Airlines Forming Partnerships of Survival

In this age of mergers, failures and consolidations in the airline business, do you ever wonder who really owns the airplane on which you’re flying?

The truth is that few airlines own their own planes. Most are financed--leased--because of the capital expenditures involved in buying new planes. For example, it would not be unusual to see a sign bolted to the inside of some cockpit doors that proclaims the aircraft is owned by a consortium of banks.

So much for the planes. But who owns the airlines ? The answers might surprise you. In the last few years, ownership of some carriers has changed rapidly, but the number of owners has decreased as airlines have failed, been sold or merged into larger carriers.

What is beginning to concern many industry observers is not just the mergers and other airline failures but the new ownership agreements and how they might affect the frequency of flights, choice of routes and the cost of your ticket.

Global Alliances

Airlines are forming global alliances in an attempt to secure long-term survival in a deregulated environment. These are more than just marriages of convenience. In some cases the airlines that are tying the knot are participants in shotgun weddings--bonds made necessary because of dismal economic projections. The airlines of the world are uniting.

Two years ago Jan Carlzon, chief executive at SAS, predicted that no more than five European airlines would survive by 1995. The way things are going, Carlzon’s prediction might come true two or three years early. And that’s just in Europe.

One by one, airlines are forging domestic and global alliances, creating mega airlines out of marketing agreements, route swapping, code sharing and, in some cases, substantial ownership of one airline by another. In most cases the resulting companies are multinational.

The result? Some rather strange bedfellows, and some possibly scary scenarios for the future of air travel.

British Airways has already absorbed British Caledonian. And there are reliable reports that KLM, Aer Lingus, Finnair and Sabena are each quietly looking for a merger partner . . . or to acquire another airline. In West Germany, Air France and Lufthansa have begun joint operations with a new airline, Euroberlin France, with scheduled service from West Berlin to destinations within West Germany.

And that’s just the start.

Other significant ownership changes: Ansett Airlines (an Australian carrier) owns a 20% stake in America West. The airline also owns 20% of Ladeco, a Chilean airline.

Fighting Debt

In October, Texas Air (owner of Continental and Eastern), faced with ballooning debt and unable to achieve an operating profit, announced an alliance with SAS.

The “preferential air carrier agreement” would not only link schedules and flights around the world, but the Scandinavians paid $50 million for the right to buy up to 10% of Texas Air within six months. (Under federal law, American air carriers can have a maximum of 25% foreign ownership.)

The agreement was nothing new to SAS. Last year the airline paid about $160 million for a 40% share in Aerolineas Argentinas. Not content with two major airline agreements, SAS struck again in December, buying 24.9% of Britain’s second-largest airline group (British Midland Airways, Manx Airlines, Loganair and London City Airways).

In the South Pacific, Qantas is becoming a large shareholder in Air New Zealand (a bid for 100% of the airline by British Airways in partnership with a Japanese tourist development company didn’t work out). But Qantas isn’t alone in the deal; the Australian airline will own 19.9% of Air New Zealand, American Airlines will own 7.5% and Japan Air Lines will own another 7.7%. The remainder of the airline stock will be divided among a host of other investors.

In the Middle East some airlines are talking privately about mergers. “It’s the only way we’re going to be able to compete with the mega carriers,” says the chairman of one airline. “Individually, we’re all too small. But together, we can be a mega carrier, too.”

Global Reservations

And American and Delta have agreed to form an “independent” partnership to operate a global agency reservations system. Delta became half-owner of the new $2-billion company by paying $650 million to American.

American is already partnered with British Airways in its Sabre reservations system (American can issue British Airways tickets, and its computer screens display connecting American and BA flights).

And there are strong industry rumors that Northwest and American are quietly pursuing a merger or, at the very least, an agreement whereby American will buy Northwest’s Asian routes (a move similar to United’s purchase of Pan Am’s Asian system four years ago).

Finally Pan Am, once a dominant airline considered America’s “flag” carrier, has just publicly acknowledged that to survive it will need a merger partner.

What does all this mean to you?

In the short run, very little. But in about three years--or even sooner--some veteran airline observers contend that these new partnerships and alliances will have a serious impact on airline routes, equipment and, ultimately, the cost of airline tickets; prices will go up, up and away.

As a result, some industry analysts believe that we will soon measure an airline not by how fit it is but by how fat. Indeed, we may be crossing the threshold of a new era--the survival of the fattest.

Joint Marketing Agreements

An integral part of most of these joint marketing and/or ownership agreements includes the sharing of airline codes, combining of many route structures and the expectation that the new alliances will result in domination of these routes by single companies.

For example, in the Texas Air-SAS agreement, the U.S. Department of Transportation approved a reciprocal code-sharing agreement between Continental and SAS. Under the plan Continental will be able to display connections to Scandinavia as Continental flights, even though the flight will be SAS. And SAS can do likewise on Continental flights in the United States.

Foreign airlines have not ignored the fact that 10 years after U.S. deregulation, only eight large airlines control 94% of the market. The foreign airlines want a piece of that market. For example, foreign airlines are prohibited from flying “local traffic” in the United States.

That means that although British Airways has a regular flight from Pittsburgh to London that stops in Washington on the way, it is not allowed to fly passengers just between Pittsburgh and Washington.

Royal Jordanian has a flight that goes from Los Angeles to Chicago on its way to Vienna and Amman. The same “no local traffic” rule applies. (There are a few dozen other examples.) The foreign airlines are hoping that these new alliances will liberalize the “local traffic” rules.

Market Share

Overseas these same foreign airlines--anticipating deregulation in Europe--want a bigger share of that market as well.

But is bigger better? Not necessarily. In Europe, where mergers have already occurred and competition on routes has diminished, air prices have risen.

That has also happened in the United States. A recent Department of Transportation study showed that at many airport hub cities where the traffic is substantially controlled by one airline, air fares have risen dramatically.

The report showed significant fare hikes in Detroit (27%), Salt Lake City (26%) and St. Louis (22%), where TWA controls more than 80% of the flights. An argument can also be made that in markets dominated by single airlines, service standards have decreased.

As airline alliances increase in number and the number of airlines continues to decrease, there is a very real danger that route domination by a small group of the fattest “multi-mega” carriers threatens to increase air fares and decrease airline service throughout the world.

If Jan Carlzon’s prediction is correct, the next few years just might be one of the last great times to look for air-fare bargains.