The U.S. Department of Transportation last week ended an informal investigation into the proposed codeshare and marketing alliance between United Airlines and US Airways. The carriers, which must adhere to certain restrictions imposed by the U.S. Department of Justice, immediately can begin certain joint activities.
The agreement is crucial for both carriers. For US Airways, it bolsters the case for finalizing a $900 million loan guarantee from the Air Transportation Stabilization Board and strengthens its business plan as it progresses through bankruptcy reorganization. Executives estimated the annual incremental revenue gain to fall between $150 million and $200 million. For United, teetering on the edge of its own bankruptcy, the codeshare pact should generate incremental revenue vital to its survival and possibly generate new or renewed corporate business by offering clients a larger network, particularly on the East Coast.
Though smaller in scope, an approved United-US Airways alliance could portend similar approval for the tripartite Continental-Delta-Northwest domestic alliance proposal still being evaluated by DOT.
Meanwhile, smaller scale alliance developments in Europe and Japan have surfaced in recent weeks.
DOT, in a statement on the United-US Airways relationship, said, "The competitive issues presented by the agreements do not presently require further investigation."
However, DOJ included conditions meant to limit anticompetitive conduct, such as codeshare carve-outs that exclude from the agreement hub-to-hub flying and other routes on which both offer nonstop service. United operates hubs at Chicago O'Hare, Denver International, Los Angeles International and Washington Dulles airports. US Airways' hubs are in Charlotte, N.C., Philadelphia and Pittsburgh.
DOT also noted that the operating carrier of a codeshare flight will collect the passenger fare, rather than the marketing carrier. "This should give each airline an incentive to compete with its partner by operating its own flights," according to the DOT statement.
To address concerns related specifically to Washington-area dominance, the carriers also may not code share on local traffic on nonstop service to the same end-point from either Dulles or Reagan Washington National, except existing service between Washington, D.C., and both Boston Logan and New York LaGuardia. Also, for routes served by only one of the two, the marketing carrier must offer fares equal to those offered by the operating carrier.
DOJ stipulated United and US Airways must act independently when bidding on corporate contracts, "although when consistent with the antitrust laws they may offer customers the option of a joint bid."
DOT noted "a number of concerns" about the alliance, citing that the combined domestic marketshare is 23 percent. "The joint venture relationship being created by United and US Airways may lead to lessening of competition between the two airlines in some markets," DOT said. "On the other hand, the joint venture will provide service benefits for a number of travelers and may increase competition in other markets."
Both airlines agreed to continue competing with each other and to independently set pricing and service levels. DOT nevertheless said it closely will monitor implementation of the agreement.
On Oct. 14, the new partners will begin airport club reciprocity, enabling a member of one of the carrier's clubs to use the other's on the day of ticketed departure. Frequent flyer reciprocity will follow in the coming months. The first United-US Airways codeshare flights are planned for the first quarter of 2003.
The tie-up between the nation's second and sixth largest carriers drew criticism from many, notably competitors. Don Carty, chairman and CEO of American Airlines—the only Big Six carrier not affiliated with a large approved or proposed domestic codeshare—said incremental revenue realized in a domestic code share means very little when put into context of the industry's structural cost issues. "They have their priorities wrong," Carty said late last month during a meeting with analysts in New York
(see story). "We know there are real sharp limitations to how much they can accomplish."
Carty is less concerned with the United-US Airways alliance—which he said combines two weakened and shrinking airlines—than the "distressing" Continental-Delta-Northwest tripartite agreement. "I'd be surprised if regulators get comfortable with it," he said.
Indeed, the criticism aimed against the proposed Continental-Delta-Northwest has been fierce. "Delta CEO Leo Mullin has expressed his desire to deploy an armada to attack us," said US Airways CEO David Siegel in a speech last month at the International Aviation Club of Washington. "Delta's strategy is built on one basic element: US Airways' failure. But it seems to me that adding Delta to the Continental-Northwest alliance introduces a whole new set of issues and complexities that will take regulators quite some time to deal with, unlike our alliance with United, which is essentially like the Continental-Northwest agreement already in place."
Even as these airline alliances—the largest in history—begin taking shape, industry observers question the utility of airline partnerships in general, aside from competitive concerns. Years after their initial formation—and reformations—many promises remain unfulfilled. Though some corporate travel managers have had recent success in establishing alliancewide contracts with Star Alliance, SkyTeam, Oneworld or Continental-Northwest, true integration to the satisfaction of both corporate buyer and traveler is the exception rather than the rule, according to critics. "Alliances have not come into their own. It is not that they are smoke and mirrors, but they have yet to fully mature in terms of bringing to the marketplace the benefits they had aspired to bring," said Eric Henderson, director of North American supplier relations at Rosenbluth International. "They seem to be only as good as the antitrust immunity they have."
WorldTravel BTI executives Danny Hood, president, and Dee Runyan, executive vice president, said in the agency's latest Insight newsletter that these "super alliances" would dominate major business routes, also specifically pointing to a 40 percent combined New York-area marketshare held by Continental-Delta-Northwest. Hood and Runyan warned that development of such alliances would result in higher business fares and "confusion between brands under codeshare agreements."
They also pointed to traveler benefits, including coordinated airport facilities, linked frequent flyer programs, more comprehensive networks offering more choices and joint fares. The airlines, they said, would benefit from stronger revenue flow at a time when they need it most.
Hal Rosenbluth, CEO of Rosenbluth International, went a step further in recent congressional testimony, suggesting United be permitted to acquire US Airways, as had been proposed in 2000. That "marriage," he said, which would account for 23 percent of the domestic market, should be one of four positioned to survive the industry crisis. The others would include an Alaska-Continental-Northwest combination controlling 21 percent of the domestic market, a larger Delta—19 percent total U.S. share—resulting from the acquisition of America West, and American retaining its current 20 percent share.
"By allowing four larger network carriers to emerge, economies of scale and superior purchasing leverage would be created. This should result in lower costs for aircraft acquisition, fuel purchasing, maintenance, training and headquarters functions," he said. "Additional savings would be found in better utilization of airport gates and use of terminal facilities."
In a grand sense, the largest global alliances may foreshadow eventual industry consolidation. With business models crumbling at many carriers around the world, the light at the end of the tunnel, especially for full-service operators, may be cross-border mergers in some form.
"Today's alliances may be a mating dance toward this reality," said Delta president Fred Reid, speaking during a SkyTeam meeting last month in Atlanta, "but they will not necessarily predetermine the outcome."
On the other side of the pond, the European Commission is set to wrap up a probe examining agreements between Lufthansa-SAS-United and KLM-Northwest. The latter tie-up did not garner any negative feedback during an open comment period, while the former—members of the Star Alliance—agreed to make available to competitors slots on certain routes, including Frankfurt to Chicago, Los Angeles, San Francisco and Washington.
Now that KLM-Northwest is not encumbered by any EC regulations, the partners may consider SkyTeam participation in the wake of the trilateral codeshare agreement proposed by Continental, Northwest and SkyTeam anchor Delta
(BTN, Sept. 9). Conflicting reports from Europe in recent weeks had Air France and KLM either discussing bringing the latter into SkyTeam, an equity transaction or both. At the same time, KLM confirmed it is continuing parallel alliance negotiations with British Airways.
Meanwhile, the Qualiflyer alliance of several European airlines, which in February began disbanding, on Jan. 1 officially will dissolve its integrated frequent flyer program. Member airlines instead are launching their own loyalty programs on that day, many with multiple links to other airlines. These developments signal the strategies of certain Qualiflyer members in aligning with other higher-profile alliances.
Swiss International Air Lines, for example, is readying Swiss TravelClub, which includes cooperation with American Airlines, Iberia and Finnair—all Oneworld alliance members. Conspicuously absent is a link to British Airways, Oneworld's most important European cog. However, there is speculation Swiss and BA eventually will come to terms, paving the way for full Swiss participation in Oneworld.
In Japan, All Nippon Airways and competitor Hokkaido International Airlines—commonly referred to as Air Do—recently finalized an alliance agreement including code sharing. ANA will purchase half of Air Do's seats between Tokyo Haneda and Sapparo as part of code sharing set to begin in February. In a statement, ANA said the partnership would include "a variety of measures aimed at realizing efficiencies and enhancing services and revenues." Such measures will involve alignment of reservations systems, settlement functions and checkin procedures.
The partnership largely is in response to the merger of Japan Airlines and Japan Air Systems, which will begin their integration this month.