Michael Whitaker
Despite a deregulated market in the United States and a new transatlantic Open Skies agreement, the airline world remains subject to various regulatory regimes. To navigate through the complexities and leverage its global network, United Airlines has pieced together a strategy that includes code shares, joint ventures and other cooperative efforts, including Star Alliance, which it co-founded a decade ago. United senior vice president for alliances, international and regulatory affairs Michael Whitaker spoke withThe Transnational after discussing the current and future regulatory environments around the globe during a Midwest Business Travel Association meeting. An excerpt follows.
What are the pros and cons of the new U.S.-E.U. Open Skies agreement that takes effect next March?
It has taken 13 rounds of negotiations [and] two failed agreements that weren't ratified before the third one was. It basically puts open skies between the United States and Europe. It doesn't do a thing for us on congestion or infrastructure. It does not create any new airports, runways or slots at congested airports. It does not change foreign ownership rules. There was a lot of debate, but the U.S. and E.U. agreed that they would resume negotiations next year to try to eliminate foreign ownership restrictions by 2010, something that will be very hard to do because Congress is dead set against it. The unions lobby very hard against it and it will very likely take a transaction of some sort to get that change. It does not allow E.U. carriers to operate in the U.S. market, but it does allow U.S. carriers to operate in the E.U. No U.S. carrier does, because those are not viable rights, economically. E.U. carriers have said that they want those rights in the U.S., but if you eliminate those restrictions on ownership, the E.U. airlines could start their own airlines in the U.S. under their own brands to achieve that.
In your presentation, you mentioned the "sure signs" that open skies is a good deal. What are they?
British Airways hated it, always did, and fought it for years and years. The U.S.-U.K. agreement was very favorable for British Airways and to a lesser extent Virgin [Atlantic Airways]. That was a stumbling block for really a decade. There are 27 countries in the European Union; 26 of them were in favor of the U.S.-E.U. open skies agreement. Only one was opposed and that was the U.K. The way things work in Europe is you don't hold out like that. You agree and try to get concessions, and that's what the U.K. did. Airlines have already announced new services. Virgin has already made announcements, along with Ryanair. All the carriers that serve the U.S.-Europe market are evaluating what to do with the new rights. I know we're going through that process at United. In the fall, you'll see concrete announcements about service changes from many carriers. There's certainly a lot of carriers that want to be in [London] Heathrow and haven't been able to, so they are in [London] Gatwick. We don't know what our competitors will do, but we're going to assume that they're going to try to get slots in Heathrow to move services from Gatwick. That will be the most significant change that we see across the North Atlantic right away. An E.U. study predicted $16 billion in economic stimulation and that's consistent with what we've seen elsewhere. Consolidation also is an inevitable process. You're already seeing it take place in the E.U. in a fairly rapid manner with KLM-Air France, Lufthansa and Swiss, Iberia currently up for bid, Alitalia up for bid. So, there is a lot of activity on the European side. We expect continued competition and cooperation across the Atlantic with deepening alliances.
How are corporate deals with airline alliancessubject to antitrust rules?
The Corporate Plus program has gone through rigorous legal examination to make sure it works without the antitrust immunity. The customer has to request the group bid and then we can formulate that and put in the universal discounts. We've had a lot of takers because it gives you one person to deal with, 18 carriers to fly on. If you have people who are flying around the world who have itineraries jumping between airlines, it really does streamline it all. With antitrust immunity, it could streamline this further. This in essence is a program that allows up to 18 participating Star Alliance carriers to work together to sell access to the Star Alliance network. It basically has a lead airline principle and gives one point of contact--usually the home carrier--and sets up a program for contracting and gaining access. We've been able to bring that expanded network into the sales world with a product that has been quite successful and has resulted in sales that are in the millions of dollars. These are products that can work together in an umbrella organization. The Star organization, based in Frankfurt, works together as a project management resource to pull these disparate airlines together, providing products and moving toward our goal of seamless.
When United sold the New York-London rights to Delta, chief revenue officer John Tagueacknowledged that United's international network decision put a "negative cast" on United's ability to service accounts in New York. How has this impacted your business in New York?
We are not one of the top couple of airlines in New York size-wise and in that sense it's always been a disadvantage for us. What we have found is that the market in and out of [Washington] Dulles is growing so strongly that we moved services from New York to Dulles. We moved Tokyo, we discontinued London and we added a number of other services out of Washington and they've all done very well. That has reconfirmed the correctness of our decision. But we still don't have a solution for New York. This is something that we've talked about since I've been at the airline: how do you fix New York? That's one of the reasons that we've been supportive of consolidation.
You've spent many years at United, and before that at TWA, trying to figure out the best way to serve various markets in the world. In an ideal world, how would you like that to happen?
An ideal solution is if the government would get out of the way and let us do what we wanted to. If the government would allow consolidation of the U.S. industry, it would certainly strengthen the balance sheets of U.S. carriers. You start to get widespread agreement about that, but it's very hard to execute. If the government would recognize that we have a highly competitive industry in the U.S. and they don't need to intervene on the behalf of a Southwest Airlines to make sure that they have advantages in the market. If the government would eliminate the restrictions on foreign ownership and let us look like other industries--Ford buying Volvo for example--and allow mergers across borders ... There are always significant infrastructure issues that we deal with for airports. But that's not the world that we live in. That's basically United's policy as a company that we're pushing for that. But in the world that we live in, we have a more limited set of choices. We can form alliances, which we've done, and push to continue the deregulation and liberalization process. United has been out in front of the alliance scene, forming the Star Alliance more than 10 years ago. It has caused all of these airlines to basically line up. The vast majority of air capacity in the world now rests within these three alliances. That is really a work around from the regulatory restrictions in place. Now what we do with our alliance partners is take advantage of their hubs to try to serve these points. It's really taken a dozen years work to clear all the regulatory approvals needed with all those countries to be able to transfer passengers. We spend a lot of our time to try to make those transfers 'seamless.' Seamless is a word we used a lot in the early days of the alliance until we realized it probably wasn't that seamless. Seamless is our aspiration, but that is the model that we use now for serving these markets.