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updated 10/14/2003 2:50:50 PM ET 2003-10-14T18:50:50

The European Union and the U.S. are to take the first step this week towards negotiating an open aviation area between the world’s two must powerful airline markets.

The talks, which begin in Washington on Wednesday, could eventually lead to a dismantling of the web of regulations, which have controlled the development of international aviation since the mid-1940s and result in a wave of consolidation across the global airline industry.

The present limits on foreign ownership of airlines - 25 percent in the U.S. and 49 percent in the EU - and restrictions on international air traffic rights have hampered efforts at cross-border mergers and acquisitions.

They have influenced the structure of the planned alliance between Air France and KLM, the French and Dutch national carriers, which is expected to be revealed this week, effectively ruling out a full merger, at least initially.

Officials in Washington and in Brussels are cautioning against hopes of an early breakthrough in the EU/U.S. negotiations, which are expected to take several years to move towards a full liberalisation of transatlantic aviation.

Both sides believe that the start of the talks represents an historic opportunity to embark on a process of reform, however, and a second round of discussions is scheduled to take place in Brussels in December.

According to Loyola de Palacio, European transport commissioner, an aviation agreement between the U.S. and the EU would provide a model for the rest of the world and the negotiations “provide an opportunity to achieve fundamental reform of this sector that we should not waste”.

In an article in the FT today Rod Eddington, chief executive of British Airways and chairman of the Association of European Airlines, calls for a dismantling of the current regime of bilateral air services agreements, which has made it impossible to create “truly global airlines”.

He warns that the talks are likely to be a “marathon rather than a sprint” and says that “as well as removing routing, frequency, pricing and ownership restrictions, the Washington negotiators will need to ensure that safety and security regulations, competition and state aid policy converge”.

U.S. officials believe an incremental easing of restrictions is more likely than a “big bang”, because some EU demands would require legislative changes that the U.S. Congress is not ready to embrace. But it is not clear whether the EU, which favours a comprehensive agreement, will agree to an “early harvest” agreement.

One possible candidate for an early deal is a change to the nationality clause, which restricts transatlantic flights of European carriers to those in and out of their home country. The European Court of Justice has ruled that the clause, contained in the present bilateral open skies agreements the U.S. has with some European countries, breaches EU law. But, in return, the U.S. may push for greater access to London Heathrow airport, which at present only two U.S. carriers are allowed to serve.

EU demands for the U.S. to ease restrictions on foreign ownership are unlikely to be met in any early agreement. The Bush administration favours increasing the foreign ownership limit from 25 to 49 percent. But Congress has resisted enacting such legislation, which is opposed by politicians, such as Ted Stevens, the powerful Alaska chairman of the Senate appropriations committee.

The weak state of the U.S. airline industry also poses a significant barrier to a comprehensive agreement. U.S. airlines are reluctant to flex their muscle on Capitol Hill over issues that would antagonise the unions.

The Air Line Pilots Association (Alpa) opposes unlimited cabotage, which would allow foreign carriers to pick up passengers in the U.S. en route to a final U.S. destination. The unions also oppose allowing U.S. airlines to lease foreign aircraft and crew - wet leasing - because it would reduce their leverage over management.

(Demetri Sevastopulo in Washington and Tobias Buck in Brussels contributed this story.)

© The Financial Times Ltd 2010. "FT" and "Financial Times" are trademarks of the Financial Times.

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