‘Everyone Wants to be a Mega-Carrier’ : Airlines Look for Partners in Europe for Expansions

U.S. airlines are joining forces with well-heeled airlines in Europe to extend their reach around the globe.

The corporate parents of expansion-minded Continental Airlines, Northwest Airlines and Delta Air Lines have joined forces in recent weeks with smaller, cash-rich European airlines anxious for more American customers. The trend is expected to continue as airlines on both continents look for ways to grow.

“Nowadays, everyone wants to be a mega-carrier,” said Frank Spencer, professor emeritus at Northwestern University’s Transportation Center, in an interview. “The fancy word is global.”

The new transatlantic alliances differ from the frequent-flier partnerships familiar to American air travelers. The new arrangements are more complex because European airlines are buying ownership stakes in U.S. air carriers, and in some cases, becoming increasingly involved in their management. The chairman of Scandinavian Airline Systems now sits on the board of Texas Air Corp., the parent of Continental and Eastern Airlines.

The airlines say the new alliances provide significant benefits. The U.S. airlines, frequently rumored to be takeover targets, get a friendly investor and, in some cases, European know-how. For example, SAS, a premium airline, is helping to improve the poor image of its U.S. partner by teaching Continental’s flight crews good customer service.

In exchange for their money and assistance, European airlines get a valuable foothold in the all-important U.S. travel market, now all but closed to them. “The bottom-line objective is to feed passengers to each other,” said Thomas McKenna, Swissair’s newly appointed manager of airline cooperation, whose sole task is to nurture his employer’s coveted relationship with Delta.

Because the partnerships between U.S. and European airlines are so new, the impact on air travelers is not yet clear. John R. Meyer, a Harvard University aviation expert, said consumers should benefit, at least for now. He said the relationships should improve connections with overseas flights and support domestic competition, since investments from rich foreign carriers should help weak U.S. airlines survive.

But some experts warn that consumers may suffer as more airlines form partnerships, especially if two strong air carriers team up. The trend “over time will tend to support higher fares because competition will be reduced,” said Paul Turk, an airline industry consultant with Avmark Inc. in Washington.

Foreign investment in U.S. airlines has raised protectionist concerns. Right now, federal rules prohibit foreigners from owning more than one-quarter of a U.S. airline, making takeovers by foreign carriers impossible. But the new alliances are viewed as a first step toward breaking down the government barriers and opening the U.S. travel market to foreign airlines.

Aviation consultant Morton Beyer, president of Avmark, said as barriers are lowered, the U.S airline industry could one day go the way of the American maritime industry, with airlines flying under the flags of Panama, Liberia or Greece.

“The American airline market is the plum of the world, and if we don’t watch it, foreign investors are going to be eating our lunch,” said Sen. Wendell H. Ford (D-Ky.). Ford, chairman of the Senate Commerce, Science and Transportation Committee’s aviation subcommittee, has sponsored legislation with Sen. John McCain (R-Ariz.) that would give the Transportation Department greater authority to reject airline deals involving foreign investors. European airlines are not alone in making U.S. airline investments. An Australian airline and a Japanese airline own stakes in two U.S. air carriers, but those relationships have produced few cooperative ventures.

Strictly an Investment

Ansett Airlines of Australia has a 20% stake in America West Airlines and leases 10 airliners to the Phoenix-based air carrier. Since both airlines operate only within their own countries, there is no opportunity to coordinate flights. America West says it might work more closely with Ansett if it gets federal permission to fly to Australia, but that is not considered likely.

Similarly, a Japan Air Lines hotel subsidiary controls 20% of troubled Hawaiian Airlines, but a JAL spokesman said its holdings are strictly an investment. “They needed capital, and we operate hotels in the region. We had an interest in helping them,” JAL spokesman Morris Simoncelli said.

The cultural gap between the United States and Asia is expected to limit the number of transpacific relationships, at least for now. But many aviation experts think that similar cultures and the pressures of deregulation in Europe will lead to more alliances between airlines on both sides of the Atlantic.

Access to the giant U.S. market is becoming increasingly important for European airlines, as the European Community prepares to deregulate the marketplace in 1992. When the economic barriers now separating the EC’s nine member-nations are dropped, small airlines there will lose their protected home markets.

By developing a strong U.S. business, smaller European airlines--such as SAS, Swissair and KLM Royal Dutch Airways--hope to better withstand competitive assaults in their home countries from large European airlines, such as British Airways or Lufthansa.

Foreign airlines need American partners to gain access to the U.S. market because federal rules greatly restrict their ability to do business here. Foreign airlines are permitted to fly passengers out of this country but are prohibited from hauling passengers between U.S. cities.

Alternative for Carriers

By closely matching flight schedules, European airlines hope that their American partners will collect Europe-bound travelers for them. SAS, for example, has moved its U.S. gateway from New York’s John F. Kennedy International Airport to Newark International Airport in New Jersey, an important hub for Continental. If the agreement works as SAS hopes, Continental will pick up Scandinavia-bound passengers from around the United States and deliver them to SAS in Newark.

“Since they (foreign airlines) can’t enter the market directly, an alternative is for them to buy a piece of an American airline,” said Alfred E. Kahn, chairman of the Civil Aeronautics Board in 1977-78 and now a professor of political economy at Cornell University.

Kahn favors alliances that tend to support small or weak air carriers. He says the SAS investment in Texas Air, for example, should help that debt-laden company remain competitive. Similarly, he approves Delta’s partnership because it helps support Swissair--”a smaller carrier whose competitive ability to survive in the long run isn’t clear.”

However, Kahn called “troublesome” possible alliances between two larger airlines with overlapping markets, such as United Airlines and British Airways. Those two air carriers have a marketing partnership but no direct financial involvement in each other. A closer relationship between the two, Kahn said, “would eliminate competition.”

The future of foreign investment is likely to be shaped by the government’s decision on the proposed transaction between KLM and NWA Inc., the parent of Northwest Airlines. KLM is a partner with Los Angeles investor Alfred A. Checchi in his winning $4.05-billion bid for NWA. Checchi is borrowing more than $3 billion of the total.

Another Foreign Investor

KLM is putting up $400 million--60% of the equity--to help buy the airline, but in order to comply with federal rules, KLM is getting just less than 5% of the voting stock. KLM will also hold one seat on NWA’s proposed seven-member board.

That transaction is complicated by the involvement of another foreign investor, the Australian brewing conglomerate Elders IXL. Elders is investing significantly less than KLM--$80 million in equity--but will receive just under 15% of the voting stock. Like KLM, Elders will have one board seat.

The Transportation Department must decide whether the transaction gives foreign interests “control” of Northwest Airlines. If it is approved, it will clear the way for more similarly structured deals between airlines in the United States and Europe, observers say.

“The entire industry is watching that case,” said consultant Beyer, “the way a mongoose watches a cobra.”

AIRLINES’ TRANSATLANTIC ALLIANCES

Continental - SAS

Scandinavian Airline Systems acquired 9% of stock of Texas Air, Continental’s parent, and has a seat on its board. Continental and SAS are linking hubs at Newark. SAS employees are teaching Continental flight crews good customer-service practices.

Northwest - KLM

KLM Royal Dutch Airways is putting up $400 million to help Alfred Checchi buy NWA, parent of Northwest. KLM and Northwest expect to work together on marketing, scheduling and other activities. KLM will get a seat on NWA’s board.

Delta - Swissair

The airlines agreed last week to buy a 5% stake in each other. They are working together on design for McDonnell Douglas MD-11s that the airlines ordered separately. Trying to coordinate flight schedules to simplify connections on international flights.

Other connections:

Ansett Airlines of Australia owns a 20% stake in America West, and leases 10 airliners to the Phoenix-based carrier. Pan Pacific Hotels, a hotel subsidiary of Japan Air Lines, owns 20% of Hawaiian Airlines as an investment.