from abroad on grounds of national security. US airlines, by contrast are allowed to wetlease to European carriers and one of the biggest, Colorado-based Atlas Air, operates flights for several foreign airlines, including BA which wetleases one of its giant Boeing 747 freighters for its Hong Kong Heathrow service.

The BCAA says it has evidence that US airlines are subsidising their European operations, allowing them to undercut British and other European carriers. The average crew, maintenance and insurance rate for a US-registered Boeing 727-200 freighter operating on a contract in the US is $3,500 per hour. But US carriers are offering European customers lease rate of $2,700-$3,000 per hour despite the extra cost of support the aircraft and crew so far from their home base, according to a BCAA-commissioned report last year.

The BCAA says the US ban on wetleasing by foreign airlines has closed a quarter of the $4 billion-a-year world market to its members. Britain's small cargo airlines are also worried that the British government will give way to FedEx's demand for the right to fly on from Britain to third countries without getting anything in return from Washington.

The BCAA was furious at the government's decision last summer to award FedEx the right to fly on from Prestwick airport to third countries after the carrier threatened to abandon its daily transatlantic flight to the Scottish airport, severing a vital transport link for the scores of small high tech companies in Silicon Glen. Within months of receiving so-called Fifth Freedom Rights, FedEx pulled the plug on its transatlantic flight anyway, switching all cargo to Stansted. And now it wants the same rights to fly from Stansted to third country destinations, especially its $250 million Euro-hub at Paris Charles de Gaulle airport. At present it has to truck cargo to Paris or charter planes from an EU-registered airline, including BCAA carriers.

The government has promised it won't give FedEx, or Atlas or UPS, the giant parcel delivery company, fly on rights unless Washington gives way on wetleasing or puts some other market-opening offers on the table when negotations resume in September.

But there's a nagging fear that FedEx will use London's desperation to get Washington's blessing for the BA/KLM merger as a lever to get its way on cargo flights. The British carriers also want Washington to allow them to operate flights within the US - so-called cabotage. They claim the US's goal in the 'open skies' negotiations is to win the right for its airlines to have access to their European domestic market while offering British carriers no equivalent access to the American market.

The BCAA is pushing for the abolition of the Fly America rule which means US officials must use US flights, and its cargo equivalent which is worth around $350 million in annual freight billings.

Britain's cargo carriers have accepted there is little chance of a breakthrough in the stalled air freight negotiations. The most they can hope for is the government will stand firm in the face of FedEx's demands. But there's no guarantee.