Where Are All Those Airline Tie Ups Headed?

That's what regulators want to know

Given the cut-throat nature of the U.S. airline business, it's no surprise that the relative calm of recent years is ending. But few would have predicted that the next twist in the high-stakes game would be huge alliances among what are already the nation's top carriers.

The proposed agreements--between Northwest and Continental, American and US Airways, United and Delta--have already set off alarm bells among regulators, consumers, and labor groups. The major airlines "obviously will have to convince us that the consumer is not worse off," says one Justice Dept. official. And, concludes one major airline executive, at least some of these deals will turn out to be trial marriages. "There will ultimately be full-fledged financial consolidation," he predicts.

But even the airlines are divided on how welcome this new development is. An American Airlines Inc. spokesman says the marketing pact announced with US Airways Group Inc. on Apr. 23 is simply "in response to what's going on in the marketplace," not a sign of the airline's support for these domestic pairings. With one of the strongest U.S. networks, American has less need for an ally than smaller rivals.

LESS RISK. But like it or not, every carrier is determined not to be left out of these "virtual mergers." The aim is to create domestic and international networks that attract more customers, especially lucrative business travelers. Indeed, the Northwest/Continental deal that started this mating dance was driven largely by the notion that the No.4 and No.5 carriers needed a larger global presence to compete for business flyers. Continental gets Northwest Airlines Inc.'s strength in Asia, while Northwest gains Continental's Latin American network. Unlike the other alliances, their deal involves cross-ownership, too. "It creates a national and international player where there wasn't a fourth," crows Continental President Gregory D. Brenneman.

Alliances appear far less risky than mergers. For one thing, the airlines avoid the turmoil of melding workers and fleets--while reaping the gains. United, which has links with Lufthansa, SAS, and others, figures it derives 8% of its pretax income, about $170 million a year, from alliances.

But even these pseudo-marriages--in which carriers combine frequent-flier programs and sell seats on one another's flights--face turbulence. The two announced deals and the Delta/United pact, which is still in negotiation, would consolidate 75% of domestic traffic in three camps. Both the Justice and Transportation Depts. are scrutinizing the pairings. "If alliances were uniquely pro-competitive and would result in broadly lower fares, the airlines wouldn't be tripping over each other to partner up," says Samuel C. Buttrick of PaineWebber Inc.

Justice is already investigating allegations of predatory behavior among the majors and Transportation has proposed guidelines to help new entrants compete. "If the government approves these alliances, it has to come up with solutions to level the playing field," says Edward P. Faberman, executive director of the Air Carrier Assn., which represents startups.

Labor may be another stumbling block. Pilot unions at most major airlines have veto power over domestic code-sharing, or selling of seats on another carrier's flights. Pilots fear the deals will limit a carrier's growth--and the pilots' earning potential. Meanwhile, some labor leaders are leery that deals will lead to lowest-common-denominator contracts. "You've certainly set yourself up to be whipsawed, one labor contract vs. another," says Allied Pilots Assn. President Richard T. LaVoy at American. Delta Air Lines Inc.'s pilots halted partnership talks with United Airlines Inc. on Apr. 24 until Delta CEO Leo F. Mullin assured them that their demand for a board seat--as a condition of their support--would be considered. The Delta-United talks have since resumed.

BAD RECORD. Business travelers are also leery. Already irate over soaring fares, many believe the potential advantages of combined frequent-flier programs and improved schedules will be more than offset by greater control of capacity and fares. "We have evidence now that the big carriers are staying out of each other's way. This is going to carve the market up further," warns Kevin P. Mitchell, chairman of the Business Travel Coalition, which lobbies for corporate travelers.

The record of some international alliances bolsters consumer concerns. Take the Brussels-New York route. Three years ago, three airlines were competing--offering corporate discounts of 20% or more to fill seats, says one corporate travel buyer. But when Delta and Sabena gained antitrust immunity for their alliance in 1996--and the ability to coordinate marketing and fares, which the U.S. alliances won't have--American dropped out of the market. Corporate discounts were cut nearly in half. The average fares paid between Kennedy and Brussels have risen 23%, vs. an 18% jump in all international fares, says Topaz International Ltd., an airfare auditing firm in Portland, Ore.

Not to worry, alliance supporters say. Without the antitrust immunity--or without full mergers--they will have every incentive to continue competing. Some believe midsize cities could even get more service if the alliances allow partners to redeploy aircraft from bigger markets. But the airlines face a steep climb in proving that these deals create more benefits than risks.

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