Delta, Partners Realign

<B> Delta, Partners Realign</B>
<I>Atlantic Excellence Dissolves Despite Shield Of Antitrust Immunity</I>

By David Jonas

With the news that Austrian Airlines is hitching its wagon to the Star Alliance and ditching long-time partner Swissair, the first major global partnership to achieve complete antitrust immunity--Atlantic Excellence--is going by the wayside. Meanwhile, the ever-changing alliance picture promises to keep buyers guessing as global partnerships jockey for position.

Atlantic Excellence showed clear signs of breaking apart earlier this year when Delta forged a new pact with Air France (<I>BTN</I>, July 5), followed closely by new codeshare agreements between Swissair and Sabena and Oneworld founder American Airlines.

"It appears that Atlantic Excellence is dead in the water," said Kevin Iwamoto, global air and car supplier for Hewlett-Packard and Agilent Technologies in Palo Alto, Calif. "However, the airline industry always has been volatile. Alliances will change as carriers drop out or join, but the worst is when they completely fall apart. Then you must go back to the drawing board and reevaluate." Iwamoto added that it is a good idea anyway to assess alliance contracts each year to ensure the best network coverage and overall value.

Colgate-Palmolive, based in New York, has a current deal with the Atlantic Excellence group, and Cyndi Perper, director of corporate travel services, still isn't certain how it all will play out. "We'll have to make sure we cover all our bases, and that could mean going back to the individual carriers and negotiating directly with them," she said. "If they each sign on with different partners, that could work as well, though it could also mean we have to strike new deals with different alliances." Perper, who also is president of the National Business Travel Association, added that she aims to cover 90 percent of air travel in global alliances but rapid changes often serve to make that target difficult to attain.

"I thought the Atlantic Excellence alliance was doing well for each of them," Perper said, "but I guess it was not generating the revenues that they had been hoping for."

Delta said that the Atlantic Excellence partnership will begin a 12-month wind-down period that will be handled by a team comprised of all four member airlines. Meanwhile, a Swissair official said, "We are reevaluating our Atlantic Excellence and Qualifyer alliances with the departure of Austrian and we are moving quickly to ensure network availability."

Philippe Bruggisser, CEO of Swissair parent SAirGroup, said that "the commercial consequences of Austrian's departure are manageable."

Franz Zoechbauer, Austrian's general manager of the Americas, said there are 200 current alliance-wide deals, some of which will run through August of 2000--when Atlantic Excellence officially closes the book--while others are due to expire sooner.

Meanwhile, Austrian will start negotiating with United and other Star Alliance members in the next few weeks regarding the various aspects of alliance integration. "We will apply for antitrust immunity with United, Lufthansa and SAS," Zoechbauer said. "But even without it, there are a lot of things we can discuss."

Austrian on April 1 officially will join the Star Alliance, bringing along its two smaller affiliates, Lauda Air and Tyrolean Airways, to the table. Combined, the global partnership will boast an impressive fleet of 2,000 aircraft serving 800 destinations. "I believe Star will end up being the premiere alliance," Iwamoto said. "With the addition of Austrian, they are the most comprehensive and have a real strong European network." He also pointed out that the Star Alliance has a significant Asia/Pacific presence, a region where the other alliances are lacking.

To many, the abandonment of Atlantic Excellence seems an ill-timed move because it basically eliminates any benefits already achieved from its coveted antitrust immunity. "There is a lot of governmental and political heat percolating these days about alliance infrastructure in regard to competition," said Jack O'Neill, vice president of airline partnerships at St. Louis-based Maritz Travel Co. "That is why the other major alliances have yet to achieve the immunity Delta and its partners had."

As Delta phases out the Atlantic Excellence, it continues to shore up ties with its new partner, Air France. Pilot unions from the two carriers last month signed a letter of intent to formalize a coalition, an important piece that has derailed other carrier alliance efforts. The partners also have been increasing steadily the number of codeshare routes.

Meanwhile, there are enough other additions, deletions and potential changes to the world's other major alliances and smaller partnerships to make a buyer's head spin. Aside from Austrian joining Star, Delta on Thursday announced a new codeshare agreement with South African Airways that for the first time will link Atlanta and Africa with nonstop service. American and Alaska also began code sharing, and Northwest and Malaysian Airlines agreed to do likewise. Aer Lingus received authority to join Oneworld, and Singapore Airlines established links with several Star participants but has yet to formally announce membership. Japan Airlines, in a similar situation, created ties with Oneworld carriers, but it too has yet to fulfill industry speculation that it is Oneworld-bound. United also announced a new partnership with Spanair, while Wings members KLM and Alitalia took a step closer to a complete merger.

And, of course, a political tug of war continues north of the border as various parties battle for control, or at least some influence, over the Canadian carriers. While Air Canada thus far has resisted efforts to merge with rival Canadian Airlines, the end result could be a unified carrier in the Oneworld family. However, it remains to be seen if the United posse can pull off a power play to maintain Air Canada's status as a Star Alliance member. The next chapter unfolds when Air Canada's shareholders vote Nov. 8 on the merger proposal.

"The situation at Air Canada, however that is resolved, certainly exemplifies the fragility of these alliances," said Randall Malin, principal in Malin & Associates of Los Gatos, Calif. "Everyone needs to determine the consequences of a key member leaving because of merger, acquisition or government policy."

As 1999 closes, there still are several key airlines either searching for partners or opting to forge ahead with only minimal links. Some of these carriers could prove to be wildcards that plug holes and in turn draw buyer interest.

Swissair and Sabena, an antitrust-immunized duo, could be an attractive insertion for the main groups. Delta and Air France have expressed interest, though Oneworld could be in the driver's seat due to the pair's recent codeshare links with American. British Midland, by virtue of its Heathrow presence, also is a highly sought-after carrier. Korean Airlines, with existing relationships with Delta and Air France, could join them soon, while unaligned Chinese carriers could provide a vital Asian piece to any alliance.

In the United States, US Airways and TWA both have expressed interest in joining a worldwide network.

Steve Tracas, vice president of sales at US Airways, said, "We fit well into any of the major alliances out there. Neither Star nor Oneworld has a dominant north-south player on the East Coast." However, despite an existing marketing relationship with American and an agreement with Sabre, Tracas said Oneworld is not necessarily the frontrunner "That's the logical assumption to make," he said, "but there are many options out there. However, we are not keen on a secondary role or an offshoot of an alliance. We would like to be a full partner in whatever we do."

Meanwhile, Alaska Airlines, which code shares with a multitude of carriers, is unlikely to join a major alliance. "It would be detrimental to them because they need to remain neutral and get support from all their codeshare partners," Iwamoto said, adding that the recent codeshare with American helps strengthen Alaska's offerings.

Ultimately, the makeup of alliance rosters, if ever finalized, is anyone's guess. However, Iwamoto predicted, "In the end, similar to the emergence of three mega U.S. carriers, there probably will be three major global alliances with a fourth hovering around."

Malin, speaking at a recent Transportation Research Board international workshop on future aviation activities, said, "It is a lot easier for a CEO to enter into an alliance than it is for the marketing department to make it work."

He added that there are two critical developments that could have a major impact on the future of global networks. "First, what happens if the Department of Transportation reverses itself on the subject of antitrust immunity? Second, what is the future of the alliance movement if governments change the current rules regarding foreign ownership?"

The only safe assumption is that similar to defunct alliances of the past, current families are bound to break apart and reshape to some degree, rematerializing as new partnerships with new strengths and benefits for corporate buyers. But the major airline players will continue to exert their power and control certain spheres of influence. "It's just a matter of moving the puzzle pieces around," Perper noted, "but it's still the same world.