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AIRLINE ALLIANCES

by Paul Stephen Dempsey Director, Institute of Air & Space Law McGill University Copyright © 2017 by Paul Stephen Dempsey

Open Skies • 1992 - the concluded the first second generation “open skies” agreement with the . It allowed KLM and any other Dutch carrier to fly to any point in the United States, and allowed U.S. carriers to fly to any point in the Netherlands, a country about the size of West Virginia. The U.S. was ideologically wedded to open markets, so the imbalance in traffic rights was of no concern. Moreover, opening up the Netherlands would allow KLM to drain traffic from surrounding networks, which would eventually encourage the surrounding to ask their governments to sign “open skies” bilateral with the United States. • 1993 - the U.S. conferred antitrust immunity on the between and KLM. The encirclement policy began to corrode resistance to liberalization as the sixth freedom traffic drain began to grow; soon , then Air , were asking their governments to sign liberal bilaterals. • 1996 - fell, followed by the , , , the Slovak Republic, Malta, . • 2001- the United States had concluded bilateral open skies agreements with 52 nations and concluded its first multilateral open skies agreement with Brunei, Chile, and . • 2002 – France fell. • 2007 - The U.S. and E.U. concluded a multilateral “open skies” traffic agreement that liberalized everything but foreign ownership and . • 2011 – cumulatively, the U.S. had signed “open skies” bilaterals with more than100 States. Multilateral and Bilateral Air Transport Agreements • Section 5 of the Transit Agreement, and Section 6 of the Transport Agreement, provide: “Each contracting State reserves the right to withhold or revoke a certificate or permit to an air transport enterprise of another State in any case where it is not satisfied that substantial ownership and effective control are vested in nationals of a contracting State . . . .”

• Like their predecessors, modern “Open Skies” bilaterals require that “substantial ownership and effective control” be vested in the nationals of the State designating the airline, and that failure to meet this requirement would entitle either nation to revoke, suspend or limit the operations of the offending airline. Nationality Rules Are Discretionary and May Be Waived

• The U.S. has waived the nationality requirements for airlines registered in states that met FAA Category I safety/security requirements, and that have concluded an “Open Skies” bilateral with the U.S.. • When gained control of Aerolinas , the U.S. did not object to the fact that Spanish citizens owned and control the Argentine carrier after opened the bilateral to expand traffic rights for U.S. carriers. • Conversely, when sought to gain effective control of USAir, the U.S. stalled until the issue of Heathrow access under Bermuda II was resolved. • Alliances are like dating. • Ownership is like marriage. • Dating, marriage, infidelity and incest occur often in intercarrier relationships. • Peter Harbison, Center for Pacific : “The alliances are all being opportunistic, jumping into bed with each other and wondering whether the other bed looks warmer.”

FOREIGN AIRLINE OWNERSHIP OF U.S. AIRLINES

Foreign Airline Percentage Ownership U.S. Airline SAS 18.4% Continental* 4.6% Delta 5% Delta Ansett Airlines 17% AmericaWest Air Lines 8.5% Hawaiian KLM 25% Northwest British Airways 15% United* British Airways 24.6% USAir 19.6% Continental Lufthansa 19%

* proposed; later withdrawn U.S. AIRLINE EQUITY INTERESTS IN OTHER CARRIERS Purchaser Percentage Ownership Target AMR (American) 33% AMR (American) 10% Iberia Continental 17.7% America West 2.7% Singapore Airlines Delta Air Lines 4.5% Swissair 7.6% America West Northwest Airlines 25% Hawaiian Air Before Alliances, there was Pan American ...... and . Before the mega- Alliances, there was , facilitated by IATA

Like dogs marking territory, airlines around the world are sniffing each other's tail fins looking for partners." Daniel Riordan

“The hardest thing in working on an alliance is to coordinate the activities of people who have different instincts and a different language, and maybe worship slightly different gods, to get them to work together in a culture that allows them to respect each other’s habits and convictions, and yet work productively together in an environment in which you can’t specify everything in advance.” Michael E. Levine

“Beware a pact with the devil.” Martin Shugrue

Airline Motivations For Alliances • the desire to achieve greater network economies of scale, scope, and density; • the desire to reduce costs by consolidating redundant operations; • the need to improve revenue by reducing the of competition wherever possible as markets are liberalized; and • the desire to skirt around the nationality rules (which prohibit multinational ownership) and cabotage (which prohibits foreign carriers from flying domestic traffic). Bilateral and Multilateral Intercarrier Agreements • ticketing-and- agreements, • joint-fare agreements, • dry leases, • wet leases, • reciprocal agreements, • blocked space relationships (capacity purchase agreements), • computer reservations systems joint ventures, • joint sales offices and telephone centers, • e-commerce joint ventures, • frequent flyer program alliances, • code-sharing, • coordination of pricing and scheduling, • pooling of traffic and revenue, and • Metal Neutral Profit Sharing Joint Ventures Hirarchy of Intercarrier Agreements Airline Cooperation: The Spectrum of Integration

Increasing Integration 

Interline Global Revenue Profit Parent Share j.v. Share j.v. Merger Merger

Source: Standard & Poors Code Sharing

The term "code" refers to the identifier used in flight schedule, generally the 2- character IATA carrier designator code and . Thus, XX123, flight 123 operated by the airline XX, might also be sold by airline YY as YY3456 and by airline ZZ as ZZ9876. Each would (falsely) list the flight as its own. “Code sharing is unnecessary for, indeed irrelevant to, any legitimate purpose or actual service. Code sharing doesn't enable an airline to fly to any more places. It just enables the airline to mislead travellers into thinking that they fly to places they don't. I call that fraud.” Edward Hasbrouck, author of "The Practical Nomad" Alliances: Procompetitive, or Anticompetitive?

• Professor Regas Doganis: "there can be little doubt that airline executives see alliances, especially when they involve code-sharing and capacity rationalisation, as a way of reducing or limiting competition.”

• US Deputy Assistant Attorney General Pate: code- sharing "can result in market allocation, capacity limitations, higher fares, or foreclosure of rivals from markets, all to the injury of consumers.“

• Brattle Group study: fares have increased significantly more in open skies markets with antitrust immunity than in open skies markets without antitrust immunity

• Consumer Reports: code-sharing is a "predatory weapon."

Alliances: Procompetitive, or Anticompetitive?

“Code -sharing, alliances, and connections are all about how do we screw the poor customer for more money?” Michael O’Leary, CEO “We see alliances as having significant anti-competitive elements and believe that our membership in one would be an artificial brake on our own business plans.” Tim Clark, CEO Metal Neutral Joint Ventures

By 2010, the highest levels of integration under antitrust immunity in “metal neutral” joint ventures had been achieved by the following airlines: • Air Canada, Lufthansa, United-Continental • -KLM, , Delta • American, British Airways, Iberia • & U.S. Dept of Transportation, Transatlantic Airline Alliances: Competitive Issues and Regulatory Approaches 7 (2010).

• The telephone regulators insist on “seamless interconnectivity.” • The airline regulators allow “preferential connectivity.” Alliance United/ British Delta/Swiss Northwest/ Lufthansa Airways/ Air KLM USAir Year 1997 1996 1997 1994

US cities 60 52 15 88 covered European 46 1 30 Cities Covered Daily code- 440 190 30 shared flights Daily flights 4 3.6 per city Extra 1500 560 110 1000 per day Extra 3.4 2.9 3.7 passengers per flight Purported Consumer Benefits • Beyond-segment competition; • One-stop travel purchase services; • Joint frequent flyer benefits; • Reciprocal access; • Seamless connectivity of passengers and luggage; and • Coordinated arrival and departure scheduling. Airline Benefits of Alliances

• An ability to provide more capacity and enter new markets without having to make large capital expenditures for purchases or airport infrastructure; • An ability to generate thousands of new “on-line” [sic] city-pair combinations; • An ability to extend the reach and scope of their frequent flyer programs to enhance consumer loyalty; • An ability to generate between three and four new passengers per flight; • An ability to enhance market power at hub making it more difficult for new entry into the network’s markets; • An ability to sell and market jointly to corporate customers; • An ability to steal market share from non-aligned competitors; • An ability to fix prices with competitors in dominant markets; • An ability to reduce competitive capacity in key markets to improve yields; • A reduction in the costs of equipment and services from third party vendors as a result of greater bargaining power of pooled purchases; • A reduction in airport handling, airport operations, selling and ticket costs as a result of economies of scale and the sharing of support services; • A reduction in travel agent and GDS costs as a result of enhanced oligopsony market power; and • An ability to pool costs and revenue to share risks and rewards. A. Light, European Airline Industry Review, Salomon Smith Barney (Mar. 5, 1998), at 30-31; see also Tiffany Co., Asian Airlines: Flying with a Tailwind, but for How Long?, Salomon Smith Barney (Oct. 20, 2000), at 32.

The A++ JV

In approving and immunizing the United-Lufthansa-Continental-Air Canada transatlantic joint venture, DOT cited the following “substantial public benefits”: • An expanded network, serving many new cities; • New online [sic] service, which includes the likelihood of new routes and expanded capacity on existing routes; • Enhanced service options, such as more routings, reduced travel times, expanded nonstop service in select markets, new fare products, and integrated corporate contracting and travel incentives; • Enhanced competition due to the addition of a major new gateway, Newark, as well as the elimination of multiple mark-ups on code-share segments and more vigorous competition between the alliances; • Cost efficiencies; and • A strengthened financial position for the carriers. • Expanded Star Application, DOT Order 2009-4-5 (2009).

Infidelity in the Airline Industry

• : → non-alligned • Austrian: SkyTeam → Star • Canadian: oneworld → Star • : Skyteam →Star • Mexicana: Star → oneworld • Northwest/KLM: Wings → Star • Singapore: Skyteam → Star • USAirways: oneworld → Star

THE

1995 2002 Air Canada, Air New , Atlantic Zealand, Ansett Coast, , , All Nippon Lufthansa, Air Airways, Austrian , South African Airlines Group Airways, SAS, British (, Midland, Air Canada, and Tyrolean , Airways), British Midland, Canadian Sales: $46 billion Airlines, Lufthansa, Fleet: 1,522 aircraft LOT, Mexicana Employees: 243,000 Airlines, SAS, Singapore Airlines, Thai RPKs: 377 billion International Airways, Passengers: 189 million United Airlines, and Varig Passengers: 276 million Aircraft: 2,002

The Star Alliance (2009)

Established in 1987 Total of 20 member airlines Annual passengers: 492.77 million Daily departures: nearly 18,000 Number of employees: 396,195 Countries served: 162 Airports served: 965 Fleet: 3,294

Star Alliance statistics 2010 Member Airlines: 26 Number of aircraft: 3,993 Number of employees: 458,817 Passengers per year: 603.5 million Sales Revenue (in US$): 171.22 billion Daily departures: 19,700 Adria Aegean Air Canada Air ANA Austrian BMI Airlines Continental Airlines Airlines Egyptair By 2010, the Star Alliance LOT Polish Airlines flew 3,993 aircraft in 19,700 Lufthansa daily departures, employed Singapore Airlines 458,817 workers, flew 603.5 Swiss million passengers, and had Tam revenue of $171.22 billion. It TAP Portugal Thai consisted of the following 27 United airlines: US Airways

ONEWORLD

1995 2002 , British Aer Lingus, American Airlines, British Airways, Airways, Canadian Airways, , Iberia, Airlines, USAir, LanChile and Qantas Sales: $44 billion Destinations: 574 in 134 countries Fleet: 1,706 aircraft Passengers: 200 million Employees: 252,000 aircraft Aircraft: 1,481 RPKs: 399 billion Passengers: 195 million Oneworld in 2009

• Added , Malev Hungarian Airlines, and Royal Jordananian Airlines • 10 airlines • 9,190 flights per day flying 320 million passengers to 692 destinations in 142 countries • More than 500 airport departure lounges

In 2011, the oneworld alliance flew 335 million passengers to 901 destinations in 45 countries in 2,473 aircraft with 312,000 employees. Oneworld consisted of the following 12 airlines: American Airlines British Airways Cathay Pacific Finnair Iberia JAL Japan Airlines LAN Malév Hungarian Airlines Mexicana Qantas Airline

SkyTeam

1995 2002 Atlantic Southeast, Austrian, , Air France, Alitalia, , Delta Air Lines, CSA , Delta Air Skywest, Swissair, , Lines, and Virgin, Singapore 500 destinations in 114 countries Sales: $27 billion Passengers: 179 million Fleet: 1,004 aircraft Aircraft 1,047 Employees: 123,000 RPKs: 227 billion Passengers: 127 million WINGS

1995 2002 Northwest, Mesaba, Express, , Continental, KLM, -Holland, Air Airways, KLM, and Northwest UK, Passengers: 122 million Sales: $17 billion Aircraft: 899 Fleet: 654 aircraft Employees: 80,000 SkyTeam (2009)

Sky team had 11 member airlines and 16,409 daily flights to 841 destinations in 162 countries. SKYTEAM IN 2010 Destinations: 856 Countries: 169 Daily Departures: 13,133 Annual Passengers: 384 million Frequent Flyer Members: 116 million Number of Lounges: 415+ Fleet: 1,941 fleet (+1,199 from related carriers) Year of Formation: 2000 Employees: 316,445 In 2010, the SkyTeam alliance flew 384 million passengers to 169 countries in 1,941 aircraft with 13,133 daily departures, employed 316,445 workers. It consisted of the following 13 carriers:

Aeroflot Aeromexico Air France Alitalia Czech Airlines Delta Air Lines Kenya Airways KLM Korean Air TAROM Airlines MEMBERS Alliance oneworld Founding members: American Airlines, British Airways, Canadian Airlines, Cathay Pacific (8 member airlines) Airways and Qantas Airways (1 February 1999). Additional members: Finnair and Iberia (September 1999), Aer Lingus and LAN Airlines (May 2000). Former members: Canadian Airlines, after being purchased by Air Canada, withdrew from the alliance in June 2000. Aer Lingus intends to leave to alliance in April 2007. Future members: Malev, Japan Airlines and Royal Jordanian will offer oneworld services and benefits from 1 April 2007. Members of the JAL and LAN Groups are to become Affiliate members. Dragonair is joining in 2007. SkyTeam Founding members: Air France, Delta, AeroMexico and Korean Airlines (June 2000). (10 member airlines) Additional members: CSA Czech Airlines (March 2001), Alitalia (July 2001), KLM, Continental Airlines and Northwest Airlines (September 2004), (April 2006). Former members:- Future members: China Southern Airlines has signed a Global Airline Alliance Adherence Agreement. Air Liban, Air Europa, , Kenya Airways, Tarom and Portugalia Airlines have begun the process of attaining Associate status. Star Alliance Founding members: United Airlines, Air Canada, Lufthansa, Thai and (17 member airlines, 3 SAS-Scandinavian Airlines (14 May 1997). regional members) Additional members: VARIG Brazilian Airlines (October 1997), Air New Zealand (March 1999), (October 1999), Austrian Airlines Group (March 2000), Singapore Airlines (April 2000), bmi british midland, (July 2000), Asiana Airlines (March 2003), Spanair (April 2003), LOT Polish Airlines (October 2003), US Airways (May 2004), Blue1 (October 2004, regional member), and (December 2004, regional members), TAP Air Portugal (March 2005), South African Airways and Swiss International Airlines (April 2006). Former members: Ansett Airlines (joined March 1999, failed in 2001), Mexicana Airlines (joined July 2000, ended March 2004), VARIG Brazilian Airlines (joined October 1997, ended January 2007). Future members: Limited has signed a Memorandum of Understanding; Airlines and Turkish Airlines have been invited to join. Star Alliance SkyTeam Oneworld

Passengers 455.5 million 428 million 319.7 million per year

Destinations 912 841 692

Market share 25.1% 20.8% 14.9%

Participants Adria Airways (JP) Aeroflot (SU) American Airlines (AA) Air Canada (AC) (AM) British Airways (BA) Air China (CA) Air Europa (UX) Cathay Pacific (CX) Air New Zealand (NZ) Air France (AF) Finnair (AY) ANA (NH) Alitalia (AZ) Iberia (IB) Asiana Airlines (OZ) China Southern (CZ) Japan Airlines (JAL) Austrian Airlines (OS) Continental (CO) LAN (LA) Blue1 (KF) Copa Airlines (CM) Malév (MA) BMI (BD) Czech Airlines (OK) Qantas (QF) Croatia Airlines (OU) Delta (DL) Royal Jordanian (RJ) LOT Polish Airlines (LO) Kenya Airways (KQ) Lufthansa (LH) KLM (KL) SAS (SK) Korean Air (KE) (FM) Northwest (NW) Singapore Airlines (SQ) South African Airways (SA) Spanair (JK) Swiss International Air Lines (LX) TAP Portugal (TP) Thai Airways International (TG) Turkish Airlines (TK) United Airlines (UA) US Airways (US) Comparison of Alliances

Alliance Star SkyTeam oneworld

Year 2005 2010 2005 2010 2005 2010

Countries 139 181 137 169 135 146

Destinations 795 1,130 658 815 599 679

Passengers 384 545 321 384 223 298 (million)

Market 29.3 43.8 20.6 29.3 23.2 27.9 share Pax RPK (m)

June 2012

Star Alliance SkyTeam Oneworld 28 members 17 members 12 members Founded 1997 Founded 2000 Founded 1999

Passengers per year 649 million 506 million 303 million

Countries 190 178 147 Destinations 1293 983 766

Revenue Billion 160.9 (124) 97.9 (90) 89.875 (85) US$ (€)

Market share 29.3% 24.6% 23.2%

Air , Air Liberte, , AOM French Airlines, Crossair, LOT Polish Airlines, Portgulia, Sabena, Swissair, TAP Air Portugal, and Turkish Airlines Passengers: 61 million Aircraft: 531 Alianza Summa , SAM and ACES (formed in May 2002) This alliance is undergoing re- organization. Avianca is operating under Chapter 11 bankruptcy protection and ACES ceased operations on August 19, 2003.

CaribSky LIAT, Windward Islands Airways (Winair), Air Caraibes in conjunction with other alliance member airlines including - Trans 2000 (TIA), Carib Aviation, Tyden Air and C.A.T.

And now, mergers . . .

Air France Holding

Air France KLM Alitalia?

And more mergers?

Lufthansa

Austrian Swiss

Air Dolomiti Austrian Airlines Austrian Arrows British Midland Airways Limited BMI Regional Korongo Lauda Air Lufthansa Lufthansa CityLine Swiss International Air Lines Swiss European Air Lines

Top 10 world airports by international passengers in 2007 (ACI) - Alliance / non alliance airline share by international flight departures for January 2009

Airport Intl Pax Non oneworld SkyTeam Star Alliance (m) Alliance Total 62.1 19% 48% 7% 26% 81% Heathrow CDG 54.9 20% 5% 65% 10% 80% Amsterdam 47.7 20% 6% 66% 9% 80% 47.1 16% 5% 5% 74% 84% 46.3 50% 31% 5% 13% 50% Singapore 35.2 37% 9% 1% 53% 63% 34.2 18% 27% 22% 33% 82% Narita * 33.5 87% 3% 3% 7% 13% 31.6 53% 6% 4% 37% 47% London 31.1 61% 34% 1% 4% 39% Gatwick

Source: Emirates Airlines Top 5 Europe-Asia city pairs by numbers in 2008 (IATA) - Alliance / non alliance airline share by passenger bookings in 2008

Alliance Non Alliance oneworld SkyTeam Star Total London - 18% 68% 2% 12% 82% Hong Kong Paris - Tokyo 1% 29% 28% 41% 99% London - 28% 41% 5% 26% 72% Tokyo Frankfurt - 33% 1% 0% 66% 67% Bangkok London - 59% 10% 1% 31% 41% Bangkok

Source: Emirates Airlines Top 5 Europe-US city pairs by passenger numbers in 2008 (IATA) - Alliance / non alliance airline share by passenger bookings in 2008 Alliance City Pair Non Alliance oneworld SkyTeam Star Total London - 32% 48% 19% 1% 68% New York - 14% 52% 1% 32% 86% London - 26% 36% 12% 26% 74% London New York - 13% 21% 61% 4% 87% Paris London - 21% 27% 2% 50% 79% Washington

Source: Emirates Airlines While other carriers shun joining the major alliances. Major Non-Alligned Carriers

CARRIER BASE RPKs PASSENGERS REVENUE

Emirates UAE 126,273 27 11,565 Southwest USA 119,801 86 10,350 Ryanair Europe 72,000 65 4,222 China Eastern China 60,942 44 5,896 easyJet Europe 45,236 40 4,101 JetBlue USA 41,762 22 3,286 Qatar 40,401 10 3,505 AIRLINE ALLIANCES

by Paul Stephen Dempsey

www.mcgill.ca/iasl