Abridged Too Far?
Corporate travel buyers weigh how airline consolidation will affect fares
BCD Travel In Motion, May 2009
With the world's airlines consolidating faster than ever through mergers and strengthened alliances, corporate customers are left wondering whether it will make their preferred supplier agreements less competitive.
On 20 April, the European Commission announced a review of anti-trust immunity proposals on transatlantic routes for the Star Alliance and oneworld airline alliances.
The commission is investigating whether the plans of alliance members to cooperate on issues like pricing and revenue management “may lead to restrictions of competition on transatlantic routes.” This is a question which is increasingly being asked not only by legislators in North America and Europe, but also by corporate buyers as the airline industry consolidates faster than at any time in its history.
In addition to alliances gaining more power to trade as single entities, there have also been important mergers and acquisitions, from Delta Air Lines taking over Northwest Airlines in the U.S. to Lufthansa buying Austrian Airlines and bmi in Europe and the already-combined Air France-KLM taking a stake in Alitalia and looking to buy Czech carrier CSA.
“The landscape has been changing tremendously, particularly over the past 12 months,” says Thomas Stoeckel, senior vice president supplier relations Europe, Middle East and Africa for BCD Travel . “In Europe, the experts said there would eventually be only three airlines. That has not happened yet, but we are on our way to it.”
Both Stoeckel and his Americas counterpart, David Mitchell , believe the question of how far, if at all, consolidation will limit competition has not been settled. But they urge corporate clients to stay attuned.
“Many think competition will remain but will not be as strong as before,” says Stoeckel. “Airlines say alliances allow them to present one face to the customer, including a single representative and loyalty program, and the same legal language in corporate agreements. In theory, this is correct, but in practice we don't know. It is hard to predict what the impact will be on fares.”
Mitchell says clients should keep their options open during the current phase of uncertainty, including maintaining relationships with individual airline members of alliances.
“Clients need to be cautious,” he says. “It will be a confusing environment for the next 12 to 24 months. If the proposed tie-up between British Airways and American Airlines gains anti-trust immunity, for example, that may make the NYC-LON market very challenging for the negotiating process. It is too early to tell if there is any real danger from the standpoint of our clients, but they should keep up relations with the different members of alliances. They should push very hard for that.”
In the U.S., concern has been raised about consolidation by, among others, the American Society of Travel Agents and James Oberstar, chairman of the U.S. House Transportation and Infrastructure Committee. In March, Congressman Oberstar told an International Aviation Club meeting that the SkyTeam alliance controls 75 percent of the New York JFK-Paris market and 100 percent of the Amsterdam-Atlanta market, while Star Alliance carriers Lufthansa and United Airlines control 85 percent of the Chicago-Frankfurt market. Between them, the three alliances account for 87 percent of the transatlantic market.
“There would be no incentive for these alliances to compete with each other, and major entry barriers at the most important airports would make it extremely difficult for non-alliance carriers to seriously challenge the alliances,” he said. “The decline in the number of competitors will affect fares as well as service.”
The alliances deny they are anti-competitive. They argue that competition between the three of them is intense and their focus is more on cutting costs and providing seamless service to travelers.
Meanwhile, consolidation is also continuing through mergers and acquisitions. This has been less the case in Asia-Pacific, where governments are unwilling to give up state ownership of carriers, or in the U.S., whose airlines are short of cash and whose laws prevent substantial foreign investment. In Europe, however, many smaller national carriers are being gobbled up, especially by cash-rich Lufthansa.
Stoeckel thinks this process will accelerate in Europe. “The big airlines are worrying that they will miss the opportunity if they don't buy potential candidates now,” he says. “It has become a race.”
Members
Recent alliance developments
Recent merger developments
oneworld
American Airlines, British Airways, Cathay Pacific, Finnair, Iberia, Japan Airlines, LAN, Malev, Qantas and Royal Jordanian
American, BA and Iberia have applied to the US Department of Transportation for anti-trust immunity for commercial co-operation on transatlantic services. The European Commission is also investigating.
Talks about mergers between BA, Iberia and Qantas in 2008 failed to achieve any agreements.
SkyTeam
Aeroflot, AeroMexico, Air France-KLM, Alitalia, China Southern, Continental Airlines (moving to Star Alliance on 24 October), CSA, Delta, Korean Air and Northwest Airlines
Anti-trust immunity granted by the US DoT last year for $12 billion joint-venture between Air France-KLM, Delta and Northwest. However, although the joint-venture has started operating, it remains under investigation by the European Commission.
Delta merged with Northwest in 2008. Air France merged with KLM in 2004. In March 2009, Air France-KLM bought a 25 percent stake in Alitalia. It is also bidding to buy CSA.
Star Alliance
Air Canada, Air China, Air New Zealand, All Nippon Airways, Austrian Airlines, bmi, Egyptair, LOT Polish Airlines, Lufthansa, SAS, Shanghai Airlines, South African Airways, SWISS, TAP Portugal, Turkish Airlines, United Airlines and US Airways
Several Star Alliance members, including Air Canada, Austrian, Lufthansa, Swiss and United, already have anti-trust immunity for global corporate deals. This joint-venture, called Corporate Plus, had 97 corporate agreements in place by the end of 2008, according to Business Travel News. In April 2009, the US DoT gave tentative approval for a joint-venture, entitled Atlantic Plus-Plus, between Lufthansa, United and Continental, which will quit SkyTeam to join Star Alliance. The European Commission has launched an investigation into this plan.
Atlantic Plus-Plus was created after United and Continental failed to agree a merger in 2008. The creation of Atlantic Plus-Plus also led United to call off a proposed merger with US Airways. Last year, Lufthansa added Austrian and bmi to its ownership of Swiss. It also took a substantial stake in Brussels Airlines with the intention of buying it outright (subject to EU regulatory approval), and has been in intermittent talks about buying SAS.