Kevin O'Toole/LONDON

Ever since US Airways announced that it was in talks with American and United Airlines just over two years ago, the world has been awaiting another round of consolidation in the US airline industry. Albeit a little delayed, it now appears to have taken off in earnest with all six of the major carriers engaged with each other in prenuptials.

The first big move came at the end of last year when Continental Airlines brushed off advances from fellow southerner Delta Air Lines, choosing instead to throw in its lot with Northwest Airlines. That set the ball in play and, on 23 April, American revealed that it had struck an initial agreement with US Airways, which was followed within hours by an ultimately premature announcement from Delta that it was close to sealing a potentially massive alliance with United. That too has now been agreed.

The question now is just how far these prospective tie-ups will actually go, or, indeed, be allowed to. So far they stop well short of mergers, limited to links on areas such as frequent flier programmes, scheduling and code-sharing. Even that will depend on the assent of pilots unions, who are likely to drive a hard bargain given their recent tussles over pay and conditions. Their hand is further strengthened by the power they now wield as sizeable stockholders in carriers such as Northwest and United.

The US competition authorities may also need to be appeased, especially given the current impetus gathering behind the "pro-consumer" lobby in Washington demanding restraints on the power of the major carriers. No wonder that the deals have been couched somewhat tentatively.

Northwest has so far laid out the boldest proposals for its deal with Continental. Its aim is for links on international, as well as domestic flights, bringing Continental into the existing transatlantic alliance with KLM. Both are already linked with Alitalia.

The deal is also backed by an equity stake of 14%. That also carries majority voting rights, although Northwest, itself not long out of an ownership dispute with KLM, has agreed not to exercise its power for three years and stresses that Continental will remain thoroughly independent. Neither will any code-sharing take place until Northwest has picked its way through some tricky contract negotiations with its pilots.

After signing the deal in January, Continental chairman Gordon Bethune made a point of saying that the earlier offer from Delta had been turned down because it came too close to a merger and was potentially threatening to unions - an accusation quickly dismissed by Delta chairman Leo Mullin.

Mullin, a newcomer to aviation, was quickly reminded again of the importance of pilots as Delta moved to launch its deal with United. Having promised an announcement on 24 April, the airline had to cry off when Delta pilots called in their veto over code-sharing, demanding voting rights on the group's board. Mullin emerged after the weekend saying that "constructive" talks were under way, but not before one financial analyst had described his misjudgement as a "high-profile foul-up". A full announcement was not made until 30 April, when the two carriers outlined a seven year code-share link pending pilot approval.

American and US Airways have been equally cautious - starting with a link on frequent flier programmes and airport lounges, leaving the question of code-sharing on one side until labour agreements are in place. However, their sizeable American Eagle and US Airways Express regional operations will forge links "shortly".

Even if the unions comply, there is no absolute guarantee that code-sharing would be waved through in Washington. US competition watchdog, the Department of Justice, is already studying the Northwest/Continental deal, with a ruling promised in the next couple of months, and such anti-trust scrutiny is expected to follow for the other deals.

The timing is not ideal, given the head of steam that has built up in Washington against what many politicians are now targeting as the anti-competitive evils of the last round of industry consolidation. That resulted in last month's new predatory pricing guidelines from the Department of Transportation in response to the damage to the low-fare airlines by the major network carriers. The consumer lobby has reacted swiftly to the latest alliances dubbing them "virtual mergers" and issuing dire warnings of a "market carve up" unless Congress further tightens the screw on competition policy.

John McCain, chairman of the Senate Commerce Committee and a champion of low-cost competitors, responded to news of the mergers saying that it "only heightens our zeal" to strengthen "pro-consumer legislation".

There is little disguising the extent of the consolidation that would result from the new alliances. Concentration in the US industry has already left the major airlines holding the bulk of domestic traffic. Year-end figures for 1997 suggest that the top six airlines together controlled close to 80% of scheduled traffic in the US domestic market, in terms of revenue passenger kilometres (RPKs) flown. Traffic flown by regional affiliates would add another few percentage points to the share scooped up by the major networks.

The latest proposed marketing alliances would effectively leave the bulk of the domestic market in the hands of only three groupings: United/Delta would take the lion's share with just over one-third; American/US Airways would have one-quarter and Northwest/ Continental would share around one-fifth of the total passenger traffic.

Similar shares would be produced by any such combination among the top network carriers, a fact which is likely to leave the competition authorities with little option but approve all or none of the alliances.

Equally, it is all or nothing for the airlines. None of the big six can afford to lose ground to their rivals by failing to take part in consolidation, leading to the rush to follow suit once Continental had signed up with Northwest. Assuming that the deals go through, the only US majors (with more than $5 billion sales)left in play will be Trans World Airlines (still struggling to balance its books), Southwest Airlines (with its non-network formula) and America West (now profitable, but small).

Credit rating agency Standard & Poor's, raising its outlook in the wake of the US Airways/American deal, points out that the core attraction of any of the alliances is to pull in new passengers through a broader network and wider frequent flyer scheme. "That is essentially a zero sum game among the various airline alliances since traffic is diverted from one system to another," it says. Yet it would not be "zero sum" if any of the majors find themselves unable to form a reasonably complete alliance able to compete.

There should be other potential benefits from increasing network scope - such as better management of capacity and yields on key inter-hub routes. However, given that the deals remain limited to code-sharing, it seems unlikely that there will be much room to reduce costs, and they could rise depending on the price extracted by unions for their agreement. The real benefit, especially for the smaller of the six, is the opportunity to expand their global reach without a crippling spend or the potential risk of a full merger.

Arguably the Northwest/Continental combination is the cleanest fit. Northwest's strengths lie in its fortress Midwest hub at Minneapolis, the well-developed transatlantic link with KLM and its privileges on Pacific-Japan routes. The resurgent Continental offers its base in the southern states and a strong presence at transatlantic gateway Newark New York, but, as Bethune is quick to highlight, also an increasingly serious challenge to American's domination of traffic to Latin America and rapid growth in Europe. Signs of economic boom in Latin America have been particularly gratefully seized on by carriers looking for an alternative to the troubled Asian markets.

For US Airways, its deal with American gives it scope beyond its East Coast heartland. Although US Airways has strong positions at airports such as Baltimore/Washington, Boston and New York La Guardia, it has fretted about the lack of geographical spread in the USA and beyond, including efforts to break into Europe.

As the largest pending alliance, United/Delta naturally offers the most complete joint network. As well as gains across the USA, including adding weight in the battle for gateway hubs such as New York's Kennedy, La Guardia and Los Angeles, the combination would also be the biggest across the Atlantic and Pacific, especially if existing alliance partners are thrown into the equation.

Northwest/Continental have already stated that their alliance will extend to global partners, but the links are largely unproblematic. Others have been more coy.

The trickiest could be for US Airways, given its history with its former partner and American's current hope, British Airways. When BA signed with American, the jilted US Airways was not shy in its criticism and hotly pursued its ex-partner through the courts. BA's only comment on the latest US Airways deal is that it is "largely a US affair".

Delta could also face the choice between staying with the thriving Star Alliance led by United and Lufthansa, or sticking with its long-standing but lacklustre partnership with Swissair/Sabena/ Austrian. Most financial analysts have already pencilled in a deal with Star. Lufthansa seemed to confirm the likelihood saying that it sees the potential for a "further positive step" in building US links.

The potential fall-out has not gone unnoticed by the European Commission, as it gears up to deliver judgement on the existing round of transatlantic partnerships. A rough calculation suggests that more than 70% of North Atlantic passenger traffic would lie in the hands of three US alliances, together with their existing partners in Europe and Canada.

Delta, plus the Star partners, would take around one-third, with American/ BA/US Airways not far behind and Northwest/ Continental/KLM on perhaps 15%. That statistic should give plenty of food for thought for regulators on both sides of the Atlantic.

Source: Flight International