American Airlines, he says, has it all: the best US domestic network, the most potential access to Canada of any US carrier through equity partner Canadian Airlines International, and a near-monopoly in Latin America. 'We have built a network that is absolutely second to none.'
This 'network of the Americas' offers unparalleled reach for possible foreign partner airlines like Air France and Air Inter. A Franco-American alliance would 'do as much or more' than the established partnerships of United Airlines-Lufthansa, British Airways-USAir and KLM-Northwest Airlines, Carty asserts: 'BA and USAir together serve 17,000 city-pair points, United and Lufthansa close to 18,000. An American partnership with Air France and Air Inter would be much more - between 21,000 and 22,000 city-pairs.'
Even without questioning the numbers or underscoring the hypothetical nature of the assertion - city-pair combination counts are notoriously unreliable while American and Air France have not even had serious discussions - the irony is still delicious to American's foes. Two years ago, AMR chairman Robert Crandall went full-throttle with a crusade against codesharing alliances between US and foreign carriers.
Then, BA and USAir had yet to receive government approval for their alliance, but the prospect had Crandall believing that his vision of AMR single-handedly dominating the world's skies was under threat. The proposed BA-USAir city-pairs meant the creation of 8,000 markets in which American would not be able to compete, and the loss of domestic and international revenue. 'We've made investments, built a network. What [the US government] wants to do in response is give another guy the right to play in our market,' Crandall said in late 1992, pushing a view also held by United and Delta Air Lines at the time.
Now it's American that wants to give the 'other guy' that right. After losing against United in an alliance negotiation with Lufthansa early last year, seeing the remaining major US carriers establish similar agreements was bad - Continental Airlines is now allied with Alitalia, and Delta has an array of seven smaller codeshares as well as its cooperation with Swissair. The realisation that it could never penetrate the lucrative but restricted Pacific market was worse - American's paltry three daily flights to Tokyo compete with the extensive Asian networks of Northwest and United. Then, in early November, US transportation secretary Federico Peña announced that future US international aviation policy would treat alliance-building as the most significant element in air transport liberalisation. Two weeks later AMR made an abrupt about-face on its public opposition to codeshare alliances. 'It's one thing to oppose a public policy, and another thing to ignore it,' says Carty.
The question now is whether American has come to the party fashionably late, or simply too late. Officials at the airline believe that the alliance-building trend has barely begun. But American also has the highest rate of alliance failures among US carriers - 50 per cent - and suffers from a lack of trust by others in the industry. The airline's preferred partners, JAL and Air France, are based in countries whose restrictive and non-existent bilateral relations with the US respectively would require laborious negotiations just to allow codesharing. 'It could take a long time,' says Hans Mirka, AMR senior vice president international. 'But if there is an aggressive interest on the part of both parties, it could be quick. Stranger things have happened.'
Within such a strange-but-true category has been what many have called American's hypocrisy in opposing codesharing - it first complained that the practice was deceptive to the consumer in 1983. More recently it has complained that codesharing produces 'screenclutter' through the double and triple-listing of codeshare flights on computer reservation systems.
But by 1986 American had established its first codeshare agreement with a non-US airline, Qantas. Later came alliances with Air New Zealand, Cathay Pacific, Malev, Air Bremen and a small codeshare agreement with Lufthansa on Chicago-Munich and Chicago-Dusseldorf services. Besides Qantas, all these earlier agreements have failed but have since been replaced with agreements with British Midland, Gulf Air, South African Airways (SAA), Transwede and, most recently, LOT of Poland.
And, in mid-1994, just as AMR filed complaints over screenclutter, it began double-listing its flights with SAA and Gulf Air. These contradictions are lost on American. 'We double-list for the same reason we codeshare,' says associate general counsel David Schwarte. 'If they are not going to ban it, we will match it.'
The obvious rub for American is the scale of the alliances developed since 1989, when KLM first invested $400 million in Northwest. Overcapacity and downward pressure on pricing from lower-cost carriers like Southwest Airlines in the US domestic market, where American still earns the bulk of its revenues, have focused AMR on its international operations. Its go-it-alone strategy has worked well, and even without any significant presence in Pacific markets it is the best-performing US carrier in the international arena: operating profits of $181 million in the first half of 1994 far eclipsed chief rival United, whose $59 million came primarily from its broad presence in the Pacific.
So why share anything that is performing so well? On the Atlantic, the answer is that codesharing alliances work, though not in the way most people believe. Preliminary findings from two codesharing analyses commissioned by the US government have shown that broad alliances produce solid economic benefits to participants by shifting traffic away from those carriers without agreements. However, the same findings suggest Delta's multi-partner strategy may be less effective.
Even in alliances where one partner is in difficulties, there are benefits. BA may write down its $400 million equity investment in USAir due to USAir's poor domestic performance, but the two carriers say they now make more than $100 million each in added revenue each year from the alliance.
'Yes, it is hurting us,' says Mirka. 'USAir and BA are not among the most happy campers, but while [the alliance] is there it is benefiting them.' Mirka adds that those benefits are coming from: 'Our hide.'
In the Pacific, Crandall has been pursuing Japan as a gateway to Asia ever since he decided not to compete with United to purchase Pan Am's Pacific network in 1985. But Japanese officials steadfastly refuse to grant any more rights or increased capacity to US carriers, and want to claw back Northwest and United's lucrative fifth freedom privileges.
American, Mirka says, is resigned to the fact that beyond rights are impossible. But it has not given up hope for services to Osaka's new Kansai airport, and has great hopes that discussions that have continued with JAL for close to a year will eventually result in a codeshare alliance. This would give American indirect access to Asia-Pacific markets. 'American [executives] would like to get involved in codesharing as soon as they can,' a source close to JAL says. 'JAL sees that as an attractive possibility, but since [the airline] has devoted the last 40 years of its existence to changing the bilateral, [it] is not going to give in on that.'
However, sources in the Japanese airline industry do say that a codesharing deal between JAL and American could revive US-Japan bilateral negotiations, which have been lifeless for years. However US officials do not favour a renegotiation if it does not mean gaining access to Osaka and at least maintaining existing rights.
AMR has launched a major campaign to reinvigorate negotiations between the two countries. A high-profile visit to Japan by Crandall in November was ostensibly to lobby for new rights to Osaka but was really to push for codesharing approval. Japanese officials were receptive, and, sources say, are backing American's wishes. Negotiations, if they are undertaken, will be long and tedious. 'If they disapprove, that's it - we're shut out of the Pacific,' says Mirka.
A difficult negotiation between the US and France would also ensue if American and Air France sought approval to establish an alliance. France, which renounced the US bilateral in May 1992, 'would have to pay for [codesharing] with a renegotiation of a liberal bilateral,' says Paul Gretch, director of the DOT's international aviation office. The likelihood of any progress in the near future is remote, however. Air France, in the midst of a difficult restructuring, would probably not contemplate an alliance with a carrier like American until after French presidential elections in May. And Air France will decide by early 1995 what to do with its currently frozen codeshare agreement with Continental.
Despite such alliance speculation on the part of American, in practice the attractions of its 'network of the Americas' are limited by constraints on codesharing from third countries. Brazil, for instance, is not likely to permit American to operate codeshare services with Air France via Miami.
Further more American's access to Canada is still limited by the highly restrictive US-Canada bilateral. Indeed even the AMR-Canadian Airlines Inter national alliance, which includes a 33 per cent equity stake in Canadian by American and extensive management support contracts, does not include codesharing. However Carty says American will offer its management services - grouped under AMR Decision Technologies (ADT) - at premium savings to its alliance partners.
American's only significant requirement of a partner is size, though its refusal to make equity investments is also a limiting factor. Mirka believes several smaller codesharing alliances would simply confuse line personnel and be more difficult to manage. Carty refers to 'equivalent economic benefits,' adding: 'We ought to buy back in a partnership a very dominant network role elsewhere in the world.'
Carty rejects the criticism that there are few potential partners left, underscoring American's slow approach to alliance-building and a conviction that alliances can change. 'Is the dance over? It doesn't look like it for British Airways, and it isn't clear if it's over for Lufthansa. They will have to decide if they prefer an alliance with United, or if the risk of American-BA or American-Air France is so great that they need to re-evaluate.'
The statement's arrogant tone may be the single biggest problem American has in its relations with other carriers. Several sources point to sense of mistrust felt by Lufthansa in former negotiations with American about joining forces. American's unwillingness to bend on several key points gave United the final victory. 'Foreign carriers are concerned that Crandall's people have to tell him how they [took advantage] of the other guy,' says one codesharing expert. The source adds that the difficulty American has had keeping alliances going 'is not an insignificant fact' for potential partners.
AMR officials generally see the need for a fair deal as a problem. European-US alliances thus far have benefited the European carriers, they believe. Nonetheless, Carty, who does not apologise for American being a hard negotiator, admits AMR has a perception problem: 'The way you get back any credibility is to demonstrate that we believe in a partnership where both parties [win].'
American is having difficulty overcoming a corporate culture that is dominated by a hard-ball negotiating strategy and is often short on subtlety. After close to a year of delicate negotiations with JAL, for example, American came close to destroying the relationship two weeks before going public on a linkup of the two carriers' frequent flyer programmes, by formally asking the US Department of Transport ation to reject a longstanding application by JAL to serve Honolulu from Sendai.
The complaint, to try and force the issue of opening Osaka to American services, took on a major symbolic value at JAL. 'What is important when the Japanese do business is a feeling of trust, [and] they jeopardised the trust they had built,' says a JAL source. American withdrew the complaint.'
American's reluctant recognition of the need to get into codesharing alliances is a defensive manoeuvre. If alliance building evolves as US policy-makers envision, all airlines will be working with partners and ultimately with anti-trust immunity. It is more than codesharing, says one US official; it will be 'the integration of networks.' The for now hypothetical integration in an AMR-JAL-Air France alliance would have produced combined revenues of $34 billion in fiscal 1993.
'This is not a crisis,' says Carty. 'We appear to be going slow because we haven't seen the deal that we want to do. But as long as US policy is what it is, we will do as much or more than anything so far.'
'This is not a crisis,' says Carty. 'We appear to be going slow because we haven't seen the deal that we want to do. But as long as US policy is what it is, we will do as much or more than anything so far.'
Source: Airline Business
