Alliances Changing Airline Industry

By Dan Reed Fort Worth Star-Telegram | THE JOURNAL RECORD, November 12, 1998 | Go to article overview

Alliances Changing Airline Industry


Dan Reed Fort Worth Star-Telegram, THE JOURNAL RECORD


FORT WORTH -- Like teen-agers in tough neighborhoods, major airlines are joining gangs.

But there are no Crips. No Bloods. Not even any Jets.

Instead, these gangs go by names like "Star," "Wings" and "OneWorld." And the only blood being shed, or that can be shed, is the figurative and financial kind. Nevertheless, the nation's largest airlines and some of the most highly regarded foreign carriers are hanging out together, talking tough and trying to control a lot of turf. They're doing those things for many of the same reasons that kids join real gangs. The big airlines are seeking security and support so they can survive in one of the meanest `hoods in the business world: the global airline industry, which is so tough that it still has a cumulative net loss for its entire history after three straight years of record profits. And the airlines are joining their high-flying, international gangs -- which they call "alliances" -- because, well, everybody else is doing it. "If you're an airline today, in order to survive, you are going to have to be a member of a gang," said Julius Maldutis, airline analyst at CIBC Oppenheimer and dean of Wall Street's airline analysts. "Unless you are very unusual, like Southwest Airlines or one of the Southwest clones in Europe like Ryan Air or Easyjet, you can't stand alone." How many alliances? It now appears that the world's airlines will form no more than four global alliance networks. Even that number could shrink if one of the alliances proves too weak and its members move to other alliances, analysts said. The largest of the four at this point is OneWorld, led by American and British Airways. A year ago, United and Lufthansa German Airlines led the formation of Star, whose roster includes six major international carriers that serve 767 destinations on six continents. Delta Air Lines leads a third, smaller team of carriers that operates under the "Atlantic Excellence Alliance" moniker. The fourth major alliance, unofficially dubbed "Wings," is led by Northwest Airlines and KLM Royal Dutch Airlines. The move toward alliances, Maldutis said, is a continuation of the trend toward industry consolidation that began in the 1980s after the government's deregulation of the U.S. domestic market. "In the 1980s, the U.S. airline industry went through 22 mergers," he said. "But only one of them, the Delta-Western merger, produced any positive results in my view. All the rest either produced negative results or bankrupted the partners. So nobody really wants to do outright mergers. They rarely work out. "Furthermore, you really can't have international mergers because of sovereignty and nationalist issues," Maldutis added. "The government of France is not going to let Lufthansa buy Air France." Still, the development of alliances represents a sweeping change in the global airline industry. As recently as 1995, some leaders at the top U.S. airlines still believed they had the operational and financial strength to expand and serve virtually any foreign markets that they needed to serve. But such beliefs were derailed by an unprecedented explosion in demand for international travel, difficulty in obtaining foreign service rights, expansion costs, and the U.S. government's encouragement of international airline partnerships. That policy, begun during the Bush administration and accelerated under the Clinton administration, seeks to force foreign countries into opening up their air markets in exchange for offering antitrust immunity to airlines based in those nations and to their U.S. airline alliance partners. With immunity, the airlines can jointly set prices, allocate capacity, share sensitive marketing data, and engage in additional activities that would otherwise be illegal. So far, 31 nations -- including Canada, Germany, and the Netherlands -- have signed "open skies" deals with the United States. Analysts estimate that a properly structured alliance blessed with antitrust immunity can produce for its members between 70 percent and 80 percent of the incremental revenue benefits they would likely see from an actual merger -- while producing almost none of the extra costs. …

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