With a landmark U.S.-European Union commercial air treatytaking effect at the end of the month, the three global airline alliances are moving to secure regulatory approval for further integration, consolidate operations of member carriers and identify synergies. But the oneworld, SkyTeam and Star Alliance partnerships--built partly as surrogates for transatlantic airline mergers--generally have not impressed corporate buyers and now face scrutiny from U.S. and European regulators.
Starting primarily as marketing arrangements, alliances have evolved to now encompass numerous code shares between members to extend networks, frequent flyer reciprocity, joint airport facilities and, in some cases, antitrust immunity, revenue sharing and joint ventures. With the coming of U.S.-E.U. Open Skies, alliances will play an even greater role in establishing global competition.
This week, the European Commission's competition authority and the U.S. Department of Transportation said they are examining the impact of airline alliances on transatlantic competition through a first-of-its-kind, formal joint research project including analysis of traffic data and fares, and interviews with travel agencies and other industry parties.
The examination will occur during a presidential election year in the United States and while U.S. and E.U. negotiators begin discussing a second phase of the Open Skies agreement. Those second-phase talks likely will address further alliance developments as well as Europe's longstanding desire for the United States to relax restrictions on foreign investment in the U.S. airline industry.
Aiming to produce a report by mid-2009, the regulators also will consider "possible changes to the role of alliances" in light of the Open Skies deal. SkyTeam and oneworld currently have applications pending with DOT to expand antitrust immunity within certain elements of their respective alliances; those requests will not be held up by the new alliance study, according to a DOT spokesperson.
"Within the alliances, you will see smaller pockets that have antitrust immunity and joint ventures," said Frank Boroch, Bear Stearns and Co. managing director, speaking last week at a National Business Travel Association forum. "They will set up common P&Ls and freely allocate passengers to one European airline or the U.S. partner's metal, irrespective of who was carrying them before. If Open Skies phase two happens in 2010, you might see cross-border ownership. That is the natural evolution for this industry."
Discussing his airline's joint venture with Air France this week during the JPMorgan Aviation and Transportation Conference, Delta Air Lines president and CFO Ed Bastian said, "The reason we believe it will be as powerful as it is is because we have antitrust immunity, so we can jointly schedule, price and manage our international capacity."
But some observers said such development stymies competition. "These alliances are anything but pro-competition," said RW Mann & Company analyst Robert Mann, adding that improved pricing power (read: higher fares) is a not-so-secret aim of alliances, since their "stated goal is to rationalize capacity."
Regarding pricing, DOT and E.C. may be concerned about the alliances' impact on consumers, but U.S. regulators in the past have examined alliances' effects on negotiated corporate deals, as well.
Yet, the corporate travel community generally sees airline alliances as beneficial only when they are immune from antitrust law are therefore relatively free to negotiate joint price contracts with business clients.
"While many of these agreements result in significant increases in savings across a travel program, there are some characteristics of each alliance that can, at the same time, result in lost savings and inefficiencies," according to a recent Carlson Wagonlit Travel report. For example, some travel buyers worry "that discounts will be lower in markets" served only by members of the same alliance.
Indeed, many remain unconvinced. Three quarters of nearly 100 travel buyers recently polled by the Institute of Travel Management "could not quantify the benefits provided to their companies or travelers by airline alliances and half are confused by alliance brands and which airlines they represent."
According to ITM executive director Paul Tilstone, alliances should play a key role in "streamlining costs and services ... Yet, in our research, despite over 30 percent of respondents spending more than £5 million (US$10 million) a year on air, not one buyer admitted to solely negotiating direct with an alliance."
"Alliances were never really built with the corporate customer in mind," added HRG group industry affairs director Mike Platt. "Maybe they will think again when/if a strong KLM/Air France/Alitaliacomes into the market."
Other recent alliance developments:
- AMR Corp. treasurer and vice president of corporate development Beverly Goulet hinted during this week's JPMorgan conference about a possible new antitrust immunity application on the part of American Airlines and British Airways: "The one silver lining with regard to the opening of [London Heathrow Airport to more airlines] is that it has removed a significant impediment should we and BA together decide to file for antitrust immunity," she said. The already-pending oneworld application does not include BA.
- Having obtained additional take-off and landing slots at London Heathrow, AA on 30 March will shift all flights currently serving London Gatwick to Heathrow, ending its 26 years of Gatwick service. The carrier cited its desire to "strengthen our competitive position within the new Open Skies regime."
- DOT approved an application by oneworld partners AA and Iberia Airlines for "blanket" codeshare authority, effective 30 March. AA plans to place its codes on several Iberia routes beyond Madrid, to such cities as Amsterdam, Brussels, Frankfurt, London, Milan, Paris and Rome. Iberia codes would be used on several AA flights within the United States.
- The SkyTeam alliance is building a new lounge at Heathrow for customers of all member airlines. The alliance previously announced plans to co-locate all member airline flights in the same Heathrow terminal.
- Star Alliance partners US Airways and Swiss submitted an application to DOT for "blanket" codeshare authority. The carriers requested approval to share codes as early as 30 March on routes between the United States and Switzerland, including intermediate points and destinations beyond their respective gateways.