THE CHANGING FACE OF AVIATION : Flying in Formation : U.S., Foreign Airlines Glide Into New Markets by Pairing Up
“What airline are you flying?” is becoming a more complicated question for international travelers as U.S. and foreign carriers rush to forge global alliances.
British Airways passengers from Phoenix to London begin their journey aboard a USAir jet. After buying a Northwest Airlines ticket between Amsterdam and Detroit, passengers end up with a seat on KLM Royal Dutch Airlines. American Airlines sells round trips between New York and Johannesburg--but a South African Airways jet does the flying.
Sharing international passengers and routes represents a dramatic new direction for many major U.S. airlines that previously had expanded overseas by flying solo. Saddled with a slow-growing, money-losing domestic market, many U.S. carriers have decided that it is cheaper, faster and less risky to move into rapidly expanding international markets by teaming up with foreign partners.
“You don’t have to invest in new airplanes. You don’t have to hire new pilots and flight attendants. You can piggy back off somebody else,” said Daniel Kasper, vice chairman of the transportation industry program for Coopers & Lybrand. “As a practical matter, (this is) the only realistic economic opportunity in the short and near term.”
Indeed, the government may soon give such pairings a big boost. Last year, a federal aviation commission proposed that Congress relax regulations limiting foreign ownership and control of U.S. airlines.
The alliances of foreign carriers now being woven together are considered by many analysts a phase in the evolution of world aviation. From a highly regulated industry of protected government carriers in most of the world, the business is becoming a galaxy of freely competing, privately-owned airlines.
Currently, global airline partnerships take many shapes and forms, ranging from simple joint advertising agreements to outright ownership by one airline of a stake in another.
The most sought after and far reaching pacts include so-called code-share agreements on international connecting flights. Code-sharing allows both British Airways and USAir, for instance, to easily promote and sell tickets on their connecting Phoenix to London trip via Philadelphia.
Such arrangements long have been used by major U.S. airlines to offer connecting service with smaller commuter carriers. On a global scale, the agreements allow two carriers to jointly market and sell fully connecting international service between their two countries and other countries as well.
In addition, code-shared flights are among the first listed in computerized airline reservation systems, so they attract the notice of travel agents--and result in more ticket sales for the allied carriers.
Despite their promise, however, global alliances have not produced automatic success or profits. In fact, many of the partnerships remain costly money pits that have sucked in hundreds of millions of dollars in investment while producing little return.
The alliances are also highly vulnerable to turbulence in international and domestic aviation. Last month, aviation treaty disputes threatened to ground separate cooperation deals between USAir and British Airways, and between United Airlines and Lufthansa German Airlines.
Further, although the deals offer consumers the allure of “seamless travel” on a single ticket, automatic transfer of baggage and access to new frequent flyer programs, the notion of dividing overseas travel between two carriers still makes many travelers wary.
“The reality is, customers don’t like it,” travel agent Thomas Nulty said. “Most travelers would rather fly with one carrier.”
Still, despite the drawbacks, both large and small airlines have sought global partners to tap into the rapid growth and fat profits promised by the explosion of international travel. Contrasted with the stagnant U.S. domestic market, international passenger traffic is projected to grow 38% between 1992 and 1997, according to the International Air Transport Assn.
“Theoretically, both carriers benefit,” explained David Hoppin, an airline consultant at MergeGlobal in Arlington, Va. “In an environment of weak traffic and overcapacity, U.S. airline executives might ask themselves, ‘Do we really need to have another seven flights to the Stockholm market or do we sign a deal?’ ”
The strategy is a marked departure from that of the 1980s and early 1990s, when the largest U.S. carriers--American, Delta and United--expanded overseas primarily on their own, spending hundreds of millions of dollars to buy routes to Asia, Europe and South America.
The shift began in earnest last year as several major carriers announced worldwide partnerships, including USAir and British Airways, Continental Airlines and Air Canada, and United and Lufthansa. Even tiny commuter carrier AirL.A. joined forces with Mexico’s largest carrier, Aeromexico, to offer joint Los Angeles-Tijuana service.
And the trend has continued into 1994. On a single day earlier this month, Delta Air Lines agreed to expand an existing partnership with Varig Airlines of Brazil and announced the start of a new relationship with Vietnam Airlines.
“It gives us an immediate presence in a place we have not been before,” said Clay McConnell, a spokesman for Delta. “It’s very important for us.”
One of the most intimate global alliances knits Minneapolis-based Northwest together with KLM. Code-sharing lets Northwest offer its customers service to more than 30 European cities. In return, KLM, which owns 49% of Northwest, can sell tickets to nearly 40 cities served by its U.S. partner.
Northwest flies from San Diego to Geneva via Detroit and Amsterdam--at least in airline-reservation computers. In the real world, however, Northwest flies from San Diego to Detroit, where the passenger climbs aboard a KLM flight to Amsterdam and then changes to another KLM plane to Geneva.
The carriers have gone further, recently announcing the launch of new business class cabins and service on international routes. A single, worldwide advertising campaign will promote the service, and the business class cabins on KLM and Northwest jets will include the same seating, decor and amenities.
“What we want to do is to make sure that the customer doesn’t know which airline he is flying,” said Barry A. Kotar, Northwest general sales manager. “The customer will know us as a single product.”
But code-sharing--domestic and international--is not without its critics. U.S. consumer groups in the early 1980s grew concerned about domestic code-sharing as misleading passengers into believing they were flying a single carrier instead of two. In response, the government required airlines to reveal the nature of code-share flights on domestic and international trips.
David Stempler, executive director of Washington-based International Airline Passengers Assn., says his group has received few complaints about international code-share flights. But that could change as the alliances grow and U.S. passengers find themselves being handed off from a familiar domestic carrier to an unknown foreign airline, he said.
“That’s where some of the shock comes in,” Stempler said. “We haven’t got into international code-sharing problems--yet. I think it’s still too new.”
Even some airlines involved in code-sharing recognize the potential for customer confusion.
“Philosophically, code-sharing in and of itself is a bit potentially confusing and misleading,” said Tim Smith, an American Airlines spokesman. “The reality of the marketplace is that it’s there and it’s done. To be competitive, it is the way to go.”
The growth of airline alliances and code-sharing has sparked international disputes and opposition from several foreign countries--ranging from the Czech Republic to Germany--and their carriers. Many suspiciously view code-sharing as a loophole U.S. carriers are flying through to enter their once-closed markets, some international airline and legal observers say.
“Those countries with airlines that are less efficient, less competitive than U.S. carriers, all of a sudden have a problem with this code share,” said Thomas McLain, who heads the international law practice at Perkins Coie in Century City. “It has never been a problem before. Now, this is a threat.”
Some U.S. airlines also feel threatened by the code-sharing alliance of British Airways and USAir. American and Delta in particular have lashed out at the partnership as giving British Airways unfair access to the United States even as U.S. carriers continue to face severe restrictions in Britain and at London’s Heathrow Airport--the crossroads of international aviation.
Earlier this month, the lack of progress in U.S.-British aviation talks almost led the U.S. Department of Transportation to revoke its approval of the USAir-British Air code-share plan. Instead, the department granted the two carriers a one-year extension on the agreement.
Various airline partners have suffered financial problems as well:
* British Airways, which bought a 24% stake in USAir for $400 million last year, has frozen plans for further investment until its financially troubled partner can restore profits. The two airlines carried only about 6,500 passengers on their code-share service during the last seven months of last year.
* KLM wrote off its $400-million investment in Northwest last year as the U.S. carrier narrowly avoided bankruptcy.
* Continental Airlines and Scandinavian Airline Systems continue to code share even though SAS lost a large investment in Continental when the Houston-based carrier reorganized under Chapter 11 bankruptcy protection.
“It doesn’t hurt anything,” aviation consultant Michael Boyd said of global partnerships. “But in terms of contributing a lot to the bottom line, there is not much there to contribute.”
Any substantial payoffs from the airline alliances will not start flowing for several years, say industry analysts. By then alliances will be in a good position to take advantage of movement in Canada, Europe and Japan to deregulate air travel.
In fact, the deregulation of worldwide aviation might lead to the break down of some airline alliances and code-sharing, because carriers would be free to fly wherever they chose. Until then, aviation observers say that partnerships and code-sharing will play a growing role, despite their drawbacks.
“Right now their only choice--and it might not be a real choice--is to code share,” Kasper said.
Global Linkage
More and more American and foreign airlines are sharing passengers, revenues and flights through “code share” agreements. These deals allow carriers to expand their service without adding planes by sharing airline flight numbers and codes in computer reservation systems. For example, Northwest Flight 196 from San Diego to Minneapolis also appears as KLM flight 196 in reservation computers. So a European passenger traveling within the United States can enjoy the familiarity--if not the reality--of booking a European carrier.
United Airlines (based in Chicago)
Has code-share agreements in place or under development with airlines in Asia, the Caribbean, Europe, and South America. United, the largest U.S. airline, soon will begin extensive code share with Lufthansa German Airlines, the largest carrier within Europe.
United’s international partners include:
* Lufthansa German Airlines (based in Cologne)
* Thai Airways International (Bangkok)
* Transbrasil, (Brasilia)
* British Midland (Derby, United Kingdom)
* Sunaire Express Airlines (Caribbean)
* ALM Antillean Airlines (Caribbean)
American Airlines (Dallas)
International partnerships are fewer and smaller in scope than its U.S competitors’. The carrier is looking for other foreign partners, particularly in Asia.
American’s international partners:
* British Midland (Derby, United Kingdom)
* Gulf Air Co. (Bahrain)
* Quantas Airways, Sydney (Australia)
* South African Airways (Johanesburg, South Africa)
Delta Air Lines (Atlanta)
Has numerous code-share agreements, but most involve service to only a few cities. Delta, Swissair and Singapore Airlines own 5% of each other’s stock.
Delta’s international partners include:
* Singapore Airlines (Singapore)
* Swissair (Zurich)
* Sabena Belgian World Airlines (Brussels)
* Malev Hungarian Airlines (Budapest)
* Varig Brazilian Airlines (Rio de Janeiro)
* Vietnam Airlines (Hanoi)
* Aeroflot (Moscow)
Northwest Airlines (Minneapolis)
Northwest and KLM Royal Dutch Airlines have one of the world’s most extensive airline alliances. KLM owns 49% of Northwest; their code sharing involves nearly 40 cities in the United States and more than 30 in Europe.
Northwest’s international partner:
* KLM Royal Dutch Airlines (Amsterdam)
Continental Airlines (Houston)
Has a longstanding code-share relationship with Scandinavian Airline Systems (SAS); the airlines share terminal operations at Newark International Airport. Air Canada owns 20.5% of Continental, but those don’t yet code share. Has linked its frequent flyer program with Air France under a marketing agreement.
Continental’s international partners include:
* SAS (Stockholm)
* Air Canada (Montreal)
* Air France (Paris)
USAir (Arlington, Va)
U.S. government recently renewed the code share relationship between USAir and British Airways, which has the world’s largest network of international flights. British Airways owns 24% of USAir.
USAir’s international partners include:
* British Airways (London)
* Alitalia Airlines (Rome)
* All Nippon Airways (Tokyo)
Carried Away
The world’s airlines expect steady, dramatic growth in international passenger traffic.
Number of International Passengers (in millions)
1997: 413.9-
- Estimate
Source: International Air Transport Assn
