Taking A Whack At Airline Alliances

Big carriers fume over EU efforts to restrict links and impose rules to aid startups

Leading European and American airlines from British Airways PLC to Northwest Airlines Inc. are betting their futures on international alliances. Since 1992, major carriers have synchronized schedules, combined frequent-flier programs, and promised seamless service between hundreds of cities around the globe--all without investing in new planes or hubs. The result: hundreds of millions of dollars of extra profit each year.

Now, however, the critical alliances are under threat. Concerned about stunted competition and rising prices on transatlantic routes, European Union officials are taking a hard look at linkups between such airlines as KLM and Northwest; Lufthansa and United; Austrian, Delta, Sabena, and Swissair; as well as the proposed tie-up between British Airways and American Airlines Inc. To open the way for greater competition, the EU may force alliances to give up slots in crowded airports, cut back service on routes they dominate, and change their reservation policies (table). Says EU Competition Commissioner Karel Van Miert: "We have to make sure the market stays open and that others can enter."

LOWER FARES? The measures, to be announced later this spring, could rewrite the rules for air travel across the Atlantic and even within Europe. While making it easier for upstart airlines to enter the market, the new rules may weaken the position of the alliances on key routes and handcuff their marketing strategies. Costs may rise for major carriers. For the consumer, though, the likely impact of the new rules would be more competition and falling prices on major routes.

The major airlines are furious. Brussels' proposed measures "would, in effect, destroy alliances," says Michael Whitaker, director of international affairs for United Airlines Inc. The alliance led by Delta Air Lines Inc. is lobbying both Brussels and Washington to steer clear of new regulations, while Lufthansa Chairman Jurgen Weber argued in a letter to Van Miert on Feb. 11 that the EU's requests amount to an "expropriation" of its routes and slots. U.S. regulators seem sympathetic to the airlines' pleas: "We would be very concerned if the EU put in place conditions that would be a real knockout punch to the alliances," says Paul L. Gretch, director of international aviation at the U.S. Transportation Dept. The U.S. has backed transatlantic tie-ups because they bring competition to the marketplace overall, even if fares on some routes increase.

Despite the negative industry reaction, the European regulators seem bent on pushing ahead with restrictive measures. The most radical proposal would force the alliances to temporarily reduce the number of their flights between hubs to about 60% of a market's capacity if a rival was trying to enter. Some alliances control up to 90% of certain routes. The EU is also considering confiscating takeoff and landing slots at busy airports, such as London's Heathrow, and awarding them to other airlines. One thorny issue is whether carriers should be paid for slots that are taken away. British Airways has been locked in a battle with regulators over Heathrow slots, which were granted without charge when it was a state-run airline but are now worth a few million dollars each.

The Europeans are also worried that the airline alliances are using subtler means to smother upstart rivals. Van Miert is looking into frequent-flier programs. He may also try to prevent carriers from awarding travel agents higher commissions when they buy huge batches of tickets from a transatlantic alliance. And he's questioning whether partners should be allowed to list each other's flights under their own code in agents' computers. The U.S. would likely object to such micromanagement, observers say. "It looks to us like aviation policy rather than antitrust policy," argues a U.S. State Dept. official.

CLANGING BELLS. The EU inquiry into transatlantic airline alliances revved up after officials began reviewing the antitrust implications of BA's link with American Airlines. Announced in June, 1996, the deal set off alarms because the airlines would control almost 60% of the U.S.-Britain market. Officials realized that they couldn't restrict American and BA while leaving the others be.

But politics are also involved in Van Miert's push. He hopes to strengthen the EU's antitrust powers by wresting the ability to negotiate air rights away from individual European governments. The Clinton Administration has made "open skies" pacts with individual countries a top priority, signing nine in Europe so far. But bilateral agreements do not ensure competition within Europe because they channel traffic to major airports, Van Miert argues. Moreover, antitrust officials have threatened to go to court to block pacts that prevent European carriers from flying within the U.S., while Delta, for example, can fly from Berlin to Warsaw. The EU wants a mandate to conduct global transatlantic air negotiations, but so far member countries are resisting.

How far can the European regulators go? The key question, industry analysts say, is whether airlines will be forced to give up some airport slots and change reservation policies--or to go further and cripple their alliances. For now, the betting is that the European regulators will stop short of that harsh step. For starters, they are fighting market forces. Already, more than 400 alliances have sprung up between airlines around the world, including three major partnerships in Europe. That's up from almost none a decade ago.

Indeed, even as Brussels scrutinizes the airlines for anticompetitive practices, KLM Royal Dutch Airlines and Northwest are hoping to gain permission for Continental Airlines and Alitalia to join their consortium. And Air France wants to sign smaller deals with both Continental and Delta. Despite the opposition from Brussels, the major carriers are certain to push hard for more such linkups that promise rich payoffs.

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