Air tie-ups give regulators a headache

Date: 08/04/1999

By Renée Cordes

VINCENT Li, according to a recent newspaper advertisement, can "rest his weary bones" at more than 200 airport lounges worldwide.

This is because Li, who is presumably a demanding business traveller, is flown by one of five airlines (soon to be six) in One World, an alliance which claims to carry 20% of global passenger traffic.

When Li steps onto a One World plane, his ticket is interchangeable between flights on British Airways, American Airlines, Cathay Pacific, Qantas Airways, Canadian Airlines and, soon, Finnair.

Like similar international partnerships around the globe, One World is a half-way house towards the kind of full merger that airlines are not allowed to enter into under a patchwork of national regulations designed to protect flag carriers. Until such red tape is cleared away, the EU's watchdogs see it as their task to ensure that these alliances do not undermine competition in the skies.

" Naturally the European Commission has to scrutinise whether these alliances have a large share of certain routes or control tariffs on some," says Thomas Koebel, an airline analyst with BfG Bank in Frankfurt. "But, in my opinion, this will not stop the momentum."

United Airlines, the world's largest carrier, has repeatedly said that it will fight attempts by the Commission to force it to shed take-off and landing slots at key international airports in return for approving the company's alliance with Deutsche Lufthansa AG and Scandinavian Airlines Systems. The Commission intends to rule on the link-up by the summer.

Last year, officials told the airlines involved in the venture that they would have to trim their flights from Frankfurt to Chicago and Washington - where the alliance was found to have a dominant position - and relinquish 108 slots at Frankfurt and Copenhagen airports to competitors.

Commission competition officials also hope to publish final decisions on KLM/Northwest alliance and that between Sabena, Austrian Airlines, Delta and Swissair before their summer break.

Acting Commissioner Karel van Miert has repeatedly made it clear that he intends to use his powers to the full to prevent the growing number of alliances stifling competition. "Alliances need to be scrutinised; the situation is not satisfactory," he said earlier this year in a speech to aviation lawyers.

Van Miert added that until a global 'open skies' accord was reached between the EU, the US and major Asian players, anti-competitive alliances had to be scrutinised - and warned that such a global deal was "not going to happen overnight".

The two-year limbo period since the Commission first began scrutinising these alliances has forced some airlines to put partnership plans on hold, or at least to delay their full implementation. British Airways' and American Airlines' decision to phase in their link-up over four to five years is a prime example of this.

But they, like their competitors, are growing impatient with the restrictions imposed on their growth by national governments.

" Our industry is, to some extent, prevented from going further and improving in other ways," Roger Maynard, director joint ventures investment at British Airways, told colleagues at a recent meeting of the European Aviation Club in Brussels.

Bound by restrictions such as those which prevent European airlines from owning more than 49% of another carrier, he said, companies were increasingly being forced to form alliances to maintain their competitive edge. "Global regulators will not let us do anything else," he added.

Thomas Kropp, general manager of international relations and EU affairs at Lufthansa, echoed this, saying: "These incoherent rules are a big challenge for all of us."

Despite this, neither airline has done too badly out of their respective alliances. Today, the world's four main global link-ups account for roughly half of all passenger traffic and experts predict the proportion could rise to 70% as alliances continue to expand their networks and air-miles programmes.

Star Alliance, which has the largest number of airline partners, carries more than 17% of the world's passenger traffic and would tip over 20% if associated carriers were added to the equation. "No airline alone can achieve such a goal," admitted Kropp.

Star partners include Lufthansa, United Airlines, Scandinavian Airlines System, Thai Airways, Air Canada and Brazil's Varig, with Air New Zealand, All Nippon and Australia's Ansett set to join the group later this year.

Passengers surveyed by a leading US research group said they welcomed the creation of alliances because of frequent flyer miles, better connections and better customer service. However, quantifiable data about how much extra passengers are willing to pay for these privileges is hard to find.

Ideally, many European airlines would like to see an end to restrictions on partnerships or joint ventures. Given that this is highly unlikely to happen in the short-term, they will have to settle for forming alliances, whether it be to get a foothold in a certain region or to win a global presence.

But both big and small airlines risk losing control over their business to preserve their alliances. For example, both Lufthansa and BA gave up slots in Australia to alliance partners, exposing themselves to danger should the coalition collapse.

For smaller and medium-sized airlines, joining an alliance also poses an inherent danger; in some cases, the smaller partner risks losing its identity as the larger partner takes over.

" Alliances are irrational," said BA's Maynard. "They suffer from a lack of control, lack of funds and a lack of common economic interests." But, he conceded, the trouble is worth it.

Alliances' share of world airline passenger traffic (measured in passenger kilometres in 1997)

One World 20.8%

Star Alliance 17.6%

Atlantic Excellence Group 9.1%

Wings 11.8%

Others/independents 40.7%

Source: European Aviation Club