<H1>Consolidation Fever</H1><H2>Major Airlines Scramble To Broaden Reach Through Global Alliances</H2><H3>By Jay Campbell</H3>The world's largest airlines are accelerating the creation of intercarrier alliance networks and bringing those already in existence closer together, streamlining service and potentially increasing costs for travel buyers.
While the creation of non-equity cooperative agreements-which for travelers has primarily meant code-sharing arrangements-have not been equated with consolidation, today's far-reaching marketing alliances have become the next best thing to mergers and acquisitions.
In a sense, the airlines have come to the conclusion that if they can't beat 'em, they'll join 'em-or at least put their designator on a few seats and pick up some additional revenue.
Over the past year, cooperation among traditionally competitive carriers has reached new heights. Major players who are known to be seriously considering setting up new alliances, under the premise that they will seek and receive antitrust immunity, include Air France, American, British Airways, Continental, KLM and United.
Feuling this activity, in part, is the Clinton Administration's support of opening international boundaries and willingness to grant antitrust immunity, which allows the airline partners to work as one entity. In the past month alone, the U.S. Department of Transportation has granted antitrust immunity to American, Delta and United and their international partners.
Although the consolidation trend is global in nature, it is these three airlines and Northwest that have pushed it the hardest. All four are vying to become the buyers' "airline of choice," and each has realized that the market in which to do it is not the United States but the world. Competition at home doesn't provide expansion opportunities because, as Northwest Airlines CEO John Dasburg put it, "Competing in an area in which you don't already have a competitive advantage, such as a historic presence at a hub, is almost impossible. The domestic industry has rationalized itself."
Avoiding those traps, carriers are setting up partnerships with one or more of the slew of strong, profitable foreign carriers and exploiting their historic presence. That way, they can increase their revenue sources without going through the cost-bloating of a merger with, say, USAir or Continental.
Of course, there are risks in international agreements, so the big four have chosen the North Atlantic as a test lab. It's the most lucrative market in the world, and it's where the first international alliance of some magnitude took shape, between Northwest and KLM. The North Atlantic also is where an alliance of the greatest magnitude, between American Airlines and British Airways, is now being contemplated.
Queried on the flurry of talk about international airline partnerships, American Airlines chairman Robert Crandall last week referred to rumors of his talks with British Airways as the "flavor of the week."
While he didn't confirm or deny those rumors, his inflection on answering a more specific question about competitive concerns was revealing: "They didn't take away too many routes from the Germans as a result of the United and Lufthansa partnership. Why should they take any away from us and the Brits if we got together with BA? Or Air France?"
While Crandall hopes that the regulatory interference in an alliance with BA would be minimal, more than likely it will be greater than any of its predecessors.
"I think an agreement between BA and AA is likely," said John Ash, a consultant for Washington, D.C.-based Global Aviation Associates. "But they'll have to pay a price. These two carriers dominate the U.S.-U.K. market, so you would need an open skies agreement between the U.S. and the U.K., as well as the opening of slots at Heathrow."
Other observers agreed that the regulatory entanglements are many, but are more skeptical of whether the deal will go through.
"I don't think either BA or AA wants Heathrow opened up," said Goldman, Sachs & Co. analyst Glenn Engel. "Perhaps they would jointly market the European continent only. But the conflict is BA's partnership with USAir, which has said its growth plans include Europe."
Lehman Brothers analyst Brian Harris called American's and British Airways' management "control freaks," and said a deal between them "wouldn't be nearly as good a structural fit as USAir would be to either of them."
The two carriers do seem to have government on their side, at least in principle. U.S. and U.K. negotiators have struggled for months to liberalize the bilateral air agreement, and some say this deal may give them an impetus for getting an open skies agreement in place. Sen. Larry Pressler (R-S.D.), chairman of the Commerce Committee, recently went so far as to call this "a truly historic opportunity."
It will be historic for carriers such as Delta and TWA, which lack valuable access to Heathrow. It also might be historic for Virgin Atlantic, which has the third largest market share from London to the United States, behind American and BA.
The United Kingdom, of course, won't be the first major foreign market to open up for U.S. carriers. In fact, the DOT, with the help of the Department of Justice (and some corporate travel managers), just handed out three awards of antitrust immunity to groups of airline partners-American and Canadian Airlines International; United and Lufthansa; and Delta, Sabena, Austrian, and Swissair. These awards were followed by the filing of an application by United and the Scandinavian Airlines System, and Air Canada said it also would file one soon, presumably with United (see stories, Pages 6 and 8).
According to analysts, antitrust immunity provides for the partner carriers the freedoms associated with a cross-border merger without the financial and managerial investment, which is limited anyway.
"You can't undertake cross-border mergers, so you need to undertake joint ventures," said Ash. "And to make them efficient and effective, you need immunity. This is the interim step to actual cross-border mergers, which are five to 10 years away."
According to Michael Levine, Northwest's executive vice president of marketing and international, "There are a lot of advantages that can be derived from acquisitions which can instead be acquired through alliances."
Northwest should know. The airline's pioneering partnership with KLM illustrates for the rest of the industry both the benefits and the potential risks of even partial cross-border investment activity.
"The KLM partnership has added $50 million to our revenue," Dasburg said. "But they have equated alliance with governance, and we have said no to the control of Northwest by KLM." Amid a lawsuit among investors in both carriers, KLM recently said that it was considering dumping Northwest for another carrier. Dasburg said he hears KLM is talking to other airlines, while Northwest is not.
There are other detriments to antitrust immunity. Many in the industry feel consumers, and particularly time-sensitive business travelers, could be shortchanged due to the potential rise in fares as fewer competitors actually compete.
The DOT and DOJ have answered these concerns by restricting immunity for routes on which the carriers have a significant presence. In researching antitrust immunity for Delta and its partners, DOJ expressed concern that business travelers on seven routes will have little choice but to fly Delta or its partners; thus, fares probably will increase because new entry into these markets is not likely. Three of the routes, from Delta's Atlanta and Cincinnati hubs, were restricted from immunity except for promotional and corporate fares. Corporate fares will lose that exemption if they account for more than 25 percent of a company's total travel with the four carriers after the 18-month period.
Proponents of immunity say it is good for the airlines, and thus good for buyers because the carriers can offer more service. "It makes a lot of sense because of the cost-savings benefits," said Harris. Ash said that while fares may go up, "service will be better."
Steven Schoen, CEO of Global Group Inc., a Burke, Va.-based consultancy, said he agreed that fares could go up, but said that "if multinational companies can leverage volume and negotiate their air purchasing, there will be more opportunities for savings."
Others, however, doubt the benefits for buyers. "It's a continuing trend toward oligopoly," said Rolfe Shellenburger, a consultant for Runzheimer International. "Combining scheduling and frequent flyer programs is very anticompetitive.