Magazine article Global Finance

Airlines Rush for Comfort Alliances

Magazine article Global Finance

Airlines Rush for Comfort Alliances

Article excerpt

Despite textbook wisdom, alliances mean survival in the airline industry By Mark Johnson

Question: Which industry makes millions of cross-border transactions a year, could serve as the emblem of globalization, yet continues to operate a model of national champions long abandoned elsewhere in business?

Answer: The international airline industry, of course, where almost every country worth its salt still has a flag carrier, even if it's now in the private sector.

Wracked by perennial boom and bust, any other industry would by now have plunged headlong into an orgy of takeovers, mergers, and general consolidation.

But the airline industry is bound by a series of bilateral agreements between countries.These tie rights to fly to a continuing majority shareholding in a particular country.

It's these rules-and the struggle to meet passengers' demands to fly to more places, with less fuss and less cost-- that are pushing airlines ever more firmly into a form of cooperation that long since fell off the MBA syllabus.

"Competition in the airline industry is now increasingly between the network of alliances rather than between airlines," is the conclusion of Chris Tarry, a transport analyst at Commerzbank Securities in London. Dominic Edridge, who works alongside Tarry at Commerzbank, says that sharing costs, such as marketing, and increasing revenue by feeding more passengers through linked networks make the alliance model a compelling one. "It's almost necessary to be in alliance nowadays," says Edridge.

That's certainly a message getting a willing reception in airline boardrooms across the globe.

At one count, there are some 580 alliances in the industry.These tie-ups can take a number of forms, ranging from sharing premium passengers lounges to code sharing and block booking to a full joint venture.

While alliances aren't new, there's no doubting the quickening of the pace of change.

The latest pieces were slotted into the jigsaw in early September, when BMI British Midland and United Airlines applied for anti-trust immunity that would allow them to combine their services across the North Atlantic.

In late August, British Airways and American Airlines filed with the US and UK regulators for permission to pool flights and revenues on nine transatlantic routes.

Their rationale: They were losing market share to airlines such as Lufthansa and United that were in an alliance.

Earlier that month the Skyteam alliance, led by Delta Airlines, and Air France had made a similar application. But if the busy routes across the North Atlantic are the juiciest prizes, they're not the only ones prompting a rush to form alliances.

No Isolationist Holdouts

Late in July, Alitalia signed up for the Skyteam alliance; co-operation with Air France on routes between France and Italy looks set to be a key part of the 10-year venture. New Alitalia CEO Francesco Mengozzi says the partnership markes "the end of the isolation of Alitalia."

That kind of linkup would need the agreement of the European competition directorate, but it's another form of regulatory deadline that may be driving the recent filings by the OneWorld Alliance and Skyteam for ventures between the United States and Western Europe.

The US Transportation Department has signaled that it won't okay the two joint ventures across the Atlantic until the French and UK governments have signed so-called Open Skies agreements that will open up landing and take-- off slots at Heathrow and Charles de Gaulle airports.

Regulatory Snags

That regulatory knot is further tangled by the European Commission. It wants to wrest responsibility for negotiating the agreements away from national governments.

Lawyers say the commission is likely to win a case it has brought to the European Court of Justice on the subject.Advisors for BA,American,Air France, and Delta are reportedly working hard to encourage progress on bilateral agreements between the United States, France, and the United Kingdom before that ruling, expected mid-November. …

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