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Airline Alliances

Valued airline pacts in the congressional firing line  Mar 08, 2009

An assault by U.S. lawmakers on the system of international alliances that dominate the global airline industry couldn't come at a worse time for carriers battling falling passenger and cargo traffic.

The top three alliances, which carry close to three-fourths of global air passengers, initially used deals to expand their international reach and boost revenue, but now are using their defensive qualities to pool flights and cut costs amid a widespread downturn in business. OneWorld said last month that, over the past ten years, it has provided its members with $3 billion in revenue they wouldn't otherwise have received.

Rep. James Oberstar (D-Minn.), a longtime critic of the alliance system is harnessing unease in Washington D.C. about the competitive impact of international pacts to back a bill that could have a drastic impact on existing and planned airline cooperation.

The chairman of the U.S. congressional committee that oversees airlines is pushing an aviation bill that would automatically withdraw antitrust approval for alliances within three years, although they could be restarted under more stringent rules.

The bill is attached to a $70 billion proposal to modernize the creaking U.S. air traffic control system, which gives it a greater chance of becoming law.

Its provisions could lead to the rolling back of the antitrust immunity, or ATI, already in effect for members of the Star and SkyTeam alliances. It could also derail efforts to expand these groupings and extend immunity to members of Oneworld, the smallest of the three.

The Air Transport Association, a U.S. industry trade group, argues the bill could lead to 15,000 job losses, hit profits and curb benefits to passengers provided by links between airlines.

Carriers with existing or planned links are growing concerned about losing valuable agreements.

"When planes are full, alliances aren't as important as they are now, since alliance partners can provide you with passengers from other airlines," said Michael Whitaker, senior vice president at United Airlines, a unit of UAL Corp. (UAUA) and lead member of Star alongside Deutsche Lufthansa AG (LHA.XE).

United and Lufthansa have long had government approval to coordinate schedules and marketing, and have applied for approval to transfer Continental Airlines Inc. from SkyTeam into Star later this year. A spokeswoman from Continental Airlines Inc. said Friday the airline remains confident in support from the U.S. Department of Transportation, and a positive ruling later this year.

SkyTeam is led by Delta Air Lines, Inc. and Air France-KLM, and has the longest-standing ATI approval.

Last year members successfully secured backing to expand the alliance. This allows them to split revenue and costs on transatlantic flights over the Atlantic, with joint marketing and business operations.

Glen Hauenstein, Delta's executive vice president, network planning and revenue management, said that in good times and bad, "alliances enable you to operate a more efficient airline".

Delta, along with U.S. competitors, has dramatically increased international growth over the past three years, in part to offset weakness in the mature domestic market.

U.S. and European carriers this week reported double-digit percentage falls in international passenger traffic.

Hauenstein said that when travel slows, carriers can cut flights while maintaining an adequate level of service. For example, Delta and Air France split service from the U.S. to Cairo on alternate days of the week, with the French airline operating flights through its Paris and Amsterdam hubs.

While Star awaits its hoped-for approval and SkyTeam aims to hang on to the benefits it has already secured, members of the Oneworld grouping have most to lose from any rollback in antitrust immunity.

Lead members American Airlines, a unit of AMR Corp., and British Airways PLC have twice tried and failed to secure immunity to deepen their existing alliance.

The two applied again last year in the wake of the first stage of the "open skies" pact between the U.S. and the European Union that deregulated transatlantic route access.

Don Casey, managing director for international planning at American, said approval can enhance competition by leveling the playing field among the three top alliances.

BA and American said they remain optimistic the DOT will grant approval in the second half of the year.

Valued airline pacts in the congressional firing line
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