American Airlines is pushing alliance logic to the limit, leaving its rivals howling in protest and regulators perplexed at the issues of hub and market dominance that have been brought to the forefront. Karen Walker reports.Mention the word 'alliance' in the same sentence as 'American Airlines' and you might as well put a match to a fuse. Never in the conflict-ridden history of the airline business have so many been so outraged by the strategy of so few.

Having waged war on American's plans to forge a transatlantic alliance with British Airways and on its proposals for major codeshare agreements in Latin America with Avianca and the Taca consortium, it was inevitable that rival US majors would also find much that was unpalatable in the recently announced alliance with Aerolineas Argentinas, its regional subsidiary Austral, and Iberia. The swiftness of the response, however, shows how finely honed a game alliance bashing has become.


American made its announcement concerning the Argentinian and Spanish flag carriers on the same Friday that BA announced its memorandum of understanding with Iberia to discuss a cooperative agreement that might also include participation in the proposed AA/BA alliance.

By the following Monday, American's rivals were screaming for regulatory intervention. The rhetoric was familiar. Continental Airlines, which had also bid for a share in Aerolineas, accused American of joining forces with British Airways to 'crush competition' in a '. . . quest for global dominance'. Both Continental and United Airlines called for detailed reviews of the proposals by the US Departments of Transportation and Justice and by the European Union.

Whether Robert Crandall, American's chairman and chief executive officer, is blatantly seeking world dominance or simply fighting for the right to be competitive in the new, global-alliance world, has become a subjective and highly contentious issue. But the proposed alliance with BA, at least, seems set for resolution one way or the other by the end of October. The outcome will have a profound effect on the other alliances that are either already in place or being explored.

What has changed in recent weeks is American's strategy in the war of words over its alliance plans. American, which in previous years had even denied the need for international airline partners, jumped on the global alliance bandwagon with typical naivity. When the alliance with BA was unveiled more than a year ago, the hope had been for regulatory approvals to be in place by last November. The unrelenting storm of protest that followed, not just from competing airlines but also from within the US Congress, appeared to catch American off guard.

Although the airline made public its arguments in favour of the alliance - which rested chiefly on the universal benefits of a US/UK open skies treaty - it resisted slinging mud back at its rivals. More fatally, perhaps, the carrier seemed to ignore the anti-alliance lobby that became increasingly vocal and powerful in Washington.

Why didn't Crandall advise his intended ally, BA's CEO Robert Ayling, to put in an appearance at a Senate judiciary antitrust subcommittee hearing in April? That oversight had some senators accusing BA of arrogance and built up a tension they could not wait to unleash on Ayling when he did finally show up at another hearing later in the year. But at that later hearing it was neither Crandall nor Ayling that held court. Instead, US Airways' CEO, Stephen Wolf, silenced the room with his methodical breaking down of the AA/BA argument and his strongly delivered insistence that the real issue was Heathrow and the limited access to London's main airport.

Maybe it was that hearing, which seemed to go so badly for American and BA, that was the catalyst for American's switch to more fighting talk. Its terse response to Continental's and United's protests over Aerolineas was to accuse them of whining and, in Continental's case, of being a poor loser.

Baseball bat

There are other signs that American is no longer prepared to absorb the verbal blows. David Schwarte, managing director of international affairs at American, admits he was 'ready to throw a baseball bat' during the latest Senate hearings and adds that the airline's patience on this issue has limits.

American is looking to the October deadline with some urgency because it needs to be ready for the slot coordination programme in November and to organise a schedule for next April. 'Commercial decisions have to drive this soon,' says Schwarte. He also has some stern words about his competitors' campaigns and has fortified American's position on the Heathrow slots issue. 'The hypocrisy has been so frustrating,' he says.

That frustration is especially marked when Schwarte is tackled on the issue of American's proposed alliances producing dominance at some of the world's most critical hub airports - notably, Heathrow and Miami. 'There is nobody out there who is saying that other than Cyril Murphy,' says Schwarte, with obvious exasperation at constantly hearing United's vice president of international affairs argue that any alliance which dominates Heathrow, Miami and Tokyo's Narita airports will also dominate the world's airline traffic.

'The "iron triangle" idea is clearly an overwrought product of an overinventive mind,' says Schwarte. 'Miami is an airport where we have no unique advantages that we didn't earn. United bought the Pan Am routes; American bought the old Eastern routes. We started dead even. There is no reason why they could not have been head to head with us today in Latin America except that they invested their money elsewhere, in Asia. We did what businesses are supposed to do.'

Finding slots

Some corporate frustrations are also directed at another vocal adversary, Virgin Atlantic's chairman Richard Branson. 'Mr Branson said [at the Senate hearings] that slots could not be had. How in the world could he look the senators in the face and say slots are not available? He has just got a new roundtrip, daily slot to fly from London to Los Angeles and he has moved a daily service from Gatwick to Miami to Heathrow. So there are 28 slots he has found.'

Schwarte points out that American is not claiming that slots are easy to find at Heathrow, simply that they are available either through airport improvements, transfer from partner airlines or purchase. American is prepared, he says, to sell 12 daily slots if it gets the immunised alliance, but there is no question of handing them over for nothing. 'We paid a princely sum for those slots together with the right to operate to London,' he points out, refering to the purchase of TWA's transatlantic routes in 1991.

The Heathrow slots argument has been turned into a useful diversion for American's competitors, argues Schwarte. 'What our critics have been able to do is change the debate from network ecomonics and growth of alliances to a very emotional one of slots, which is easier for people to understand. That is why everyone is fixated on slots.'

But for all the delay and outcry, Schwarte insists that American is not yet looking at any backup plan, such as a codeshare agreement only or dropping BA altogether. The immunised alliance remains the 'much preferred' option and BA remains the preferred European partner because of its similar corporate profile.

Schwarte is also in no doubt that the trend towards global alliances is 'inexorable' along with the movement towards open skies. But its rather late acceptance of this explains why American is now going hell for leather down the alliances track somewhat late in the day compared to Delta , Northwest and United.

In the past year American has inked agreements with no fewer than 10 carriers, including the latest with Aerolineas and Iberia. No wonder its rivals are worried.

'The wisdom of the direction in which these two strong currents of alliances and open skies are taking us is irrelevant,' says Schwarte. 'We are all being propelled by them whether we like it or not. And those airlines who wish to be real players in global aviation in the 21st century had better find a way to capitalise on both trends.'

American's concern is especially focused now on United's Star Alliance with Lufthansa, Thai Airways International, SAS and Air Canada. 'American did not champion the idea of global alliances. We decided it was better to grow internally, but we lost that debate,' says Schwarte. 'So now we have decided to put together an alliance that would match the others.'

Schwarte claims that American is already having trouble maintaining a viable service on some routes where it is pitched against Star Alliance services (see table). Crandall has said that his alliance would be 'dwarfed' by the Star Alliance, which has $42 billion in annual revenues against AA-BA's $27 billion, and serves 78,000 potential city-pairs against AA-BA's 36,000. However if all planned alliance members are taken into account, American's group is very similar to Star (see page 31).

If approved, the agreements with Avianca, Aerolineas and the Central American five-airline Taca Group will fit in with American's strategy of creating a viable global alliance. But they are different from the BA proposal in important ways, says Schwarte. 'We will not seek antitrust immunity with Aerolineas or Taca,' he says.'They will operate far more like conventional codeshares in that we will be competing for seats on the same planes. But Aerolineas brings us the ability to extend our network to Argentinian points we cannot reach ourselves. Similarly, our agreements with Taca and Iberia would be very efficient ways to expand the network.'

American's argument that its alliance strategy is essential to stay competitive draws some sympathy from Craig Jenks at New York-based Airline/Aircraft Projects. But Jenks also identifies the unique problems that this alliance has raised. 'The crux of the matter is whether they are just doing the same as everyone else,' he says. 'And legally, they are. What Crandall is really saying is, "don't blame me, I'm just responding to everyone else." But Crandall's skill, imagination and creativity is pushing the envelope. So at some point, governments have to start asking questions.'

Three pillars

Jenks' analysis is that American's alliance strategy is a logical extension of its domestic strategy. 'Ten years ago, American's domestic policy was built on one pillar - hub and spoke. Today, it is built on three pillars: hub and spoke; being in big city pairs; and having the largest possible market share in the markets they choose to be in,' he says. The key difference is that a powerful hub to hub concept has evolved from the hub and spoke pillar, he adds.

Jenks believes American is trying to replicate this with its foreign alliances. 'With the London route, they would clearly get all three. Even with open skies and slots set aside, under any imaginable outcome they still would get massive market share and hub to hub in a major way.'

Similarly, he argues, the Taca agreement 'exposed the fireworks of Miami.' ' The big city pair pillar does not happen here, but this certainly hits the other two criteria of market share and hub to hub,' he adds.

'With Aerolineas, the combined market share is said to be about 70 per cent. Clearly there is hub to hub because Austral, the domestic carrier, is involved. And it's a pretty big city pair - not one of the all time greatest, but not insignificant either.'

But the proposed alliance with BA is the landmark deal in global alliance strategies, says Jenks. 'What happens here will be extremely important. It will have a very strong influence on commercial decisions elsewhere. For example, the [proposed] talks between Delta, Continental, Alitalia and Air France are very iffy right now and it is by no means certain that they will happen. But what they are essentially doing is letting others know that this is what they would do 'if'. . . It's classic CEO behaviour with Gordon Bethune leading the crusade. If, on the other hand, the AA/BA alliance does not come out in its current form, it relieves the pressure on the other CEOs.'

One outcome might be a de-escalation of alliances. Indeed some even question whether American's true aim may have been to push the alliance logic to the limit in order to incite regulatory scrutiny of both its own and rival alliances like KLM/Northwest and Star.

Tim Hannegan, assistant director of aviation issues at the US General Accounting Office, also believes the outcome of the AA/BA proposal will be critical to the alliance plans of other airlines, but agrees with Schwarte that alliances are part of the airline industry landscape from now on. 'Alliances are here to stay, but it is difficult to predict where we are going,' says Hannegan. 'A lot will depend on how the AA/BA deal, if it survives the review, is structured. Until that shoe drops, a lot of plans are being put on hold, not just transatlantic but in Latin America and the Pacific as well. You may see a number of changes in alliance plans over the next two years.'

Hannegan says that American, having found itself lagging on the alliance front, is now trying to leapfrog its way to the front. 'American has got to have an alliance to be a global competitor,' he says. 'It was definitely handicapped by starting in the game late.' Hannegan adds that, while there are legitimate competitive issues that are unique to the AA/BA proposal, he also believes those concerns can be addressed. 'If those competition issues can be addressed, there is an expectation at the DOT that they would like to obtain an open skies agreement with the UK,' says Hannegan.

Schwarte, meanwhile, also warns that if American is denied antitrust immunity and forced to pursue a codeshare-only agreement with BA, the resulting lack of an open skies agreement with the UKmight be the worst possible outcome for its competitors. But a codeshare-only deal would not necessarily receive automatic DOT approval either. Sources in Washington say that, at the very least, such a codeshare agreement would be highly scrutinised because the airlines share so many important routes.

Equal terms

For now, at least, American is sticking to its message that a non-immunised alliance might not 'measure up' and that it is not yet exploring that avenue. 'We are focused on getting the immunised deal done,' says Schwarte. 'A non-immunised deal would have us at such a competitive disadvantage. For instance, an alliance competitor could have a system wide sale of 25 per cent and we could not match that. This is a network business and we have got to be able to compete on equal terms.'

But Delta Air Lines' director of international alliances, Susie Snider, says that much can be achieved just through codesharing and that Delta holds its nine codeshare partners in equal regard with its immunised alliance partners, Swissair, Austrian and Sabena. 'Delta, in fact, has led the industry in developing partnerships and American has historically criticised us for it,' says Snider. What she does not emphasise, however, is that without antitrust immunity American and BA would not be able to share revenues and profits on their codeshare routes, as the Delta-Swissair group does.

Delta remains a firm advocate of open skies because it is secure in the level of service it provides and believes it can compete, says Snider. But she adds that open skies should not be used to set up a monopoly, a charge frequently levelled at the AA/BA proposal by American's opponents.

Along with all the ballyhoo American contends that, under GAO proposals for AA/BA to relinquish slots for 23 daily return flights in exchange for approval of the alliance, the partners' combined US-UK market share would drop from around 54 per cent to 45 per cent. So why is American persisting with this chase?

Schwarte says there are two overriding motivations. 'First, it extends our network beyond BA. Second, although our market share will be smaller, it will be from within a much bigger pie,' says Schwarte. But he adds that American also views the struggle as part of a larger picture. 'Airlines that wish to remain, or to become, full-fledged players in the international arena had better find a way to cope with the new world order.'

'For those who wish to be global participants rather than niche players, the writing is on the wall: join a global alliance. American proposed its alliance with BA because we will not accept being relegated to the role of a secondary citizen in the world aviation community.' Now that is a battle strategy of which even former UK prime minister Sir Winston Churchill would have been proud.

Source: Airline Business