EU inches toward "open skies" pact, Britain wary

BRUSSELS (Reuters) - The European Union hopes to launch a new era in transatlantic air travel on Thursday by backing a broad aviation pact with the United States, but objections from Britain may cast a cloud over the deal.

EU transport ministers are set to decide whether to approve an "open skies" agreement with Washington that proponents say would boost competition, increase flight frequencies, reduce fares and create jobs on both sides of the Atlantic.

The pact, which comes after four years of talks, would allow any EU airline to fly from any city in the 27-nation bloc to any city in the United States and vice versa. It is slated to enter into force in October.

But Britain is reluctant to lift restrictions on London's busy Heathrow airport without getting more rights to invest in U.S. carriers.

Industry sources say Britain will vote against the deal unless there is a delay in its implementation and an automatic termination of its contents if talks for a second stage -- when the EU will push for greater ownership rights of U.S. airlines -- are not in full swing by 2010.

One EU diplomat said there was cautious optimism that a deal would be reached on Thursday. "It should be doable, but it's not completely in the dry dock," he said.

Speculation that "open skies" would trigger airline mergers boosted shares in British Airways Plc (BA) and Spain's Iberia on Wednesday.

Despite objections from BA, which stands to lose lucrative market share at Heathrow, European and U.S. airlines largely support the deal.

"We welcome the agreement and hope that it's approved," said Anthony Concil, spokesman for airline industry group IATA. "It's not the great leap forward that's going to fundamentally change the industry, but it's a step in the right direction, so let's take it."

Currently British Airways, Virgin Atlantic, AMR Corp.'s American Airlines and UAL Corp.'s United Airlines are the only carriers allowed to fly transatlantic routes through Heathrow.

The new rules would abolish those restrictions but would not create extra takeoff and landing slots at the busy hub.

U.S. rules limit foreign investment in U.S. carriers to 25 percent of voting-rights, whereas U.S. companies can control up to 49 percent of EU carriers -- a key sticking point for Europe.

The new deal would give European companies the right to own more than 50 percent of non-voting equity in U.S. carriers and allow the EU to limit U.S. investment in EU airlines to 25 percent of voting-shares.

(additional reporting by Pete Harrison in London)