Tuesday, September 30, 2003

Mergers and alliances in the air The announcement of a merger between Air France and KLM Royal Dutch Airlines is a move that is likely to have profound consequences in the airline industry. The combined company, to be named the Air France-KLM Group, will create the third largest airline in the world and the largest in Europe, surpassing British Airways. The two companies' operations will be, for the time being, run as separate entities, but planning, scheduling, and destination coverage will be coordinated closely. If given the go-ahead by European regulators, this will be the first time that national airlines have merged across borders. (That is excepting Scandinavian Airline Systems (SAS), which merged the operations of Norway, Sweden, and Denmark in the 1940's.) But it may soon be followed by more. Alitalia has announced that it is interested in negotiating to be come part of the new company. Swiss International Airlines came close to merging with Lufthansa, but backed out recently. This merger comes as the worldwide airline industry is suffering - both American carriers and national airlines in Europe. US airlines are still recovering from the one-two punch of terrorism and recession. The European airlines are hurting thanks to competition from discount airlines and the unwillingness of national governments to continue subsidizing their losses. The big warning happened when Belgium's airline, Sabena, went belly-up in 2001. Swissair failed in 2003. Up to now, most the activity has been in terms of airline alliances. These arrangements allow international carriers to cooperate in terms of ticketing, frequent flier miles, priority flier clubs, joint discount fares, and single check-in service. There are now three major alliances; and it will be interesting to see if Northwest Airlines and Continental Airlines, whose alliance with KLM will continue, will join the Sky Team group. Northwest and Continental already have a domestic alliance with Delta. Star Alliance (26%) - Air Canada. Mexicana, Air New Zealand, SAS, ANA (Japan), Singapore Airlines, Asiana Airlines (South Korea), Spanair, Thai Airways, Austrian Airlines Group (Austrian Airlines, Tyrolean Airways and Lauda Air), British Midland (BMI), United Airlines (US), US Airways, Lufthansa (Germany), Varig (Brazil) oneworld (19%) - British Airways, American Airlines, Swiss International Air, Aer Lingus (Ireland), Finnair, Lan Chile, Lan Ecuador, Cathay Pacific (Hong Kong), Quantas (Australia) Sky Team (12%) Aeromexico, Air France, Alitalia, CSA Czech Airlines, Delta Air Lines (US), Korean Air KLM/Northwest (6%) - KLM, Northwest (US), Continental (US) Alliances are the closest to mergers most airlines will come to merging in the foreseeable future, given national interests and antitrust hurdles. US Airways just recently joined the Star Alliance. Among the rumored future affiliations to air alliances are Aeroflot (Russia) joining Sky Team, Air China has considered joining the Star Alliance, LOT (Polish Airlines) is planning to join that group as well. Tough times have accelerated the natural tendency to merge in the airline industry. Even the traditional nationalistic barriers are starting to fade. And through the air alliances, we are likely to see airlines get as close to mergers as they can. This fragmented industry is succumbing to the tides of globalization and oligopolization. 5:46:14 PM

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