Continental's alliance switch alters balance of power in US

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The switch of Continental Airlines to the Star Alliance has ramifications for the key New York and Houston markets

The move of Continental Airlines into Star alters the balance of power among the global groupings and changes the competitive balance in vital regions such as New York and Texas.

After rejecting an outright merger with Star member United, Continental unveiled plans in June to leave SkyTeam next year and join Star. It will also create joint ventures with United and eventually other Star members.

glen tilton (left) and larry kellner 

United chief executive Glenn Tilton says the "arrangement will take us well beyond the benefits of a standard codeshare". Continental chief executive Larry Kellner adds: "In a network business, there is significant value gained from linking with larger networks to provide truly national coverage and expanded global reach."

In reporting a $3 million loss for the second quarter, Kellner told analysts in July that he envisioned more benefits flowing from Star than SkyTeam. He added that Continental would seek to join Star's transatlantic joint venture, which is headed by United and Lufthansa, "some time in 2009".

After it became clear the Northwest/Delta merger would make its SkyTeam membership unpalatable, Continental debated between Star and oneworld, and ultimately rejected oneworld as likely raising too many competitive issues. Continental's membership in oneworld would have concentrated too much alliance power in Texas, with Continental based at Houston and American at Dallas.

Continental joining oneworld may have also raised competitive issues at London Heathrow, where oneworld founders British Airways and American both have large slot allocations. BA and American are now mulling seeking antitrust immunity for their North Atlantic operations, a request US competition authorities have rejected in the past. The two carriers believe a new request could be approved given the changed marketplace but with Continental added to the mix they could be rejected.

The major change brought about by Continental's alliance-hopping is the competitive situation in the New York City area. It removes New York's two dominant carriers, Continental and Delta, from common membership in SkyTeam and increases competition between alliances and airports. Continental has a hub at Newark and almost 20% of the boardings at the city's three airports, while Delta, which has a growing transatlantic hub at JFK, has about 10%. American has about a 15% share of the market in New York while Star members United and US Airways now only have about 6%.

US Airways is focused on its Philadelphia hub and United on its Washington Dulles hub. With Continental strong in New York, Star becomes an East Coast powerhouse. Consultant Bob Mann of RW Mann and Associates says the move marginalises US ­Airways in the corporate travel marketplace while presenting a great challenge to American.