No alliance can hope to survive and prosper when the partners are at each others' throats. A clear message runs through this month's cover story about KLM/Northwest: what a pity if the world's most successful airline alliance were destroyed by infighting.

If asked about the conditions needed for an alliance to be successful, any management consultant will list items such as a meeting of minds at senior level, a coincidence of strategic objectives, and a system for encouraging employees to make the alliance successful at the operational level. Sadly, in the case of KLM/Northwest these conditions are absent or are unravelling.

It is time for the chief executives of both airlines to make a decision. Either they must bury their differences and get on with their alliance, or they will have to agree to differ and find alternative partners.


Test case

British Midland's new analysis of European competition makes a strong case for the benefits of competition, pointing out that three or more airlines on a route means lower fares and more traffic.

No doubt the European Commission's own study, due out in July, will reach similar conclusions. But the Commission's own ability to oversee and encourage airline competition remains under question. British Midland advocates urgent action on state aid, ground handling, infrastructure, and abuses of a dominant position. The Association of European Airlines is angry with the Commission for even considering re-regulation of air fares.

There is little point in having a free market if players are allowed to abuse their positions in it. The implementation of EU competition laws needs to be speeded up, with measures to enable the Commission and the courts to act quickly to counter any abuses. But no re-regulation, please.


Heavy hand

Our mini-survey of new routes demonstrates just how heavy the hand of the regulators still is in many airline markets. Five out of the seven new routes surveyed have been compromised to some extent by regulatory restrictions.

Northwest was able to launch Detroit-Beijing only after some delay, and had to be inventive in balancing commercial and bilateral considerations. The Swiss government blocked British Midland's fares out of Zürich. Emirates' frequency increase to Johannesburg was conditional, and Ansett cannot make its Hong Kong flight daily. All Nippon Airways launched Kansai-Seoul due to slot shortages at Tokyo/Narita rather than to suit the market.

Perhaps the message has still not reached regulatory authorities: new air routes and more competition stimulate traffic, benefit trade and tourism, and boost national and regional economies.


Cost cuts

It is ironic that two of Europe's airline success stories, British Airways and Lufthansa, are embarking on aggressive new cost-cutting programmes at a time when many of the money-losing carriers are still struggling to get their first-generation programmes in place.

BA and Lufthansa are performing well, but not well enough. At the peak of the business cycle - in other words, now - carriers need to be earning substantial returns to enable them to invest in new equipment and survive leaner years. At the same time, competition from start- ups is intensifying. So launching a cost-cutting programme during a time of record profitability is logical.

This is bad news for carriers like Air France, Alitalia, Sabena and Iberia. They are still losing money heavily, despite the industry upturn and, for many, state aid handouts. As the profitable airlines cut their own costs further, the gap between them and their money-losing competitors will widen further still.


Body politic

At long last, moves are afoot to convert Airbus from an anachronistic partnership into a proper limited company. The structure under which Airbus has operated for 27 years is inappropriate for an enterprise which turns over $10 billion a year and plans a massive investment in a new aircraft.

Airbus may have sold over 2,000 jet airliners, but the current cumbersome structure, under which the partners are both shareholders and subcontractors, places it at a disadvantage to its principal competitor, Boeing.

Boeing executives make their own strategic decisions, know their cost structure, have wide financing options, and buy goods and services on the open market at the cheapest possible price. They have the benefits of a single corporate culture and no political interference. Boeing uses its management freedom to cut production costs and cycle times, while Airbus cannot launch a new aircraft unless it transforms its own organisation.

It is vital for airlines to have healthy competition among planemakers, and to have a manufacturing sector which can invest in risky new products. Turning Airbus into a corporate organisation can only be good for its customers.

Source: Airline Business