American Airlines' new chairman and chief executive officer, Don Carty, is keen to stress that it's business as usual since the smooth handover from the high-profile Robert Crandall to his heir apparent. But business as usual for American, of course, includes a slow struggle to put in place its proposed alliance with British Airways. If Carty's imprint can be detected since his promotion then it may be in a resigned acceptance that the alliance deal the company wants remains a long-term goal, if it is achievable at all.
American now seems more determined than ever not to walk into the alliance on terms it deems to be unworkable. Indeed, its latest offer to the regulatory authorities is likely to further delay a full alliance launch until well into 1999 or beyond. While the new CEO talks optimistically about being '. . . finally on the verge of being able to move forward', it is clear that after two years forward progression is a relative term and no-one, least of all American, is expecting a fast track for this most problematic and drawn-out of alliances.
At presstime Carty's hopes for progress rested on two imminent events. The European Commission was expected to reveal its thoughts on the alliance on 8 July and the US Department of Transportation looked likely to call an oral hearing in the same month, since it has now received comments on the alliance from all interested parties and replies from American and BA to those comments. By its own admission, however, American is not anticipating an easy ride after those events. The company's more realistic expectation is simply that by August it will have a clearer picture of what the rules will be for any alliance. And while American talks enthusiastically about a long-term partnership with BA, it has said that it could drop the alliance proposal. 'We are prepared to walk away from the deal that is on the table,' says Carty. 'We won't do a dumb deal. That doesn't mean we don't see ourselves as allies in some other form. The work we are already doing with BA under the existing bilateral has been very successful. We will continue to exploit those opportunities because we see ourselves as nicely married.'
This admission that the terms of an alliance might not be acceptable lends a new tone of resignation to American's rhetoric. The company was insisting 12 months ago that the alliance would have to happen eventually because of the need for a US-UK open skies deal. The stated goal was to have regulatory issues resolved by October 1997 so that the two airlines could organise their 1998 summer schedules. One year later, the airline clings to the same hope - except now for the 1999 summer schedule - and senior managers make jokes about how their children will have graduated through high school and college before the alliance becomes a reality. 'We have been three weeks away for some time now,' observes David Schwarte, American's managing director of international affairs.
If American were confident that approval was imminent, then its newest tactic would seem a strange bargaining chip to put on the table so late in the day. American has offered to delay full implementation of the alliance until 14 daily roundtrip slots - in other words 196 weekly slots - become available to competing airlines between the US and London/Heathrow. American, which is not offering to relinquish any of its own 14 slots, argues that the playing field would be levelled at that point. BA has about 30 transatlantic slots. American says it could take up to a year for those 14 slots to become available, but is prepared to wait.
The conundrum here - given American's long-held argument that many slots could be found by competitor airlines if better use was made of current resources - is why would competitors rush to find these slots if this would help expedite the AA/BA alliance? Also, why is this offer being made now when it falls far short of the number of new slots that the General Accounting Office, the Department of Justice and the European Commission have suggested would be necesssary to ensure fair competition?
Some in Washington DC believe that this new tack shows recognition of the fact that a deal might not be achievable until well into the next century. Neither airline wants to rush in at this point and offer the major concessions that the regulatory authorities are seeking.
Christopher Allen, BA's head of competition and industry affairs, confirms the proposal has not been put directly to the Commission, which is believed to be looking for up to 280 weekly slots to be given up, but says the ideas behind the proposal have been discussed. 'Whether they are interested we don't yet know,' says Allen. It seems unlikely, however, that Europe's competition commissioner Karel Van Miert will look kindly on the offer. As recently as June, Van Miert emphasised that the two airlines should be made to give up slots and they should be 'interesting' slots.
The offer, so far removed from what the regulatory authorities are seeking, may support suspicions in the US that the airlines are eyeing the exit door even before their alliance is born. Even the softer options, such as a joint frequent flier programme, may not escape the attention of the regulatory authorities because of the sheer size of such a venture. The DOT has not made it clear where it would stand on a frequent flier-only programme, but does not rule out intervention.
Even if the two airlines remain committed to some form of a partnership, they seem to accept that a fully fledged alliance may be months or even years away. They are digging in their heels, not only on the slots issue but also on the idea of forced carve-outs of large markets, such as Chicago/ O'Hare to Heathrow, suggested by the DOJ and Van Miert. Carty argues that carve-outs would make the alliance 'very, very complicated', especially if the two airlines want to offer joint corporate deals. 'We would have to go into different rooms to talk about Chicago,' he points out. 'The practicalities of carve-outs are very difficult to manage and are not well understood. Some 60 per cent of our traffic between Dallas and London is going on to somewhere beyond, so what's really being carved out?' In a line clearly meant to land on the desks of the DOJ and the Commission, he adds: 'I am not saying it's impossible, but the notion of carve-outs is a bureaucratic expression of a lack of understanding.'
In the middle of all this regulatory bargaining, American has declared an incentive as to why the alliance remains a worthwhile pursuit. According to Schwarte, the alliance would allow American to pick up BA traffic from key European cities other than London - mainly in Belgium, Germany and Switzerland - where American has dropped some services citing strong competition from other alliances. While BA currently routes those passengers to the US via Heathrow, the alliance would allow them to fly nonstop to the US with American. BA describes this arrangement as being '. . . one of the potential consumer benefits' that makes good sense for all parties. This emphasis on non-UK traffic is new; previously, American has argued that it wants the alliance because open skies would expand the transatlantic marketplace, giving it a smaller marketshare from a larger pie.
American's senior vice president of finance and planning, Gerard Arpey, still describes the proposed alliance as the 'linchpin' of the company's international strategy. 'BA and ourselves will be partners for a long time, irrespective of how it works out. We are already doing much more interlining,' he says.
The company sees the BA alliance as one of a core group of international partnerships that includes Canadian Airlines, Iberia, Japan Air Lines and Qantas. That grouping is not cast in concrete, says American, but it is at the heart of the company's international strategy. Arpey confirms that American may take an equity stake in Spanish flag carrier Iberia even though the company is usually cautious of such overseas investments.
Meanwhile, the extended AA/BA approval process has enabled both companies to work out many of the practicalities of an alliance, says Schwarte. The two airlines are 'well into the process' of developing a separate brand identity for the alliance. 'We need some sort of moniker,' says Mike Gunn, American's vice president of marketing.
American is maintaining its cautious attitude towards a planned domestic alliance with US Airways. Carty says that US Airways has always been American's 'preferred' domestic partner, chiefly because the airlines' networks are 'completely complementary with almost no overlap'. Both use Sabre for their information technology, points out Carty, so it would be a relatively simple task to cooperate. But short-term plans are for only a shared frequent flier programme and reciprocal access to member lounges. 'If the industry trend is towards codesharing, we will do it, but we are not leading that parade,' says Carty. 'Our inclination is to let the other carriers lead in terms of the legal and labour difficulties. If it then becomes a fact, then we will want to codeshare too. But we are not going to rush into this thing. We will be the fastest to market in terms of frequent flier programmes, but the slowest in terms of codeshare.'
If a sedate pace is to be the hallmark of the US Airways partnership, then American has an advantage here: its experience with the BA proposal provides a wealth of lessons to be drawn upon.
Source: Airline Business
