NEW YORK (Reuters) — Transatlantic air fares are expected to tumble when an agreement between the European Union and the United States takes effect next spring, posing a fresh challenge to the airline industry.

Traditional US airlines like AMR Corp’s American Airlines and UAL Corp’s United Airlines, are seen as particularly vulnerable. In recent years, big US airlines have turned to lucrative international routes to escape tough competition from low-cost carriers domestically.

Competition on flights between the US and Europe is expected to heat up after the “open skies” agreement takes effect on March 30, 2008.

“As it gets into its real swing, we will have fare wars,” said Terry Trippler, airline expert at US travel club myvacationpassport.com. “It’s going to get bloody.”

“It’s bad news for airlines,” said Trippler. “It’s been one area where they could make a buck.”

The open skies agreement, which was approved by EU transport ministers yesterday, will allow EU airlines to fly from any city in the 27-nation bloc to any city in the US and vice versa.

It will also open London’s busy Heathrow airport to other transatlantic carriers. Currently only British Airways , Virgin Atlantic , United Airlines, and American Airlines have access to Heathrow to serve US destinations.

Airlines broadly welcomed the agreement touting the new opportunities it will offer.

“United has long been a proponent of Open Skies and looks forward to increased competition,” said UAL CEO Glenn Tilton in a statement. “Open markets create new opportunities for United.”

Some airlines moved quickly to use those opportunities.

US carrier Continental Airlines said it filed for approval to fly between its hub in Houston and Heathrow and between Cleveland and Paris. Irish carrier Aer Lingus plans three new routes to the US this year. Delta Air Lines Inc. said it is focusing on access to Heathrow.

“You’ll see a burst of competition,” said Stuart Klaskin with KKC Aviation Consulting. “You’re going to see fares broadly fall initially.”

Airline consultant Bob Harrell said: “It’s definitely going to put downward pressure on fares because you’re opening up a lot of new markets.”

But some industry watchers were sceptical the agreement would lead to lower fares.

Airline consultant Robert Mann said the agreement will allow airlines to coordinate schedules with their alliance partners and thereby reduce competition on key routes.

“I think this is highly anti-competitive,” said Mann. “I think what we’ll see is higher prices.”