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AIRLINE ALLIANCESby Paul Stephen DempseyDirector, Institute of Air & Space LawMcGill UniversityCopyright 2008 by Paul Stephen Dempsey

Before Alliances, there wasPan American World Airways . . .

. . . and Trans World Airlines.

Before themegaAlliances,there wasinterlining,facilitated byIATA

Like dogs marking territory, airlines around the world are sniffing eachother's tail fins looking for partners."Daniel Riordan“The hardest thing in working on an alliance is to coordinate theactivities of people who have different instincts and a differentlanguage, and maybe worship slightly different travel gods, to get themto work together in a culture that allows them to respect each other’shabits and convictions, and yet work productively together in anenvironment in which you can’t specify everything in advance.”Michael E. Levine“Beware a pact with the devil.”Martin Shugrue

Airline Motivations ForAlliances the desire to achieve greater economies of scale,scope, and density; the desire to reduce costs by consolidatingredundant operations; the need to improve revenue by reducing the levelof competition wherever possible as markets areliberalized; and the desire to skirt around the nationality ruleswhich prohibit multinational ownership andcabotage.

Intercarrier e AgreementsJoint-Fare AgreementsReciprocal Airport AgreementsBlocked Space RelationshipsComputer Reservations Systems Joint VenturesJoint Sales Offices and Telephone CentersE-Commerce Joint VenturesFrequent Flyer Program AlliancesPooling Traffic & RevenueCode-Sharing

Code SharingThe term "code" refers to the identifier used inflight schedule, generally the 2-characterIATA carrier designator code and flightnumber. Thus, XX123, flight 123 operatedby the airline XX, might also be sold byairline YY as YY456 and by ZZ as ZZ9876.Each would list the flight as its own.

“Code sharing is unnecessary for,indeed irrelevant to, anylegitimate purpose or actualservice. Code sharing doesn'tenable an airline to fly to anymore places. It just enables theairline to mislead travellers intothinking that they fly to placesthey don't. I call that fraud.” by Edward Hasbrouck, authorof "The Practical Nomad"

Alliances: Procompetitive, orAnticompetitive? Professor Regas Doganis: "there can be little doubt thatairline executives see alliances, especially when theyinvolve code-sharing and capacity rationalisation, as a wayof 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 tothe injury of consumers.“ Consumer Reports: code-sharing is a "predatory weapon."

Carve-Outs “When antitrust immunity has been sought, we haverecommended that DOT "carve out" certainunrestricted fares involving these city pairs from theorder granting antitrust immunity . . . . For example,the [Antitrust] Division recommended that sevencity pairs be carved out of theDelta/Swissair/Sabena/ Austrian alliance (AtlantaZurich, Atlanta-Brussels, Cincinnati-Zurich, NewYork-Brussels, New York-Geneva, New YorkVienna, and New York-Zurich); one for theAmerican/ Canadian Air alliance (New YorkToronto); two for the United/ Lufthansa alliance(Washington-Frankfurt and Chicago-Frankfurt); andtwo for the United/ Air Canada alliance (ChicagoToronto and San Francisco-Toronto).”R. HEWITT PATEDEPUTY ASSISTANT ATTORNEYGENERAL

SwissAirNorthwest/KLMYear1997199619971994US citiescovered60521588EuropeanCitiesCovered461Daily codesharedflights440190Daily flightsper city43.6Extrapassengersper day1500560110Extrapassengersper flight3.42.93.730301000

Purported Consumer Benefits Beyond-segment competition;One-stop travel purchase services;Joint frequent flyer benefits;Reciprocal airport lounge access;Seamless connectivity of passengers andluggage; and Coordinated arrival and departure scheduling.

Airline Benefits ··········· An ability to provide more capacity and enter new markets without having to make largecapital expenditures for aircraft purchases or airport infrastructure;An ability to generate thousands of new “on-line” city-pair combinations;An ability to extend the reach and scope of their frequent flyer programs to enhanceconsumer loyalty;An ability to generate between three and four new passengers per flight;An ability to generate net benefits of at least 10% (and often 20%) of relevant revenuefrom the alliance;Revenue enhancement of approximately 2% above market yield;An ability to capture 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 resultof greater bargaining power of pooled purchases;A reduction in airport handling, airport operations, selling and ticket costs as a result ofeconomies of scale and the sharing of support services;A reduction in travel agent commission costs achievable as a result of carrier marketpower; andAn ability to pool costs and revenue to share risks and rewards.

ORBITZ WEB SITE – INITIAL PARTICIPATINGAIRLINES (2000)Air CanadaBritish MidlandKoreanAir JamaicaComair HoldingsMidwayAir New ZealandContinentalMidWest ExpressAir TranCopa AirlinesNorthwestAlitaliaCSA CzechSingapore AirlinesAmerican AirlinesDelta Air LinesUnited AirlinesANA (All Nipon)Hawaiian AirlinesUS AirwaysASA Holding, Inc.IberiaVanguardATAKLMVarigAustrian

Alliances are like dating. Ownership is like marriage. Dating, marriage, infidelityand incest occur often inintercarrier relationships.

FOREIGN AIRLINE OWNERSHIP OF U.S. AIRLINESForeign AirlinePercentage OwnershipU.S. AirlineSASSwissairSingapore AirlinesAnsett AirlinesJapan Air LinesKLMBritish AirwaysBritish AirwaysAir stUnited*USAirContinentaljetblue* proposed; later withdrawn

U.S. AIRLINE EQUITY INTERESTS INOTHER CARRIERSPurchaserAMR (American)AMR (American)ContinentalDelta Air LinesDelta Air LinesMesa Air GroupNorthwest AirlinesPercentage Ownership33%10%17.7%2.7%4.5%7.6%25%TargetCanadian AirlinesIberiaAmerica WestSingapore AirlinesSwissairAmerica WestHawaiian Air

THE STAR ALLIANCE1995United Airlines, Atlantic Coast,Air Wisconsin, Lufthansa,Lauda Air Luxair, SouthAfrican Airways, SAS, BritishMidland, Air Canada, Varig,Thai AirwaysSales: 46 billionFleet: 1,522 aircraftEmployees: 243,000RPKs: 377 billionPassengers: 189 million2002Air Canada, Air New Zealand,Ansett Australia, All NipponAirways, Austrian AirlinesGroup (Austrian Airlines,Lauda Air and TyroleanAirways), British Midland,Canadian Airlines, Lufthansa,LOT, Mexicana Airlines, SAS,Singapore Airlines, ThaiInternational Airways, UnitedAirlines, and VarigPassengers: 276 millionAircraft: 2,002

The Star Alliance (2008)Established in 1987Total of 20 member airlinesAnnual passengers: 492.77 millionDaily departures: nearly 18,000Number of employees: 396,195Countries served: 162Airports served: 965Fleet: 3,294

ONEWORLD1995American Airlines, BritishAirways, CanadianAirlines, USAir, QantasSales: 44 billionFleet: 1,706 aircraftEmployees: 252,000 aircraftRPKs: 399 billionPassengers: 195 million2002Aer Lingus, American Airlines,British Airways, Cathay PacificAirways, Finnair, Iberia,LanChile and QantasDestinations: 574 in 134 countriesPassengers: 200 millionAircraft: 1,481

Oneworld in 2008 Added Japan Airlines,Malev Hungarian Airlines,and Royal JordananianAirlines 10 airlines 9,190 flights per day flying320 million passengers to692 destinations in 142countries More than 500 airportdeparture lounges

SKY TEAM1995Atlantic Southeast, Austrian,Comair, Delta Air Lines,Skywest, Swissair, Sabena,Virgin, SingaporeSales: 27 billionFleet: 1,004 aircraftEmployees: 123,000RPKs: 227 billionPassengers: 127 million2002Aeromexico, Air France, Alitalia,CSA Czech Airlines, Delta AirLines, and Korean Air500 destinations in 114 countriesPassengers: 179 millionAircraft 1,047

WINGS1995Northwest, Mesaba, Express,KLM, Martinair-Holland, AirUK, Kenya AirwaysSales: 17 billionFleet: 654 aircraftEmployees: 80,0002002Braathens, Continental, KenyaAirways, KLM, and NorthwestPassengers: 122 millionAircraft: 899

Skyteam (2008)Skyteam has 11 member airlines and 16,409 dailyflights to 841 destinations in 162 countries.

MEMBERSAllianceoneworld(8 member airlines)Founding members: American Airlines, British Airways, Canadian Airlines, Cathay PacificAirways 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 fromthe 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 servicesand benefits from 1 April 2007. Members of the JAL and LAN Groups are to becomeAffiliate members. Dragonair is joining in 2007.SkyTeam(10 member airlines)Founding members: Air France, Delta, AeroMexico and Korean Airlines (June 2000).Additional members: CSA Czech Airlines (March 2001), Alitalia (July 2001), KLM,Continental Airlines and Northwest Airlines (September 2004), Aeroflot (April 2006).Former members:Future members: China Southern Airlines has signed a Global Airline Alliance AdherenceAgreement. Air Liban, Air Europa, Copa Airlines, Kenya Airways, Tarom and PortugaliaAirlines have begun the process of attaining Associate status.Star Alliance(17 member airlines, 3regional members)Founding members: United Airlines, Air Canada, Lufthansa, Thai Airways International andSAS-Scandinavian Airlines (14 May 1997).Additional members: VARIG Brazilian Airlines (October 1997), Air New Zealand (March1999), All Nippon Airways (October 1999), Austrian Airlines Group (March 2000), SingaporeAirlines (April 2000), bmi british midland, (July 2000), Asiana Airlines (March 2003), Spanair(April 2003), LOT Polish Airlines (October 2003), US Airways (May 2004), Blue1 (October2004, regional member), Adria Airways and Croatia Airlines (December 2004, regionalmembers), TAP Air Portugal (March 2005), South African Airways and Swiss InternationalAirlines (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: Air China Limited has signed a Memorandum of Understanding; ShanghaiAirlines and Turkish Airlines have been invited to join.

Star AllianceSkyTeamOneworldPassengersper year455.5 million428 million319.7 millionDestinations912841692Market share25.1%20.8%14.9%ParticipantsAdria Airways (JP)Air Canada (AC)Air China (CA)Air New Zealand (NZ)ANA (NH)Asiana Airlines (OZ)Austrian Airlines (OS)Blue1 (KF)BMI (BD)Croatia Airlines (OU)LOT Polish Airlines (LO)Lufthansa (LH)SAS (SK)Shanghai Airlines (FM)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)Aeroflot (SU)Aeroméxico (AM)Air Europa (UX)Air France (AF)Alitalia (AZ)China Southern (CZ)Continental (CO)Copa Airlines (CM)Czech Airlines (OK)Delta (DL)Kenya Airways (KQ)KLM (KL)Korean Air (KE)Northwest (NW)American Airlines (AA)British Airways (BA)Cathay Pacific (CX)Finnair (AY)Iberia (IB)Japan Airlines (JAL)LAN (LA)Malév (MA)Qantas (QF)Royal Jordanian (RJ)

QUALIFLYERAir Europe, Air Liberte, AirLittoral, AOM FrenchAirlines, Crossair, LOTPolish Airlines, Portgulia,Sabena, Swissair, TAP AirPortugal, and TurkishAirlinesPassengers: 61 millionAircraft: 531

Alianza Summa Avianca, SAM and ACES (formed in May2002) This alliance is undergoing reorganization. Avianca is operatingunder Chapter 11 bankruptcyprotection and ACES ceasedoperations on August 19, 2003.CaribSkyLIAT, Windward Islands Airways(Winair), Air Caraibes in conjunctionwith other alliance member airlinesincluding - Trans Island Air 2000(TIA), Carib Aviation, Tyden Air andC.A.T.

And now, mergers . . .Air France HoldingAir FranceKLMAlitalia?

And more mergers?LufthansaLufthansaSwiss

While other carriers shun joining themajor alliances.

AIRLINE ALLIANCESby Paul Stephen Dempsey

Founding members: American Airlines, British Airways, Canadian Airlines, Cathay Pacific 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 purchase