Continental's plan to leave SkyTeam and tightly align with United Airlines and its Star Alliance partners comes short of the merger agreement many expected earlier this year, but the move poses a competitive defense against the strengthened SkyTeam alliance as the Delta-Northwest deal moves forward.
Continental and United also plan to launch a four-way joint venture with Air Canada and Lufthansa—a plan that mimics in part what its SkyTeam partners Delta-Northwest and Air France-KLM are building.
Such deepened relationships can provide some of the revenue benefits of a merger without the risk, retired aviation professor and airline merger consultant Darryl Jenkins said, adding, "The alliance has less risk, but it also has less reward. A merger has more risk, more reward."
Bob Brindley, vice president of the Americas for Advito, BCD Travel's consulting division, agreed: "This is obviously a less risky way for them to go than moving forward with an acquisition that they clearly had second thoughts about."
Under the transatlantic joint venture proposal, Continental, United, Lufthansa and Air Canada plan to "pool revenue" and gain the right to jointly set fares, schedules and services and negotiate with corporate clients on international routes where immunity extends. Star Alliance carriers also are planning joint ventures for the Latin America and Asia/Pacific regions.
Where the deal falls most short of a merger is on the domestic front, as the carriers would be unable to gain antitrust immunity for intra-U.S. travel. However, Continental and United said they plan to initiate codesharing on domestic flights, "which facilitates the creation of itineraries using both carriers, as well as frequent flyer program, elite customer recognition and airport lounge reciprocity."
In the meantime, there's the business of breaking up with SkyTeam and then integrating with Star—a process that could continue through the end of 2009. Continental declined to be interviewed for this article, but a spokesperson by e-mail said the carrier "has obligations to the SkyTeam alliance and to Delta-Northwest for several months after the closing of the proposed Delta-Northwest merger." Though Continental said "the exact timeline is still being determined," the carrier by the end of June expects to "make all the necessary regulatory filings" for antitrust immunity.
The carrier already has begun to pull back in its relationships with Delta and Northwest. For example, the three carriers folded the SkyCorp Direct product, which they launched last summer for small market corporate customers to book the three carriers' content for free and also reserve other air, car and hotel content for a $5 transaction fee.
Christian Klick, vice president of Star Alliance's corporate office, said Continental is subject to the same prerequisites any new member carrier must satisfy, including IT system connectivity and frequent flyer integration, among many others. "There's normally a period between a year and 18 months between the first announcement of the intention to join and the actual joining date," Klick said.
SkyTeam carriers Air France, Delta, KLM and Northwest have a similar timeframe for putting together their own joint venture, as DOT in May gave them an 18-month deadline to implement a four-way joint venture that would supersede separate agreements between Air France and Delta and between KLM and Northwest.
SkyTeam chairman Leo van Wijk said the alliances are evolving from simple marketing arrangements to more deeply integrated entities. "The alliances in the early days were fairly loosely knit, focusing on codesharing arrangements and frequent flyer exchange. We've come to a point where everybody understands that the future of aviation—certainly under these difficult circumstances—is probably to strengthen the alliances." That includes more frequent flyer coordination, airport collocation, cost-saving initiatives and, in the case of a few carriers, antitrust immunity and joint ventures, van Wijk said.
"What you can say is that an alliance can be focused on codesharing only and then maybe frequent flyer mile exchange," van Wijk said. "The next step is to coordinate capacity and pricing, which is made possible by antitrust immunity. Then if you want to go a level deeper, as we have done between KLM and Northwest, you share all the revenues and costs and thereby your bottom line on a particular route. That's what is going to happen within this context between Air France-KLM on the one end and Delta-Northwest on the other end."
That's also what is likely to happen to Continental, United, Air Canada and Lufthansa, and the decade-old Northwest-KLM code share seems to be the template for this type of increased cooperation, Jenkins said. "Northwest and KLM is the oldest and most successful codeshare alliance, and there is no competition between them. For years, codeshares were inherently unstable because partners were competing for originating traffic. Whereas, Northwest shut down their European offices and KLM shut down their American offices. The whole idea behind it was the virtual merger. They are the ones who brought it off the best."
When Delta and Air France last year announced a similar joint venture
(BTN-online, Oct. 22, 2007), they said the Northwest-KLM deal laid the foundation.
Jenkins said the United-Continental joint venture plan creates "something to compete against Northwest and Delta. It is in part a reaction to it, in that Delta and Northwest is going to be so strong," Jenkins said. "You have Northwest-Delta on one side and Air France-KLM on the other side. These are very big deals. This really puts a lot of pressure on American. I would immediately go for antitrust immunity with British Airways. You don't want to be the last person in the dance without a partner."
Though Jenkins, and others, suspect American and BA are working on their own transatlantic immunity deal, a British Airways spokesperson said there is "nothing to report," as neither carrier has filed applications for ATI with DOT.
Instead of pulling the alliance carriers closer, Oneworld members American, Iberia, Finnair, Malev and Royal Jordanian in June withdrew a request for antitrust immunity "without citing a reason," the U.S. DOT filing said.
In response to Continental's plan to join Star, US Airways said its "longstanding codeshare relationship with United remains intact, as does our status as a Star Alliance member carrier," though US Airways had yet to enter discussions with Continental "on a possible codeshare or potential bilateral relationship."
Continental had been reevaluating its standing in SkyTeam since its alliance partners Delta and Northwest announced plans to merge earlier this year. CEO Larry Kellner during Continental's first-quarter earnings call said, "We are committed to being an important player in one of the three global alliances so we can offer a broad global network to our customers." With its days in SkyTeam numbered, Star appeared the most logical fit, Brindley said.
"There's not nearly as much overlap with United, and it gives Continental a bigger presence in the Pacific," Brindley said. "It also gives United more access to the New York market via Newark, where they really in the last few years have been pulling back, while Continental is stronger in Latin America. Continental was in a position where they were the odd carrier out with SkyTeam. From that standpoint, it makes sense."