ALEXANDER CAMPBELL / LONDON & CHRISTINA MaCKENZIE / PARIS
The round of partnership ventures sweeping the world's maturer markets may not provide the savings the airlines need
Airlines in Europe and North America are strengthening commercial links in a bout of consolidation that may leave just three airline alliances standing.
KLM, Wings alliance founder member, says it is in talks with Air France, joint founder with Delta Air Lines of SkyTeam alliance, on the "increasing scope for co-operation between Air France and KLM in Europe"; Delta Air Lines, Continental Airlines and Northwest Airlines are seeking approval for a codesharing agreement that could see them joining SkyTeam; and Swiss International Air Lines is working its way into Oneworld by setting up a joint frequent-flier deal with British Airways.
If these moves go ahead, the European, US domestic and transatlantic markets would be dominated by three alliances, with the KLM and Northwest-led Wings group and the moribund Qualiflyer scheme disappearing as independent players (see diagram).
US and European competition authorities have the power to stop the absorption of Wings into SkyTeam, but analysts suggest they are unlikely so to do. For one thing, the mature airline markets of Europe, the North Atlantic and the USA are dominated by six players: the big three US carriers - American Airlines, Delta Air Lines and United Airlines - and their European partners, British Airways, Air France and Lufthansa, respectively. Losing Wings will not reduce competition appreciably, as it was always well behind the big three alliances. In addition, the airline industry is suffering, and regulators are likely to tolerate consolidation of this sort.
The Continental, Delta and Northwest proposal, which would see the three carriers connect their networks through codesharing, frequent-flier programmes and airport co-ordination, is in response to a similar proposal announced just weeks ago by United and US Airways. That proposed alliance is already undergoing US Department of Transportation (DoT) scrutiny. Analysts believe it is likely to approve United-US Airways without imposing harsh conditions - given the loans that the two carriers are likely to receive from the Air Transportation Stabilization Board, the US government will have a direct financial interest in keeping them alive. If the DoT approves one codeshare deal it will have to approve all, says one analyst.
In Europe, however, Alitalia has warned it would veto KLM's accession to SkyTeam unless its two-year dispute over a broken alliance with the Dutch carrier is settled first. Haggling over how many slots need to be surrendered to maintain competition may slow alliance entry, particularly in the less sympathetic European market.
The moves may also lead US regulators to look again at the proposed American/BA codeshare, rejected earlier this year. Analyst Chris Tarry of Commerzbank says: "The new [SkyTeam/Wings] group will have a significant transatlantic presence, and this disadvantages BA." A merged SkyTeam/Wings would have roughly the same capacity as Oneworld, with antitrust immunity already granted to its core carriers, Air France and Delta. With American/BA still unresolved, Oneworld would be seriously threatened by the merger.
Swiss, in its previous incarnation as Swissair, led the Qualiflyer alliance, which also included Sabena: the collapse of its leading members turned it into little more than a Swiss frequent-flier programme. Since its relaunch, chief executive André Dos‚ has stated his intention of leading Swiss into Oneworld, although agreements with member airlines, particularly BA, are taking longer than he expected. The latest idea is to merge Qualiflyer with BA's own airmiles programme, as the first step to a bilateral deal. Once it has signed bilaterals with the rest of the alliance, as it has with American Airlines, Swiss will be able to join.
What is driving the airlines into alliances? For one thing, the industry is in crisis. In any other industry, mergers would be happening, but regulatory barriers rule this out for airlines. Increased size and reach seem the most obvious reason, to use alliance partners to bring in more passengers to the hub, but this does not hold in every case. Virgin Atlantic, despite operating in the competitive and mature transatlantic market, provides a largely point-to-point service and has little need for alliance partners to bring it traffic. Emirates, operating in the less mature Middle East market, also has little to gain from alliance membership.
But most airlines can point to higher revenue resulting from alliance membership. Reducing costs - a benefit still more important in the current downturn - has proved more difficult. At present, "most links are about cost reduction", says Tarry. But Tim Coombs of consultancy Aviation Economics says: "Alliances have had limited success in driving cost savings. It's not going to happen until we get mergers, and that's a long way off."
Joint purchasing, the most obvious way of using alliances to cut costs, has foundered on airlines' insistence on preserving their own peculiar service levels; and joint aircraft buying, where market clout could really make a difference, is very unlikely in the near future.
Cost savings, Tarry says, are only important in the mature markets of the North Atlantic. While they may consolidate, those elsewhere are unlikely to follow.
Source: Flight International
