Indifference to metal shines at the top of the alliance spectrum
The wheels of bureaucracy may grind slowly but often a quiet logic emerges that can still the shrill voices of political rhetoric. So the EU Commission and the US Department of Transportation's release of their Nov-2010 joint report on competition and airline alliances appears as one more step in anchoring the open skies EU-US Air Transport Agreement.
It should be sufficiently entrenched by now, but issues still divide the parties, such as access between their respective internal points and differences over ownership and control rules, where the US is particularly defensive. Over the course of the prolonged negotiations, there were many threats and counter-threats, but the patient work of the negotiators - when political noise levels were raised - has so far prevailed.
One feature of the agreement involved formalising cooperation on competition matters between the Commission and DoT. The report, Trans-Atlantic airline alliances: competitive issues and regulatory approaches, is part of that process. It addresses the nature of their respective oversight regimes (and how possibly to standardise them) and their attitudes to the competitive impact of the antitrust immunity granted by the EU and DoT.
Complex dance since emergence of alliances
The Commission and the Department have been engaged in a complex dance over the north Atlantic ever since alliances emerged in the 1990s. With the creation and growth of the three global alliances, Star, oneworld and SkyTeam, both authorities had struggled to define their stance on various forms of comprehensive cooperation.
The provisional 2007 agreement provided the opening needed. The report notes that its "immediate effect … was to introduce more competition in trans-Atlantic markets. The provisional implementation of the agreement as of end of March 2008 led to capacity and structural changes." Today, "on the US-London Heathrow routes, departures are up 15.3% versus 2007 and overall seats have increased by 8.7%". This Heathrow increase came despite the economic downturn and against a reduction in overall seats in all US-EU markets - a remarkable shift - and it was accompanied by a wider array of US routes from the UK capital.
The bilateral agreement cleared away many differences, leaving more fertile ground for grants of antitrust immunity to the bilateral and multilateral partnerships of the three global alliances.
The report helpfully offers a review of the nature and role of lower-level tactical alliances (such as simple codeshare) through to the full strategic ones and concludes that "the trend towards joining a global alliance may not necessarily represent consolidation or reduced competition in the aviation industry".
On the role of the competition regulator, the conclusion is that "although alliance members cooperate on many aspects of the customer experience, they may nonetheless remain competitors, as the level of integration between and among the members of the alliance varies greatly".
Between them they now dominate the north Atlantic market. Respective shares of the groupings on north Atlantic routes are: Star 37.6%; oneworld 22.7%; and SkyTeam 28.3%. Non-aligned carriers accounted for 11.4% of the market, or 2.7 million passengers, in the year to Jun-2010, according to DoT figures.
Alliance members gain very different value
The report determines each alliance has only three members which operate with a "high" level of cooperation, each having an "integrated JV in north Atlantic markets". The spectrum of alliance membership then ranges through medium to low, depending on the degree of antitrust immunity granted (or necessary) for the activities in which that group of airlines engages. So alliance members gain very different value from their membership, even though it may not always be obvious to them.
Thus each member qualifies necessarily as having all of the attributes for at least a "low" categorisation. That is, all 26 Star, all 11 oneworld and all 12 SkyTeam airlines achieve at least low-level benefits.
Only nine Star members progress to the next level, "medium" - Air Canada, Austrian, bmi, LOT, Lufthansa, SAS, Swiss, TAP and United-Continental; five of the oneworld airlines - American, British, Iberia, Finnair and Royal
Jordanian make it here; and five of the SkyTeam - Air France-KLM, Alitalia, Czech, Delta and Korean are included.
Spectrum of Alliance Cooperation
Source: CAPA - Centre for Aviation and EU-DoT report
But at the most exclusive - strategic - level, only three in each alliance shine at the top of the spectrum.
These "core members", according to the report, "have deepened their cooperation by launching highly integrated JVs. Their stated goal is to become effectively indifferent to which aircraft or 'metal' carries a passenger, i.e. they seek 'metal neutrality' in their cooperation. This form of cooperation is effectively a close substitute to a merger because it typically involves full coordination of the major airline functions on the affected routes, including scheduling, pricing, revenue management, marketing and sales."
This tiered structuring gains significance in that the world's two main competition bodies show, in a joint presentation, how they perceive the various alliance arrangements. The assessment is skewed inevitably towards operations on the north Atlantic, north Pacific and Latin America (and to some extent Africa and the Middle East), but even so, allowing some airlines much greater market power in those markets must overflow into their other global operations.
Not surprisingly, only airlines from north America and the EU get this highest-level flying start. In global terms, the two major powers are providing their own alliance members a great advantage over all other airlines, including other alliance partners. Logically that is to be expected, as their competition/antitrust powers are local, but other jurisdictions, concerned that their airlines are unable to "merge" in ways that the three core members of each alliance can now at least come close to, should take note.
The possibilities for real cross-border mergers in the next decade will remain limited, so these quasi-mergers are as near as most will come to expanding internationally. So unless other jurisdictions make huge strides in improving their legal frameworks - as well as airlines seeking to take advantage of them - the global alliances will continue to entrench the strengths of the select nine airlines on the top level of the spectrum.
Other major airlines may not regard this as an optimal state of affairs.
Alliance Members with 'High Level Cooperation': the Brightest Part of the Spectrum
This article appears in the December-January issue of Airline Leader - visit AirlineLeader.com