The world of global airline alliances is no place for the faint hearted. Just when it looked as if the newlyweds might be ready to start making a life together, the field has been thrown wide open. First KLM announced that it was calling off its marriage to Alitalia, and British Airways began revisiting its alliance strategy. Then, United Airlines once more reopened the issue of US consolidation with a full bid for US Airways.
With these key players back in the game, pretty much everyone is once again talking to everyone else. So were the sceptics right to warn that the fashionable marriages of the 1990s would soon unravel? Well, not quite.
In fact, the latest round of upheavals may be a sign that airline boardrooms are getting more, rather than less, serious about the need for long-term commitment. In the days when alliances were seen as little more than casual (or convenient) flirtations, then the risks of being trapped in a dead-end relationship were relatively slight. Today the stakes are higher and the mood has changed.
In Europe, there are signs that this could be the moment when the courting comes to an end and the major carriers have to commit. If that is true then the current upheavals will mark the prelude to a fundamental reshaping rather than an unravelling of alliance strategy.
The pressures to build alliances are clear enough. The consensus over the ageing bilateral regime, with its implicit national ownership restrictions, is starting to erode. As it does so, it will bring down the national boundaries which have long been a form of natural protection for reluctant alliance partners. Swissair parent, the SAirGroup, is already pushing at those boundaries in Europe with what amounts to a full cross-border acquisition of Belgian's Sabena - bilaterals notwithstanding.
Then there is the promise of the hard, structural cost reductions that a merger can bring - an estimated 10%. Finally, there is the prospect of being left in the cold. The Star Alliance alone now accounts for more than 20%of the world passenger market and will grow again if US Airways comes into the fold. If that is the benchmark for other global alliances, then a combination of mathematics and competition law would seem to suggest that there are unlikely to be more than perhaps three such groups truly able to compete at this level.
The KLM and Alitalia deal was seeking to address just such issues through a "virtual merger". While it may have failed, both parties are in no doubt that they still need to seek a merger with someone. One of KLM's fears was that it could find itself left on the shelf if it stayed too long in an ultimately unconsummated marriage. It has since said that it would consider a less senior role in an alliance - a concession indeed.
BA too is looking for deeper ties, both across the Atlantic and within Europe. As a leader of the nearest competitor to Star, its choices are likely to be critical. Seeking anti-trust on the Atlantic would almost have to be with someone other than American, unless there is a surprise display of generosity among regulators in Brussels and Washington. Perhaps more pressing is the issue of how it responds in Europe. KLM is suddenly available again, although bringing with it Northwest as the preferred US partner. Swissair/Sabena, now seeking antitrust immunity with American, could be an equally interesting catch uniting oneworld with Qualiflyer.
The US end of the equation is, meanwhile, in its own state of flux with United's plans to spend $4.3 billion on US Airways. How the cards eventually will fall is difficult to predict; the last round of merger/alliance activity within the USA - back in early 1998 - resulted in the inevitable frenzy of activity but ultimately achieved very little. The only solid outcome was the codeshare pact, backed by equity, between Continental and Northwest Airlines. That attracted the attention of the Department of Justice and appears, two years later, to be headed nowhere.
This new United-US Airways proposal, however, is made of different stuff. Despite all the hurdles that they will clearly face - competition concerns and union issues among them - the two groups are pushing for an outright merger. No vague talks of a marketing alliance here, and, in any case, that would hardly have been sufficient to achieve the serious cost savings that US Airways sorely requires. Announcing the deal with his counterpart in New York, United chairman James Goodwin expressed it all: "We've made a personal commitment to each other, to stick together and get this deal done."
If the deal does actually get done ,it would clearly reverberate around the world, creating a group with $26 billion in revenues; a head taller than any near competition. Along the way it would also propel Star into a new league.
The message for competitors is clear - that they too need to emerge from this latest round of discussions, not with loose alliance deals, but with committed relationships that soon may move towards mergers. There will be last minute doubts, but that is only natural when marriage is at stake.
Source: Airline Business
