With JAL secure and immunity near, Oneworld rises from dead

By Michael Fabey

In a few short weeks, the Oneworld alliance, dominated by American Airlines, British Airways and Japan Airlines, has been resurrected from near death following years of frustration.

As recently as mid-January, Oneworld appeared to be locked into a disastrous competitive disadvantage in both the transpacific and transatlantic markets.

On the Asia front, most aviation experts and several leading business publications predicted earlier this year that JAL would bolt the alliance for rival SkyTeam, knocking out the cornerstone of Oneworld’s transpacific service.

SkyTeam, dominated by Delta, threw increasingly seductive enticements at JAL throughout the fall as the Japanese carrier emerged from bankruptcy, forcing American to keep upping the ante if it wanted to salvage the Asia leg of Oneworld.

Meanwhile, on the transatlantic side, Oneworld was caught in a bureaucratic quagmire, its application for crucial antitrust immunity seemingly stuck in neutral at both the U.S. Transportation Department and the European Commission.

Oneworld members had first expected immunity to be granted last fall, then by the end of the year, then hopefully, sometime soon, but both regulators continued to drag their feet.

Both the Europe and Asia markets are crucial. The loss of either JAL’s Asia access or antitrust immunity in the transatlantic markets would have been the final nail in the alliance's coffin.

By the end of last week, however, it had become clear that reports of Oneworld’s demise were premature. The alliance not only survived, it is on course to be stronger than ever in both transatlantic and transpacific markets.

First, JAL resisted Delta’s bait and decided to stick with Oneworld. Now the alliance’s members are applying for antitrust immunity for a joint venture relationship on transpacific routes. Once immunized, Oneworld will be on course to strengthen and grow its Asian business.

Moreover, last week the DOT finally announced that it planned to approve a request by Oneworld members American, British Airways, Iberia Royal Jordanian Airlines and Finnair for antitrust immunity for joint venture status on their transatlantic routes.

While the Justice Department and members of ASTA and the Interactive Travel Services Association protested that immunizing Oneworld would consolidate too much transatlantic power in the hands of a few carriers, others in the industry welcomed the approval.

Supporters argued that Oneworld would now be able to compete on an even playing field with the SkyTeam and Star alliances, which are already immunized. Greater competition, they asserted, will be good news for passengers.

"Corporate travel departments in the U.S. and Europe will now be able to aggressively leverage professional procurement processes to their benefit," said Kevin Mitchell, chairman of the Business Travel Coalition. "An immunized American Airlines-British Airways will strengthen the competitiveness of London Heathrow, vis-a-vis Paris Charles De Gaulle, Germany’s Frankfurt and Amsterdam’s Schiphol airports, resulting in greater opportunities to play one alliance off against the others."

Mitchell added that JAL’s decision to remain with Oneworld guaranteed "three-way alliance competition in the U.S. to Japan and Northern Asia markets as well in the intra-Asia markets."

In the end, the DOT acknowledged that while an immunized Oneworld could introduce some anticompetitive practices into the market, it would be worth the risk, because it would give passengers a choice of three evenly matched alliances instead of two powerhouses and one significantly weaker group.

The DOT will be collecting comments on its proposed decision until the end of March and responses to those comments until mid-April.

"Oneworld becomes a strong third alliance competitor, becoming more competitive with SkyTeam and Star in 841 transatlantic markets, affecting almost 5 million passengers," Susan Kurland, assistant transportation secretary for aviation and international affairs, wrote in last week’s DOT opinion.

Helping a "third strategic alliance," Kurland said, benefits the public.

Kurland continued: "Oneworld will become more competitive in a number of markets, exerting increased competitive discipline on fares and services in those markets. Consumers getting a third viable option will enjoy more destinations, better connections, improved schedules and better frequent flyer benefits. These benefits complement the annual surplus from price reductions and increased traffic on current interline routes."

The DOT went even further, praising the proposed joint venture the Oneworld airlines have said they want to form.

Joint ventures are near mergers for airlines, as they share information on sales, marketing, pricing and other operations in what the industry calls a "metal neutral" manner, meaning that it doesn’t matter which carrier flies the passengers because the revenue is shared by the members.

Carriers say joint ventures are the only way they can get global in the current legal climate, in which most countries, including the U.S., impose strict limits on foreign ownership or investment in their airlines.

"The applicants present for our consideration a detailed and integrated joint venture agreement," Kurland said, with a metal-neutral focus that "allows the joint-venture partners to share risks and rewards … without regard to which partner owns and operates the aircraft."

Kurland went on to say, "The applicants are planning broader and deeper cooperation than ever before. The proposed alliance features broad multilateral cooperation …which would allow Oneworld to flow traffic over multiple hubs that are less congested than Heathrow and to compete more vigorously with Star Alliance and SkyTeam."

The DOT noted that the applicants had specifically cited the value of Iberia’s Madrid hub as an uncongested alternate connect point for transatlantic traffic.

What made this American-British Airways-led attempt for immunized service different than the first two failed attempts was the promise of a more tightly knit network.

"Their third attempt to form an immunized alliance, made in conjunction with other partners under the Oneworld umbrella, represents … a more integrated and network-oriented approach," Kurland said.

Acknowledging concerns about Oneworld possibly dominating Heathrow slots, the DOT is demanding, as a condition of approval, that the alliance give up a pair of slots in the Boston-Heathrow market as well as two other slots, to be used at any U.S. gateway for services in the U.S.-Heathrow market.

American and British Airways had refused such a condition in previous attempts for antitrust immunity. But with the European Commission making similar demands as a condition of approval, few expect Oneworld’s members to balk this time.

A handful of slots, analysts say, seems a small price to pay to solidify Oneworld’s transatlantic triumph, especially so soon after winning the battle with SkyTeam for JAL and only a few weeks after its future seemed all but dead.

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