Paul Lewis/WASHINGTON DC

Despite a strong 1998, US carriers are cautious about the outlook for the year ahead

The US airline industry is preparing for a period of turbulence. A combination of stagnating yields, stalling traffic growth and stiffening competition has sparked a fresh round of corporate mergers and acquisitions.

This, in turn, is fuelling new labour unrest and greater regulatory scrutiny of the industry.

Most US international and regional carriers closed the year on a high note, buoyed by strong earnings. But a weaker performance in the fourth quarter has prompted many majors to sound a note of caution in their forecasts for 1999. A 1.2% slide in yields and near static traffic growth has begun to erode incomes.

The economic turmoil in Asia and, more recently, South America, has taken its toll on US airline international traffic. At the same time, cost-cutting by major US carriers struggling to recover market shares lost in strikes is undermining efforts to profit from strong domestic traffic. The clear net gainers are the US regionals, with traffic growth close to 25%.

This may bring a scramble by carriers to strengthen alliances and form new affiliations to shore up the supply of business and cut costs. There has also been a rash of small airline acquisitions and attempted take-overs by the majors trying to strengthen key hub positions and combat increasingly successful regional operators.

Codesharing alliances

United Airlines has been the most active on this front, establishing codesharing alliances with more than 20 carriers, at the heart of which lies the nine-strong Star Alliance. On the home front, it tried, but failed, to forge a marketing alliance with the USA's third biggest carrier, Delta Air Lines, which, in turn, has bolstered its position by buying partner regional carrier Atlantic Southeast Airlines.

United also has partnership agreements with five United Express carriers. Its attempted take-over of Phoenix-based America West, which was designed to bolster its position in the western half of the USA, has proved less successful, however. The planned acquisition faced an uphill battle from the start, confronted by potential opposition from stockholder Continental Airlines, the US Department of Justice (DoJ) and the airline unions.

Challenging United's pre-eminence in the US market is second-placed American Airlines, which with British Airways leads the new oneworld alliance, comprising heavyweights Canadian Airlines, Cathay Pacific Airways, Qantas and, perhaps soon, Japan Airlines. American, too, has moved to improve its domestic position with a frequent flier tie-up with sixth place US Airways, while subsidiary American Eagle has taken over Business Express.

Observers suggest it was American's purchase of Reno Air that prompted United to move on America West. The strategy behind buying the Nevada-based regional was clearly to give American a western foothold from which to take on United and Southwest Airlines. But the result was a damaging period of industrial action by American pilots, who felt threatened by their less expensive Reno colleagues.

Pilots' strike

Northwest Airlines is also struggling to overcome the damage caused by a two-week pilots' strike last year, which is estimated to have cost the carrier $1 billion in lost revenue and incurred expenses. It has also suffered a setback at the hands of the DoJ, which has moved to block its $456 million purchase of a 51% interest in Continental Airlines.

The two carriers have been struggling to create a critical mass internationally and domestically and, if allowed to complete their "virtual merger", would emerge as the second largest carrier in the country. Despite the DoJ action, Northwest and Continental are moving ahead with a commercial tie-up, including codeshare flights and linked frequent flier programmes.

Northwest says an alliance with Houston-based Continental is central to its recovery, as is its participation in a planned new global alliance, Wings. This would bring together Northwest's longstanding partner KLM and the Dutch carrier's own partner, Alitalia of Italy. Other potential members being courted include Air France and Air China. The former appears divided having announced plans to strengthen co-operation with both Continental and rival Delta.

Source: Flight International