UK may vote against transatlantic air pact: sources

LONDON (Reuters) - Britain will vote against a transatlantic aviation deal between the European Union and the United States unless two key conditions are met, industry sources said on Wednesday.

EU transport ministers meet in Brussels on Thursday to decide whether to approve a draft EU-U.S. "open skies" agreement aimed at liberalising transatlantic air travel, which comes after years of negotiations.

London has reservations about the deal. It wants guarantees Washington will negotiate a follow-up agreement giving European airlines more freedom to invest in U.S. airlines and operate domestic U.S. flights.

One industry source said Britain wanted a delay in implementation of the "open skies" deal until March 2008 and automatic termination of the deal if the United States was not negotiating on a second-phase agreement by 2010.

The draft agreement is due to take effect in October.

"If the rest of Europe doesn't agree with delay and automatic termination, the UK will vote against 'open skies'," the source said.

A second industry source confirmed Britain would push for a delay to "open skies" and a right to automatic termination.

A spokeswoman for Britain's Department for Transport declined to comment, saying: "Negotiations are still ongoing."

A UK government source said it was still an open question whether Britain would agree to a deal or not on Thursday. "It's still up for grabs ... whether we end up doing a deal or not," the source said.

Shares in British Airways Plc and Spain's Iberia climbed on Wednesday on speculation an open skies deal could unleash a wave of takeovers among airlines.

Prime Minister Tony Blair's spokesman said Britain was discussing the draft agreement with the EU's executive Commission, the bloc's German presidency and the United States.

Blair spoke to President Bush by phone on Tuesday about "a lot of issues," a White House official said, declining to go into detail.

The official, speaking on condition of anonymity, added: "President Bush supports the 'open skies' agreement."

A U.S. official said last week Washington regarded the negotiations as over.

ITALY CONSIDERING POSITION

Britain has been alone in voicing reservations about the agreement, but Italy's Finanza & Mercati newspaper reported that Italy could join Britain in blocking the deal, because of a perceived threat to flag carrier Alitalia.

But a spokesman for Italian Transport Minister Alessandro Bianchi said: "There is no Italian position yet; it is being decided ahead of tomorrow's meeting of EU transport ministers."

The draft agreement would allow European carriers to fly from any EU city to any U.S. city, while easing restrictions on U.S. airlines flying to EU airports -- opening London's Heathrow, where only four airlines now offer direct transatlantic flights.

Britain's main long-term demand is that Washington allow foreign airlines to buy control of U.S. carriers, establish airlines in the United States, and fly domestic U.S. routes.

U.S. airlines came out broadly in favor of the tentative "open skies" deal on Wednesday, saying it would promote competition and benefit passengers.

AMR Corp.'s American Airlines and UAL Corp.'s United Airlines, the U.S. No. 1 and 2 carriers, are now the only U.S. airlines allowed to fly to Heathrow.

"Over the long term, open skies is the right way to go," said Jake Brace, UAL's chief financial officer, at a JP Morgan investor conference in New York on Wednesday. "The Heathrow operation will face more competition, and we accept that."

American Airlines Chief Executive Gerard Arpey, speaking at the same conference, said the agreement was an opportunity to boost its partnership with British Airways.

BA and Virgin Atlantic, the only European airlines that can fly transatlantic routes from Heathrow at present, have attacked the draft accord, saying the United States won greater access to Heathrow without giving ground on the EU's key demand to loosen ownership restrictions on U.S. carriers.

(Additional reporting by Adrian Croft, Jason Neely, Katherine Baldwin and Dominic Lau in London; Ben Harding and Elisabeth O'Leary in Madrid; Andreas Moeser in Frankfurt; William Schomberg in Brussels and Alberto Sisto in Rome)