The airline alliance dance has moved into a new phase with the announcement of the virtual merger between Northwest Airlines and Continental Airlines. The entire industry is still trying to digest the implications of this innovative deal, which, as usual, poses more questions for the future than it answers.
At first sight, Northwest and Continental have been very clever. An alliance which stops short of a full merger has many attractions, as it avoids several troublesome issues attached to merging two US majors, such as pilot seniority lists, job losses, employee morale, and incompatibility in terms of fleet, management and systems. Both airlines can keep their identities, and the top managers keep their jobs.
Some scepticism is in order here. The history of full mergers between US majors is littered with casualties and bad experiences, but alliances involving minority equity stakes, largely cross-border phenomena up to now, have had an equally shaky history. Northwest itself had a protracted dispute with KLM over corporate governance, which was only resolved because both partners realised that their alliance was too important to be sacrificed.
Northwest says it does not want to exercise control over Continental, and doubtless it means this. But things can change. Some future Northwest management might be unhappy with some future Continental's management, for example, or a recession or other industry change may prompt a re-evaluation of the arrangement. After all, the virtual nature of this merger means that the cost-saving aspects are effectively eliminated - a fine tactic during an industry boom, but questionable during harder times.
The deal is being portrayed as neutral in the competitive sense, as the two carriers have virtually no route duplication. Here, the airlines' managers are stepping onto thinner ice. As we all know, individual routes are only part of the story in the modern airline battle-field. What really matters is network competition and the fight for hub dominance. And suppose the pair decide to seek antitrust immunity to allow them unite their fare structures?
Northwest and Continental both have several potent hubs, and some very detailed analysis will have to be done in Washington to determine whether these hubs really compete with each other in a meaningful way or not. Northwest's Minneapolis and Detroit hubs might well be competing against Continental's Newark operation for a passenger flying from the midwest to Europe, for example.
Indeed, the international ramifications of the tie-up are considerable, and here the questions outnumber the answers. Does the deal mean that Continental becomes a KLM partner and Alitalia a Northwest partner? Will all four airlines merge their transatlantic operations à la Northwest/KLM? What happens to other international alliances which may be incompatible, like Continental's with Air France and Virgin or Northwest's with Asiana?
But the most important issue raised by the Continental-Northwest deal is its wider ramifications within the US domestic market. It is inevitable that a deal like this will cause all the other players to look very carefully at their own strategies, especially if other majors think that they can use the pair's virtual merger as a model (see News Analysis, p24).
So far, the majority of the speculation has centred on the airlines with the biggest holes in their route maps, such as US Airways, TWA, Alaska Air, and America West; the latter plans to continue codesharing with both Continental and Northwest. The biggest US loser from the Continental-Northwest deal is Delta, which turned down Continental's original approach only to re-appraise its opinion following Leo Mullin's appointment as CEO. Delta's corporate about-turn was too late, and in any case failed to allow Continental the degree of independence which it wanted.
Delta has lost more than the chance to fill in its position in the midwestern US and boost its activities in Europe and Latin America. The Northwest-Continental combination pushes Delta into fourth place in the US and in the global mega-alliance game.
The Northwest-Continental deal poses yet another complication for the hard-pressed people who have to regulate this industry. Washington will have to strip away the veneer covering this arrangement and see it for what it really is - an effective merger which will result in the top four airlines controlling almost 70 per cent of US major-airline revenue. Brussels will have to take this deal into account as it continues its long-running efforts to make a decision on the proposed American-British Airways alliance and as it tries to create a blueprint with which to judge and control the other transatlantic alliances.
The Northwest-Continental deal poses yet another complication for the hard-pressed people who have to regulate this industry. Washington will have to strip away the veneer covering this arrangement and see it for what it really is - an effective merger which will result in the top four airlines controlling almost 70 per cent of US major-airline revenue. Brussels will have to take this deal into account as it continues its long-running efforts to make a decision on the proposed American-British Airways alliance and as it tries to create a blueprint with which to judge and control the other transatlantic alliances.
Source: Airline Business
