Southern Hemisphere elusive for airline alliances

By Michael Fabey

The question of whether the three major global airline alliances -- Oneworld, SkyTeam and Star -- are seen as a threat to competition depends on which side of the equator you happen to be flying.

Over the past two years, the alliances have managed to solidify or expand their presence in Asia and Europe and bolster their vital east-west networks. That success has sparked fears among opponents of such partnerships that the alliances have grown too powerful at the expense of the flying public, agents and other elements of the distribution channel.

On the other hand, the alliances' inability thus far to establish any kind of meaningful power base in the Southern Hemisphere has many analysts wondering if in some regions, particularly Latin America, the airlines will have to settle for playing second fiddle to local carriers.

In a recent report about possible Latin American alliance moves, the Centre for Asia Pacific Aviation described the "relative significance of achieving local power over allegiance to a particular alliance." The center said that as the alliance system evolves, "the alliance becomes secondary" and "their relevance to airlines will diminish," leading to "a reduction in the power and value of the alliances."

But not just yet.

On today's world stage, the center said, there is no denying the growing reach of the Oneworld, SkyTeam and Star alliances.

"Global alliances have done much to reshape world aviation, providing a 'poor man's virtual merger,' where archaic cross-border merger rules prevent closer combinations," the center said in a report last month."In doing so, each attempts, to varying extents, to capture the respective airline for their grouping -- both to add to the alliance's marketing clout and to prevent them from joining competitors."

But alliance detractors say the three alliances are divvying up little bits of the globe among themselves and tightening the competitive noose through intra-alliance joint ventures or services they are allowed to operate with antitrust immunity.

Indeed, they say, alliances are stepping stones for de facto mergers.

The most vocal alliance critic is Rep. James Oberstar (D-Minn.), who, as the chairman of the House Transportation Committee, is also among the alliances' most influential detractors. Oberstar has made alliance-busting a personal crusade.

"They're just carving up the international pie," said Oberstar, who has introduced legislation to curtail the power of alliances.

Oberstar cites studies by the Transportation Research Board suggesting that passengers in mainline markets -- gateway-to-gateway routes where alliance airlines were once main competitors -- have seen few tangible benefits from alliances.

Oberstar's main focus recently has been on the transatlantic markets, sparked by the Star Alliance's request in 2008 that antitrust immunity be granted to members United, Lufthansa, Air Canada and, later, Continental.

Star said it needed the immunity to keep pace with rival SkyTeam, whose members Delta and KLM-Air France have a joint venture and antitrust immunity on key transatlantic routes.

Oneworld leaders American Airlines and British Airways (which is merging with Iberia) followed up with their own antitrust immunity request, their third in about a decade, after the first two failed.

Richard Aboulafia, vice president of the Teal Group consultancy, said government regulators at the European Commission and the U.S. Transportation Department had little choice but to grant the recent immunity requests by Star and Oneworld. Otherwise, he said, SkyTeam would have had an unfair advantage along vital transatlantic routes.

Analysts were not surprised, then, when the E.C. and DOT granted those requests, securing a competitive transatlantic future for each alliance.

Meanwhile, Oberstar said, the alliances are stifling competition on key routes.

SkyTeam logoFor example, he said, in 1990 there were six airlines competing on the route between Paris and New York's Kennedy Airport, while today there are only three, with SkyTeam partners Air France and Delta controlling about 75% of the market.

Star, SkyTeam and Oneworld together control more than 87% of the traffic between the U.S. and Europe. Globally, Oberstar said, the alliances account for almost 80% of the total world airline capacity.

While transatlantic routes are the bedrock of the alliances' power, there is no way to ensure global success without paying attention to the burgeoning Asian and transpacific travel market.

That's especially true for major network carriers such as American, Delta and United, which need seamless east-west routes circling the planet to serve international business clients.

Just how vital that Asian piece is to the planetary puzzle became apparent when Japan Airlines declared bankruptcy last January and produced a restructuring plan that, among other things, entertained the possibility of leaving Oneworld and moving to SkyTeam.

The move would have created an Asian kingdom for SkyTeam, which was already a powerhouse in the market as a result of the strong presence Northwest ceded to Delta in the merger of the two airlines.

Oneworld was not about to gamble on a Delta juggernaut in Asia. Led by American, the alliance launched an all-out blitz to protect its turf in Japan, agreeing earlier this year to provide about $1.4 billion in cash and other investments as well as free advice on how to set up low-cost subsidiaries and make other business moves.

In the end, JAL stuck with Oneworld, and the alliance members applied for antitrust immunity, which most analysts predict will almost certainly be approved, given that Japan made immunity approval for its state airline a condition of its open-skies agreement with the U.S.

Japan's All Nippon Airlines and its fellow Star Alliance members also have applied for antitrust immunity.

Nor is SkyTeam resting on its existing network: Malaysian Airlines is reportedly talking with the alliance about becoming a member, and last week China Airlines, the largest carrier in Taiwan, announced it would join SkyTeam next year.

Oneworld logoBut in southern climes, the alliances have so far failed to find secure footing.

When SkyTeam's Delta sought to expand its reach into Australia and the South Pacific through an enhanced partnership with V Australia and the Virgin Group last year, its request for antitrust immunity specifically excluded the possibility of those two carriers joining the alliance.

"The Virgin Blue carriers have no intention to join SkyTeam," the airlines said in their DOT filing. "Nor does Delta have any plans to cooperate with any other Virgin-branded entity."

The airlines remained mum on why SkyTeam, which has no presence in the market, was excluded from Delta's plans. Some analysts say Virgin Group Chairman Richard Branson wanted to steer clear of entanglements with the alliance while he fought transatlantic incursions by alliances and their members' joint ventures.

But those entanglements often demonstrate how well airlines can mesh and integrate, and the DOT likes to monitor such results to ensure that the carriers actually can realize the benefits for passengers they say they can achieve. The agency wants this proof before it will even consider granting an immunity request.

For that reason, U.S. regulators said this month they intend to deny the immunity request.

"Where the department has given weight to such promised benefits [of immunized service], it has done so because alliance partners produced detailed and comprehensive alliance agreements that aligned pricing and selling functions across the joint network and readily allowed large-scale pricing efficiencies to be passed on to consumers," the DOT said. "The applicants have virtually no experience as commercial partners."

United and Star are finding out the hard way how fleeting a commercial partnership, even a formal alliance, can be in Latin America.

A little more than a month after United Vice President John Tague bragged publicly about TAM joining Star, the airline announced in August it was merging with Santiago, Chile-based LAN to form a new airline, LATAM, combining the Brazilian carrier with the LAN group of carriers in Chile, Peru, Argentina and Ecuador.

This turn of events prompted the Centre for Asia Pacific Aviation to observe: "TAM has many valuable linkages throughout the Star grouping, and they could not so easily be reconstituted on a bilateral basis without the alliance framework behind them."

LAN, on the other hand, is "a gem in the crown of the Oneworld group," the center said. The Latin carrier has been an alliance member for a decade.

Keeping the new carrier will be a priority for both alliances, especially given its size and scope.

Star alliance logoOnce merged, LATAM will enjoy a "near-monopolistic position in so many major markets," the center said. The question now is which alliance will ultimately lay claim to the new South American monolith.

"The proposed merger between Latin America's two main network airlines ... will set in train another scramble between their respective alliances ... much in the same way as occurred when it appeared that Japan Airlines might defect from Oneworld to Star," the center said.

"The two airlines, which dominate Latin American aviation, are each key elements of the global groups' alliance strategies for the continent," the center observed. "Any dilution of the airlines' effectiveness as members will have an immediate flow onto other members' interests and to the effectiveness of the groups overall. There are hundreds of millions of dollars at stake, when measured in access to almost the entire South American market.

"Neither alliance would feel comfortable with a permanent hybrid arrangement, straddling the two. Yet the alternative, for one or the other, could be to lose out entirely on group access to South American markets, at least in the short term. And maybe even SkyTeam; who knows, when all the balls are up in the air, anything can happen. The LAN-TAM combination would be the biggest trophy to be had in today's world alliances; the team would have a lot of negotiating power."

Analyst Raphael Bejar, CEO of AirSavings, an airline consultancy, said, "TAM will be very pragmatic. They will probably do an assessment to figure out which is most likely to bring them the best synergies."

Oneworld can ill afford to lose LAN, especially after another Latin American member, Mexicana, went bankrupt and stopped flying last month. Yet some analysts wonder how much of a fight the alliance can muster, especially after investing so heavily in Asia to keep JAL in the fold.

For example, Oneworld members did not rush to Mexicana's rescue as they had to save JAL, and some analysts saw that as proof that there are limits to alliance power and reach.

Continental found that out the hard way, CEO Jeff Smisek told Congress earlier this year. When the airline joined Star a year ago, he said, "We were hoping the Star Alliance would be sufficient to return us to profitability." It wasn't. Instead, he said, Continental continued to post losses until the second quarter of this year.

By then, Smisek was telling Congress that the only way to stay profitable would be to merge with United.

"I'm not so excited about results of alliances," Bejar said. "They are not bringing what [airlines] are expecting most, which is real savings."

Still, airline executives continue to tout the importance of alliance relationships.

"Our alliance partners continued to be critical to our success," United's Tague told analysts in July.

That same month, Delta President Edward Bastian told analysts, "We remain focused on strengthening our global network through the SkyTeam alliance. Our reach continues to grow."

American President Tom Horton told analysts, "With our Oneworld partners, we're working together to enhance and expand our alliance in key regions with quality carriers. We're looking forward to welcoming F7 in Russia and Kingfisher in India into our alliance."

It looks like airlines will be crowing about their alliance relationships for some time.

"Alliances are how airlines define their future," said analyst Darryl Jenkins of the Airline Zone, an aviation economics website.

The Centre for Asia Pacific Aviation did not find that particularly surprising. "Thanks to the combined inertial forces of nationalism, vested interests and unpredictable competition laws," the center predicted, "the alliances will have little to fear for at least a decade to come."

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