Karen Walker

To the relief of its new chief executive officer, Delta Air Lines has joined the US matchmaking game. But the planned strategic alliance with United Airlines has union and governmental hurdles ahead.

The two airlines confirmed their alliance plans on 30 April. The pair say they will remain independent companies and have no plans to merge. Initially, they will codeshare and have reciprocal frequent flyer programmes in the US only, but later will extend that to international services. European routes, however, will be excluded from the codeshare 'at this time' because of the current sensitivity over global alliances.

As such, this alliance goes further than the American Airlines/US Airways frequent flyer partnership, but not as far as the Continental Airlines/Northwest Airlines alliance that involves equity transfers and eventual voting control by Northwest. It may, however, be the one that tips the balance of governmental patience over airline alliances while the Departments of Transportation and Justice investigate the true competitive colours of a consolidated industry.

On paper, Wall Street likes the Delta/United match. Standard & Poor's has revised its outlook on Delta to positive from stable and says ratings on both airlines could be raised if the alliance is implemented substantially as planned. 'The proposed alliance,' says S&P's Philip Baggaley, 'would create by far the world's largest airline network, improving the competitive position of both carriers.'

Delta and United estimate that improved competitive position will reap an additional US$600 million annually that will benefit each partner equally. This would accrue in the third full year after the alliance is launched.

But at least one analyst is honest about where those incremental revenues will come from - the pockets of other airlines. 'An alliance does not stimulate traffic,' says Julius Maldutis at Salomon Smith Barney. 'They do reduce competition and they may lead to a reduction in the number of services to the public. But there is no evidence that traffic has been stimulated by them.'

The analyst's remarks are the type of comments that Mullin and United chairman Gerald Greenwald most fear as they prepare to convince authorities that their alliance, which would control some 36 per cent of total US airline traffic, keeps competition alive. 'If this regulatory and political battle gets debated on superficial one-liners, then we will have a problem. If it gets debated on its merits, then we don't have a problem,' says Greenwald.

The CEOs also have to make a case to each airline's pilot's union. For Delta pilots there remains the crucial issue of a voting position on the board of directors - which is something that Mullin has not yet been prepared to concede.

Source: Airline Business