Bermuda II - Historical Background

Historical Background

In July 1976, Edmund Dell, the then new UK Secretary of State for Trade, renounced the original Bermuda Agreement of 1946 and initiated bilateral negotiations with his US counterparts on a new air services agreement, which resulted in the Bermuda II treaty of 1977.

The reason for this was that there was no provision in the original 1946 Bermuda agreement that would have allowed British Caledonian (BCal), then the UK's foremost wholly privately owned, independent international scheduled airline, to use the licences the UK Civil Aviation Authority (CAA) had awarded it in 1972 to begin daily scheduled services from its London Gatwick base to Houston and Atlanta. (These cities were not nominated as "gateway cities" in the original Bermuda agreement.) In addition, there was no provision in the original Bermuda agreement that would have allowed Laker Airways to use the licence the UK's Air Transport Licensing Board (ATLB), the CAA's predecessor, had awarded it the same year to commence a daily "Skytrain" operation between London Stansted and New York.

Under the new agreement, BCal had its licences to commence scheduled services from its Gatwick base to both Houston and Atlanta confirmed and was designated as the UK's exclusive flag carrier on both routes. It also obtained a licence and sole UK flag carrier status to commence scheduled services from Gatwick to Dallas/Fort Worth. In addition, BCal obtained a licence and sole UK flag carrier status to commence scheduled all cargo flights between Gatwick and Houston – including an optional stop-over at Manchester or Prestwick in either direction.

The UK Government chose to designate Laker Airways rather than BCal as the second UK flag carrier to New York to enable that airline to inaugurate its long-planned "Skytrain" operation on that route.

Moreover, both sides agreed to continue dual designation, i.e. designating two UK flag carriers as well as two US flag carriers, on the London–New York and London–Los Angeles routes. The principle of dual designation was extended to another two high-volume routes. The UK side chose to designate a second carrier on London–Miami, while the US side chose London–Boston for the same purpose. This meant that a second British airline was permitted to commence scheduled services on the former route while another American carrier could do the same on the latter route. The UK Government chose to designate Laker Airways as the second UK flag carrier on the Los Angeles and Miami routes while the US Government decided to designate Northwest as the second US flag carrier on London–Boston. (Pan Am and TWA continued in their role as the two designated US flag carriers between London and New York as well as London and Los Angeles respectively.)

During the Bermuda II negotiations, the UK side succeeded in having inserted into the new air services agreement a clause stating that Gatwick – rather than Heathrow – was to be nominated as the designated US flag carrier's London gateway airport whenever BCal was going to be the sole designated UK flag carrier on the same route. This clause was meant to support the growth of BCal's scheduled operation at Gatwick as well as to redress the competitive imbalance between it and its much bigger, more powerful rivals.

The UK side furthermore succeeded in negotiating a three-year "exclusivity" period for the incumbent operator on any new route with their US counterparts.

For Gatwick-based BCal this meant that it did not have to face any competitor that was using Heathrow, a more accessible airport with a bigger catchment area and a far greater number of passengers connecting between flights, on any of the new routes it was planning to launch to the US. It also meant that it had any new route to the US completely to itself for the first three years of operation, which most airline industry analysts reckon is sufficiently long for a brand-new scheduled air service to become profitable.

At British insistence Bermuda II furthermore contained clauses that made it illegal for any airline operating scheduled flights between the UK and the US to resort to predatory pricing or capacity dumping. Air fares were only approved if they reflected the actual cost of providing these services. Similarly, capacity increases were sanctioned on a reciprocal basis only. The reason for insisting on the inclusion of these provisions in the Bermuda II agreement was to prevent the much bigger, better financed and commercially far more aggressive US carriers from undercutting BCal with "loss-leading" fares cross-subsidised with profits those carriers' vast domestic networks generated as well as to stop them from "marginalising" the UK carrier by adding capacity far in excess of what the market could sustain.

In 1981, in an annex to Bermuda II, both sides agreed to automatically nominate Gatwick as the gateway airport for London for any London–US route that did not already exist under the original 1946 Bermuda agreement.

When all available routes between London Heathrow/Gatwick and the US were taken, any carrier wishing to start a new route to a US gateway city not served from either of London's two main airports at the time of application for route authority needed to drop another route. In addition, any such change could only become effective when there was unanimous agreement between both the UK and US governments. Failure of both nations' governments to agree to such changes prevented the introduction of additional non-stop flights, including between London and Honolulu, Portland (OR), and Salt Lake City.

Bermuda II's access restrictions to Heathrow lasted 30 years. BA's access rights to Heathrow under Bermuda II derived from the fact that it was the legal heir to British Overseas Airways Corporation (BOAC) on all routes that airline used to operate between Heathrow and various points in the US under the original Bermuda agreement. American's and United's access rights to Heathrow under Bermuda II derived from the fact that they were TWA's and Pan Am's respective legal heirs on all routes these airlines used to operate between various points in the US and Heathrow under the original Bermuda agreement. It was subsequently claimed that Bermuda II contained terms that US negotiators had overlooked. The agreement specifically mentioned Pan Am and TWA. When Pan Am sold its Heathrow traffic rights to United Airlines, British negotiators initially stated that they would not allow United to receive the transferred route authority citing the treaty's specific designation of Pan Am. They furthermore stated that United was not a successor airline because it was not assuming ownership of Pan Am. This may have been a negotiating ploy as the British later did allow transfer of route authority to United. Virgin Atlantic's access rights to Heathrow under Bermuda II derived from the fact that the UK was not using its entitlement to nominate a second carrier to match the two US carriers' presence at London's premier airport. The UK Government therefore took advantage of the abolition of the London Traffic Distribution Rules, which had confined Virgin's London operations to Gatwick, as well as of the US Government's intention to have American and United replace TWA and Pan Am as the designated US flag carriers at Heathrow to help Virgin establish a presence at that airport as well. These access restrictions were also the reason BA (as BCal's legal heir between London and Houston, Dallas, and Atlanta) and American (as Braniff's legal heir between Dallas and London) were compelled to continue using Gatwick as their UK gateway for all non-stop scheduled operations between London and Houston, Dallas, and Atlanta as long as Bermuda II remained in force.