(TVLW) – For Northwest, the skies truly have turned out to be open.
The fifth largest U.S. carrier is perhaps the biggest beneficiary of two key liberalized aviation agreements reached this year. As a result of the open skies pact approved by the European Commission in March, Minnesota-based Northwest will operate three new flights to London’s Heathrow Airport.
And thanks to a similar arrangement reached with China in May, Northwest will be able to maximize service to the world’s most populous nation from its hub at Tokyo’s Narita Airport once deliveries of its Boeing 787s begin.
Access to Heathrow, the world’s busiest international airport, was the big prize U.S. carriers were targeting with the European open skies deal.
Along with Northwest, Continental and Delta were also winners. All three are members of the Skyteam alliance and had been previously shut out by a restrictive bilateral agreement.
“Heathrow is a very important business airport in the largest business market in the world, and it was closed to all but two U.S. carriers,” said Laura Liu, Northwest senior vice president for international operations, in an interview. “Those of us who were the have-nots are really happy to see it open.”
Next summer, Northwest will fly daily from Heathrow to Detroit, Minneapolis and Seattle. Continental will fly twice daily to Houston and Newark. Delta will fly daily to Atlanta and twice daily to New York.
Northwest will use slots leased from its partner, KLM, part of Air France KLM. Their relationship, which goes back to 1993, has long been considered a model, providing antitrust immunity and revenue sharing that minimizes conflict.
“We split everything in the joint venture in half. Half the airplanes go red, half go blue,” said Liu, referring to the two airlines’ colors.
The arrangement definitely works for KLM, which previously used its slots to fly small planes to Rotterdam and Eindhoven in the Netherlands.
“It’s far more interesting to use them to connect Heathrow with Minnesota and Detroit and with Seattle,” says KLM spokesman Bart Koster. “What makes it more interesting is that you get more revenue and higher yields.”
March will bring an additional bonus, when British Airways (BAB – Cramer’s Take – Stockpickr – Rating) will move to its new Heathrow terminal and KLM will take over the terminal they now share.
“That means we can make terminal four a Skyteam terminal, and all of a sudden we will have a secondary hub in Europe,” Koster said. Skyteam carriers will operate 49 daily Heathrow flights in the summer of 2008.
To be sure, easier Heathrow access has a drawback.
“Anytime you liberalize a market, there is increased opportunity for competition, and you see falling yields,” said Morningstar analyst Brian Nelson. “At the same time as you see Northwest’s European expansion, you’re seeing others expand internationally as well, and all of those airlines will face a dilution of ticket prices in 2008. Airlines always compete away their profits.”
Still, yields at Heathrow are higher than at Amsterdam, Frankfurt and Paris, the other key European hubs, Koster said, noting: “London is the financial capital of Europe.”
In China, where liberalization is occurring more slowly, Northwest’s growth will likely be ahead of the curve.
“We probably have the most experience in Asia, where we just celebrated our 60th year anniversary, and we are probably are going to be the most ambitious about expanding in Asia,” Liu said. “We are deep in the heart of trying to understand how much demand there is to and from the secondary cities in China.”
The arrival of Boeing 787s, starting in the first half of 2009, will trigger Northwest’s China expansion, Liu said. The two countries’ May agreement provides limited access to Beijing, Shanghai and Guangzhou, along with easier access to most other cities.
Determining the level of demand in those cities is a problem, because data is practically nonexistent. Much travel occurs “off the grid,” Liu says.
Industry consultant Mike Boyd, who regularly analyzes aviation opportunities in China, says: “There are no metrics to use, and there is a whole lot we don’t know. We don’t know much about travel patterns. We don’t know about how the air space is managed.
“But there is a lot of economic growth, and there is a lot of traffic, and Northwest is sitting in the catbird seat,” he said. “They have access to many of the places where China invests in the U.S., they have a Tokyo hub, and they understand the value that brings them.”