Transatlantic airline relationships are about to undergo massive change as carriers from both sides of the Atlantic team up to strengthen their market share and extend their global reach.
Continental and United Airlines recently announced a broad co-operation pact that will also see Continental leave SkyTeam and join the Star Alliance, while oneworld partners British Airways and American Airlines remain in talks over a deeper co-operation agreement which is reportedly close to fruition. What are the implications of such agreements for the transatlantic market?
Houston-based Continental expects to join Star and leave SkyTeam some time in 2009, and has already asked the US Department of Transportation for antitrust immunity for the first steps of its joint venture.
Continental would join United, Lufthansa and Air Canada in a transatlantic joint venture dubbed the A++ Agreement. The Star A++ group has a 25% share of the seats between the USA and Europe, about the same as the SkyTeam immunised group. Oneworld has about a 19% share, while non-aligned Virgin Atlantic has a 6% share.
United chief Glenn Tilton shakes on the deal with Continental's Larry Kellner
Bill Swelbar, head of the MIT Airline Project, says: "When you look at Star and the addition of Air Canada, we're moving toward a North American airline. That balances the new and emerging concept of a European or pan-European airline. It's a move toward the globalisation we have needed for a long time."
Continental moved to United and with it Star after it became clear that the Northwest/Delta merger would make its membership in SkyTeam - led in the US by Delta and Northwest - untenable. The carrier debated between Star and oneworld, and ultimately rejected oneworld as likely raising too many competitive issues.
But the basic impetus for the move is made clear by Continental chief executive Larry Kellner, who said: "In a network business, there is significant value gained from linking with larger networks to provide truly national coverage and expanded global reach."
The network that Continental joins is truly global, with United, Lufthansa and Singapore as global anchors. This makes clear that Continental offers more to Star than Star does to Continental - and Star had to have Continental lest someone else gain it. Consultant Bob Mann of R.W. Mann & Company says that "Continental delivers Star another well-fed New York gateway. Star has nothing behind JFK except their own turns and Lufthansa's deal with JetBlue. It also gives Star a US-flag Atlantic operation and a US-flag Central Americas operation, to replace Mexicana, which [joins] oneworld in April 2009. It also gives Star a US-flag Air Micronesia".
Star also gets access to an important chunk of the US - Texas - and into Latin America via Houston Bush. Continental gains a huge transpacific network, access to vast chunks of the globe that it did not previously serve extensively, such as Africa and the Middle East. "Star gives Continental global reach via different European and Asian gateways and likely Middle East gateways yet to come," says Mann.
Most importantly, Star gets into the New York City area, notes George Hamlin, managing director at ACA Associates. It removes the metropolitan area's two dominant carriers, Continental and Delta, from common membership in SkyTeam and sets up a competition between alliances and airports. With a hub at Newark Liberty, Continental has almost 20% of the boardings at the city's three airports, while Delta's growing JFK transatlantic operation has about 10%. And American's JFK hub, for which a new terminal was opened last year, has nearly 15%. Lagging in these rankings are Star Alliance members United and US Airways, which have a combined market share of about 6% at the three airports and a strong position at none. US Airways has focused on its Philadelphia hub about 80 miles away, and United has focused on its Washington Dulles hub, about 200 miles south of New York.
A Continental presence at New York will turn the Star Alliance into an East Coast powerhouse. In New York, says Hamlin, "it moves toward equalising the competition. And when - as is much more likely this time around - BA and AA get their antitrust immunity, it really makes the New York City area a competitive hothouse. And Latin routes out of Houston gain enormous feed as the Star Alliance can create routings from all around the world". Henry H. Harteveldt of Forrester Research says: "United is the incredible shrinking airline, with no international or domestic network planning department that we have any evidence of. So many people at Star are cheered by the thought of Continental entering the alliance."
Not to be outdone, changes are also afoot at oneworld, which is widely believed to be preparing a third attempt at gaining antitrust immunity. The two founders of oneworld, American Airlines and British Airways, have been in talks since April over forming a deeper co-operation agreement with one another. London-based ABN Amro analyst Andrew Lobbenberg sees any potential co-operation between BA and American as "positive" for BA, but he points out that "the real benefit is still more than 12 months away since assessment of the deal will be drawn out and implementation gradual". BA and American present a range of antitrust concerns - including the fact that the two hold a large amount of London Heathrow slots. They are expected to argue that with the European Union-US Open Skies agreement and a slew of new entrants to Heathrow - including Continental, Delta, and Northwest - the competitive situation has changed dramatically since the last time they sought immunity.
Swelbar of MIT says: "This is clearly a way for oneworld and SkyTeam to differentiate themselves: Star is building itself into an alliance that focuses on major cities and gateways, and SkyTeam, with its Delta/Northwest focus on secondary cities, shows it depends on those lesser gateways. Jackson, Mississippi, and Lyon, France are as important as Charles de Gaulle in Paris. When Star adds Continental, it adds a very decent portfolio of secondary cities as well."
So why did Continental choose Star over oneworld? Continental is based in the same region as American, about 240 miles south of American's headquarters. With American, Continental's membership in oneworld would have concentrated too much alliance power in Texas, with Continental based at Houston in South Texas and American at Dallas/Fort Worth in North Texas. The labour situation at American, a toxic quagmire, may also have deterred Continental, a carrier that has long enjoyed solid union relations. While United is hardly a bed of roses, it is certainly in better shape than American.
Still,some are sceptical,and Moody's Investors Services senior vice-president George Godlin says that both BA and American are in bad enough shape that an alliance - as opposed to a merger - would "just be window-dressing". Harteveldt of Forrester Research says that the regulators would very likely demand "a giveback of slots or a carve-out of some sort".