ANALYSIS: July 2 2009

Where now for airline alliances?

There seems to be a growing feeling among politicians and administrators on both sides of the Atlantic that airline alliances as they grow and seek more anti-trust immunity (ATI) may not be a good thing.

The European Commission launched a new inquiry earlier this year into the benefits which Star Alliance and oneworld provide for the consumer. (It is already holding a similar probe into the third major alliance SkyTeam).

But this is low key compared to the gathering head of steam against alliances in the US. Congressmen have become increasingly outspoken against ATI and laws to limit the length of ATI deals are being considered.

James Oberstar

But it is the scathing attack by the US Department of Justice (DoJ) upon the applications by of the Star Alliance airlines to include new member Continental Airlines in their immunity agreement that has seriously upped the stakes. Just where - if anywhere - do alliances go after this? Do they even have a future or are we going to see some fundamental changes in how they operate?

The rumblings in the US against alliances started in March. Congressman James Oberstar, a 76-year-old Democratic member for Minnesota and chairman of the House transportation and infrastructure committee, said they worked in the corporate interest not the consumers'.

He said that the three major alliances were in effect monopolistic mergers unfair to the public and added: "Is that what I voted for when I voted for (US airline) deregulation in 1978? Hell no."

In May, Mr Oberstar successfully proposed a clause for the Federal Aviation Authority Authorization Bill 2009 to limit ATI deals to three years. It was approved by 277-136 in the House of Representatives and will now go before the Senate.

By the time, the US Department of Transportation (DoT) had already given, in April, tentative approval to Continental's request, submitted last year, for ATI with the other members of the Star group.

But in June the rumblings escalated when the US Attorney General Eric Holder to a Senate Judiciary Committee hearing that he had had talks with the DoT secretary James LaHood who would "work with us in making a determination in how this particular alliance should be viewed."

Once its foot was in the door, the DoJ wasted little time in making its real views know. It did not like these ATI deals.

It published last Friday (June 26) its comments on Continental and the Star group's applications. Even in the preamble it make no bones about its opposition. Anti-trust regulations played a "vital part" in bringing increased competition and ensuring benefits to the consumer. Any exemption to them, such as it seems Star wants, should be "strongly disfavoured."

Gathering speed, the DoJ paper said it could see no benefits to the consumer through granting Continental immunity with Star member on routes out of the US to Latin America.

Eric Holder

If it were granted immunity on routes out of New York to Stockholm, Geneva, Lisbon, Geneva and Zurich competition on those routes would  significantly recue or in some cases completely eliminate competition.

Similar words were used for routes from the US to Canada.

The DoJ said the applicants had "failed to demonstrate the required elements for the broad immunity sought" before adding that the benefits the applicants said would accrue could just as easily be delivered without immunity.

This puts Mr LaHood and his DoT in a tight corner to put it mildly. He has little room for manouevre. There is likely to be a mighty row if he goes ahead and confirm ATI for Continental and Star and Mr Holder might wonder just what those talks had been all about.

If he refuses the application, where does that leave not only Star but also the oneworld applicants BA, American Airlines and Iberia? All airlines continue to say they are optimistic their requests will be granted but this looks increasingly misplaced with Mr Holder on the warpath.

There was a straw in the wind last week when the DoT ordered SkyTeam members (led by Air France KLM and Delta Air Lines which all in the happy position of having received ATI) to prove that this benefitted consumers.

It also issued an order to SkyTeam airlines to file annual reports detailing alliance goals and how these will benefit passengers.

If this is the shape of things to come, it signals the end of what looked like a cosy relationship between airlines and the DoT. Any future ATI deals - if there are any - are likely to be very different and probably much more complex and exacting than agreements in the past.

James LaHood

Will airlines wear this? The ATI deals were a way for closer co-operation without taking the final step of merging. Few doubt that ATI benefits airlines as it allows them to pool resources and in the process cut costs - vital, they would claim in the current recession.

There is also the problem that many mergers, given the US policy of limiting foreign ownership of American carriers, would not in these terms be attractive to the Euroepans. These who would argue that their carriers are probably financially stronger than many US airlines and would not be happy taking a secondary role in a tie up.

If the benefit to airlines of ATI is fairly clear, what they do for the consumer is less clear. Critics would say sporadic at best. But a refusal of the Star and oneworld applications could put back the development of the industry for years.

The idea of more competition on the transatlantic routes, when many carriers wish for a 20% reduction to ensure survival, does not seem like a good idea. But there again the means of survival - co-operation can work against the consumer interest.

Few would envy Mr LaHood his decision. The whole industry will be watching him.