AIRLINE ALLIANCES

by Paul Stephen Dempsey

Director, Institute of Air & Space Law y McGill University
Copyright 2010 by Paul Stephen Dempsey

Before Alliances, there was Pan A American World Airways . . . i ld Ai

. . . and Trans World Airlines. Airlines

Before the megaAlliances, Alliances there was interlining, facilitated by IATA

Like dogs marking territory, airlines around the world are sniffing each other's tail fins looking for partners." th ' t il fi l ki f t " Daniel Riordan

The hardest thing in working on an alliance is to coordinate the activities of people who have different instincts and a different language, language and maybe worship slightly different travel gods, to get them gods to work together in a culture that allows them to respect each others habits and convictions, and yet work productively together in an environment in which you cant specify everything in advance. Michael E L i Mi h l E. Levine Beware a pact with the devil. Martin Shugrue

Airline Motivations For Alliances

the desire to achieve greater economies of scale, scope, and density; the desire to reduce costs by consolidating redundant operations; the need to improve revenue by reducing the level of competition wherever possible as markets are f ii h ibl k liberalized; and the desire to skirt around the nationality rules (which prohibit multinational ownership) and cabotage (which prohibits foreign carriers from flying domestic traffic) traffic).

Intercarrier Agreements g

Ticketing-and-Baggage Agreements Joint-Fare Joint Fare Agreements Reciprocal Airport Agreements Blocked Space Relationships Computer Reservations Systems Joint Ventures Joint Sales Offices and Telephone Centers E-Commerce Joint Ventures Frequent Flyer Program Alliances Pooling Traffic & Revenue Code-Sharing Code Sharing

Code Sharing
The term "code" refers to the identifier used in flight schedule, schedule generally the 22 character IATA carrier designator code and flight number. Thus, XX123, flight 123 operated by the airline XX, might also be sold by airline g y YY as YY3456 and by airline ZZ as ZZ9876. Each would (falsely) list the flight as its own.

Code sharing is unnecessary for, indeed i l i d d irrelevant to, any legitimate purpose or actual service. service Code sharing doesn t doesn't enable an airline to fly to any more places. It j enables the p just airline to mislead travellers into thinking that they fly to places they don't. I call that fraud. by Edward Hasbrouck, author of "The Practical Nomad" f" h l d"

Alliances: Procompetitive, or Procompetitive Anticompetitive?

Professor Regas Doganis: "there can be little doubt that airline executives see alliances, especially when they involve code-sharing and capacity rationalisation, as a way of reducing or limiting competition. competition. US Deputy Assistant Attorney General Pate: code-sharing "can result in market allocation, capacity limitations, higher fares, or foreclosure of rivals from markets, all to the injury of consumers. f i l f k t ll t th i j f Brattle Group study: fares have increased significantly more in open s es a e s with antitrust immunity than in open skies markets skies markets w a us u y a ope s es a e s without antitrust immunity Consumer Reports: code-sharing is a "predatory weapon."

Section 1 of the Sherman Act

Prohibits contracts, combinations, and conspiracies in restraint of trade. Per se violations: Price-fixing; territorial allocations; group boycotts; tying arrangements. Airlines seek antitrust immunity to create alliances. NW/KLM granted antitrust immunity in 1993.

Section 2 of the Sherman Act

It is unlawful to monopolize, or attempt to monopolize . . . Any part of the trade or commerce among the several States. States One may not use monopoly power to foreclose competition g p g y p or gain a competitive advantage to destroy a competitor. One may not acquire, maintain or use monopoly power by anticompetitive or exclusionary means, as opposed to growth resulting from a superior product, business acumen product or historical accident.

The Clayton Act

Asks whether a merger would reduce or eliminate competition in a relevant (product and geographic) market; Asks whether the merger would be likely result in market power the y p ability to reduce competition so that the merged entity would be able to charge supra-competitive prices or reduce service below competitive levels.

Antitrust Immunity
49 USC 41309: DOT must find that the alliance agreement is not adverse to the public interest. It cannot approve an intercarrier agreement that substantially reduces or eliminates competition unless it is necessary to meet a serious transportation need or achieve important public benefits that cannot be achieved or met by reasonably available alternatives that are materially less anticompetitive. The public benefits require consideration of, inter alia, international comity and foreign policy factors.

Antitrust Immunity
49 USC 41308: permits DOT to exempt from the antitrust laws to the extent necessary to allow the person to proceed with the transaction if DOT concludes the exemption is required by the public interest

Antitrust Immunity: Public Interest ?

The USDOT insists upon an open skies agreement as a prerequisite to antitrust immunity immunity. Will the alliance benefit travelers by g pp enabling applicants to offer better and more efficient service? Will the alliance enhance competition by providing new on-line services [sic]? on line Will the allied carriers be able to p y improve the efficiency of their operations?

Carve-Outs
When antitrust immunity has been sought, we have recommended that DOT "carve out" certain unrestricted fares involving these city pairs from the order granting antitrust immunity . . . . For example, the [Antitrust] Division recommended that seven city pairs be carved out of the Delta/Swissair/Sabena/ Austrian alliance (AtlantaZurich, Atlanta Brussels, Cincinnati Zurich, New Atlanta-Brussels, Cincinnati-Zurich, York-Brussels, New York-Geneva, New YorkVienna, and New York-Zurich); one for the American/ Canadian Air alliance (New Yorko o o); wo o e U ed/ u a sa a a ce Toronto); two for the United/ Lufthansa alliance (Washington-Frankfurt and Chicago-Frankfurt); and two for the United/ Air Canada alliance (ChicagoToronto and San Francisco-Toronto). R. R HEWITT PATE DEPUTY ASSISTANT ATTORNEY GENERAL

Article 81 of EC Treaty
Prohibits all agreements between undertakings which may affect trade and which have as their object or effect the prevention, restriction or distortion of competition . . . . Examples: Price-fixing; P i fi i Limitation or control of production; Shared markets or sources of supply; pp y; Applying dissimilar conditions to equivalent transactions, placing other trading parties at a competitive disadvantage; Making the conclusion of contracts subject to approval by concl sion s bject appro al b others without commercial justification.

 The telephone regulators insist on seamless interconnectivity. y The airline regulations allow preferential connectivity. connectivity

Alliance

United/ Lufthansa 1997 60 46

British Airways/ USAir 1996 52 1

Delta/Swiss Air 1997 15

Northwest/ KLM 1994 88 30

Year US cities covered d European Cities Covered Daily codeshared flights Daily flights per city Extra passengers per day Extra passengers per flight

440

190

30

4 1500

3.6 560 110 1000

3.4

2.9

3.7

Purported Consumer Benefits

Beyond-segment competition; One-stop travel purchase services; l h Joint frequent flyer benefits; Reciprocal airport lounge access; Seamless connectivity of passengers and y p g luggage; and Coordinated arrival and departure scheduling. p g

Airline Benefits
An ability to provide more capacity and enter new markets without having to make large capital expenditures for aircraft purchases or airport infrastructure; An ability to generate thousands of new on-line city-pair combinations; An ability to extend the reach and scope of their frequent flyer programs to enhance consumer loyalty; An ability to generate between three and four new passengers per flight; An ability to generate net benefits of at least 10% (and often 20%) of relevant revenue from the alliance; Revenue enhancement of approximately 2% above market yield; An ability to capture market share from non-aligned competitors; An ability to fix prices with competitors in dominant markets; An ability to reduce competitive capacity in key markets to improve yields; A reduction in the costs of equipment and services from third party vendors as a result of greater bargaining power of pooled purchases; A reduction in airport handling, airport operations, selling and ticket costs as a result of economies of scale and the sharing of support services; A reduction in travel agent commission costs achievable as a result of carrier market power; and An ability to pool costs and revenue to share risks and rewards.

Multilateral and Bilateral Air Transport u e d e spo Agreements

Section 5 of the Transit Agreement, and Section 6 of the Transport Agreement provide: Each Agreement, Each contracting State reserves the right to withhold or revoke a certificate or permit to an air transport enterprise of another State in any case where it is not satisfied that substantial ownership and effective control are vested in nationals of a contracting State . . . . Like h i Lik their predecessors, modern Open Skies d d O Ski bilaterals require that substantial ownership and effective control be vested in the nationals of the State designating the airline, and that failure to meet this requirement would entitle either nation to t thi i t ld titl ith ti t revoke, suspend or limit the operations of the offending airline.

Nationality Rules Are Discretionary and May Be Waived

The U.S. has waived the nationality requirements for airlines registered in states that met FAA Category I safety/security requirements, and that have concluded an Open Skies bilateral with the U.S.. When Iberia gained control of Aerolinas Argentinas, the U.S. did not object to the fact that Spanish citizens owned and control the Argentine carrier after Argentina opened the g g p bilateral to expand traffic rights for U.S. carriers. y, y g Conversely, when British Airways sought to gain effective control of USAir, the U.S. stalled until the issue of Heathrow access under Bermuda II was resolved.

 Alliances are like dating. Ownership is like marriage. Dating marriage infidelity Dating, marriage, and incest occur often in intercarrier relationships. relationships

FOREIGN AIRLINE OWNERSHIP OF U S AIRLINES U.S.

Foreign Airline
SAS Swissair Singapore Airlines Ansett Airlines Japan Air Lines KLM British Airways British Airways Air Canada Lufthansa

Percentage Ownership
18.4% 18 4% 4.6% 5% 17% 8.5% 25% 15% 24.6% 24 6% 19.6% 19%

U.S. Airline
Continental* Delta Delta AmericaWest Hawaiian Northwest United* USAir Continental jetblue

* proposed; later withdrawn

U.S.AIRLINEEQUITYINTERESTSIN OTHERCARRIERS
Purchaser AMR(American) AMR (A i ) AMR(American) Continental DeltaAirLines DeltaAirLines MesaAirGroup Mesa Air Group NorthwestAirlines PercentageOwnership 33% 10% 17.7% 2.7% 4.5% 7.6% 25% Target CanadianAirlines C di Ai li Iberia AmericaWest SingaporeAirlines Swissair AmericaWest America West HawaiianAir

THE STAR ALLIANCE

1995 United Airlines, Atlantic Coast, Air Wisconsin, Lufthansa, Lauda Air Luxair, South African Airways, SAS, British Midland, Air Canada, Varig, Thai Airways Sales: $46 billion Fleet: 1,522 aircraft ee : ,5 a c a Employees: 243,000 RPKs: 377 billion Passengers: 189 million 2002 Air Canada, Air New Zealand, Ansett Australia, All Nippon Airways, Austrian Airlines Group (Austrian Airlines, Lauda Air and Tyrolean Airways), Airways) British Midland Midland, Canadian Airlines, Lufthansa, LOT, Mexicana Airlines, SAS, Singapore Airlines, Thai International Airways, United I t ti l Ai U it d Airlines, and Varig Passengers: 276 million Aircraft: 2,002 2 002

The Star Alliance (2009)

Established in 1987 Total of 20 member airlines Annual passengers: 492.77 million Daily departures: nearly 18,000 Number of employees: 396,195 Countries served: 162 Airports served: 965 Fleet: 3,294

Star Alliance statistics 2010 Member Airlines: 26 Number of aircraft: 3,993 Number of employees: 458,817 Passengers per year: 603 5 million 603.5 Sales Revenue (in US$): 171.22 billion Daily d D il departures: 19,700 t 19 700

ONEWORLD
1995 American Airlines, British Airways, C di Ai Canadian Airlines, USAir, Qantas Sales: $44 billion Fleet: 1,706 aircraft Employees: 252,000 aircraft RPKs: 399 billion Passengers: 195 million
2002 Aer Lingus, American Airlines, British Airways, Cathay Pacific Airways, Finnair, Iberia, LanChile and Qantas Destinations: 574 in 134 countries Passengers: 200 million Aircraft: 1,481

Oneworld in 2009
Added Japan Airlines, Malev Hungarian Airlines, and Royal Jordananian Airlines 10 airlines 9 190 fli ht per day flying 9,190 flights d fl i 320 million passengers to 692 destinations in 142 countries ti More than 500 airport departure lounges

SKY TEAM
1995 Atlantic Southeast, Austrian, Comair, Delta Air Lines, Skywest, Swissair, Sabena, Virgin, Singapore Sales: $27 billion Fleet: 1,004 aircraft Employees: 123,000 RPKs: RPK 227 billion billi Passengers: 127 million 2002 Aeromexico, Air France, Alitalia, CSA Czech Airlines, Delta Air Lines, and Korean Air 500 destinations in 114 countries Passengers: 179 million Aircraft 1,047

WINGS
1995 Northwest, Mesaba, Express, KLM, Martinair Holland, Air Martinair-Holland, UK, Kenya Airways Sales: $17 billion Fleet: 654 aircraft Employees: 80,000 2002 Braathens, Continental, Kenya Airways, KLM, and Northwest Passengers: 122 million Aircraft: 899

Skyteam (2009)

Skyteam has 11 member airlines and 16,409 daily flights to 841 destinations in 162 countries.

SKYTEAM IN 2010 Destinations: 856 Countries: 169 Daily Departures: 13,133 Annual Passengers: 384 million Frequent Flyer Members: 116 million Number of Lounges: 415+ Fleet: 1,941 mainline fleet (+1,199 from related carriers) Year of Formation: 2000 Employees: 316,445

MEMBERS Alliance

oneworld (8 member airlines)

Founding members: American Airlines, British Airways, Canadian Airlines, Cathay Pacific Airways and Qantas Airways (1 February 1999). Additional members: Finnair and Iberia (September 1999) Aer Lingus and LAN Airlines 1999), (May 2000). Former members: Canadian Airlines, after being purchased by Air Canada, withdrew from the alliance in June 2000. Aer Lingus intends to leave to alliance in April 2007. Future members: Malev, Japan Airlines and Royal Jordanian will offer oneworld services and benefits from 1 April 2007. Members of the JAL and LAN Groups are to become Affiliate 2007 members. Dragonair is joining in 2007. Founding members: Air France, Delta, AeroMexico and Korean Airlines (June 2000). Additional members: CSA Czech Airlines (March 2001), Alitalia (July 2001), KLM, Continental Airlines and Northwest Airlines (September 2004), Aeroflot (April 2006). Former members:Future members: China Southern Airlines has signed a Global Airline Alliance Adherence Agreement. Air Liban, Air Europa, Copa Airlines, Kenya Airways, Tarom and Portugalia Airlines have begun the process of attaining Associate status. Founding members: United Airlines Air Canada Lufthansa Thai Airways International and Airlines, Canada, Lufthansa, SAS-Scandinavian Airlines (14 May 1997). Additional members: VARIG Brazilian Airlines (October 1997), Air New Zealand (March 1999), All Nippon Airways (October 1999), Austrian Airlines Group (March 2000), Singapore Airlines (April 2000), bmi british midland, (July 2000), Asiana Airlines (March 2003), Spanair (April 2003) LOT Polish Airlines (October 2003) US Airways (May 2004) Blue1 (October 2003), 2003), 2004), 2004, regional member), Adria Airways and Croatia Airlines (December 2004, regional members), TAP Air Portugal (March 2005), South African Airways and Swiss International Airlines (April 2006). Former members: Ansett Airlines (joined March 1999, failed in 2001), Mexicana Airlines (joined July 2000 ended March 2004) VARIG Brazilian Airlines (joined October 1997 2000, 2004), 1997, ended January 2007). Future members: Air China Limited has signed a Memorandum of Understanding; Shanghai Airlines and Turkish Airlines have been invited to join.

SkyTeam (10 member airlines)

Star Alliance (17 member airlines, 3 regional members)

Star Alliance

SkyTeam

Oneworld

Passengers per year Destinations

Market share

455.5 million 912 25.1% Adria Airways (JP) Air Canada (AC) Air China (CA) Air New Zealand (NZ) ANA (NH) A A( ) Asiana Airlines (OZ) Austrian Airlines (OS) Blue1 (KF) BMI (BD) Croatia Airlines (OU) LOT Polish Airlines (LO) Lufthansa (LH) SAS (SK) Shanghai Airlines (FM) Singapore Airlines (SQ) g p ( Q) South African Airways (SA) Spanair (JK) Swiss International Air Lines (LX) TAP Portugal (TP) Thai Ai Th i Airways International I i l (TG) Turkish Airlines (TK) United Airlines (UA) US Airways (US)

428 million 841 20.8% Aeroflot (SU) Aeromxico (AM) Air Europa (UX) Air France (AF) Alitalia (AZ) Ali li (A ) China Southern (CZ) Continental (CO) Copa Airlines (CM) Czech Airlines (OK) Delta (DL) Kenya Airways (KQ) KLM (KL) Korean Air (KE) Northwest (NW)

319.7 million 692 14.9% American Airlines (AA) British Airways (BA) Cathay Pacific (CX) Finnair (AY) Iberia ( ) b i (IB) Japan Airlines (JAL) LAN (LA) Malv (MA) Qantas (QF) Royal Jordanian (RJ)

Participants

QUALIFLYER
Air Europe, Air Liberte, Air Littoral, AOM F Li l French h Airlines, Crossair, LOT g Polish Airlines, Portgulia, Sabena, Swissair, TAP Air Portugal, and Turkish Airlines Passengers: 61 million Aircraft: 531

Alianza Summa Avianca, SAM and ACES (formed in May 2002) This alliance is undergoing reorganization. organization Avianca is operating under Chapter 11 bankruptcy protection and ACES ceased operations on A ti August 19, 2003. t 19 2003

CaribSky

LIAT, Windward Islands Airways (Winair), Air Caraibes in conjunction ( ) b with other alliance member airlines including - Trans Island Air 2000 g (TIA), Carib Aviation, Tyden Air and C.A.T.

And now, mergers . . .

Air France Holding i ldi Air France KLM Alitalia?

And more mergers?

Lufthansa

Lufthansa

Swiss

Brussels Airways, Eurowings, BMI, Air Dolomiti, Condor, Austrian Airlines, JetBlue

Air Dolomiti Austrian Airlines A i Ai li Austrian Arrows British Midland Airways Limited BMIbaby BMI Regional Brussels Airlines Eurowings Germanwings Korongo Lauda Air Lufthansa Cargo Lufthansa CityLine Lufthansa Italia Lufthansa Regional Swiss International Air Lines Swiss European Air Lines

While other carriers shun joining the major alliances.

AIRLINE ALLIANCES
by Paul Stephen D b P l St h Dempsey

www.mcgill.ca/iasl