another opinion
Delta's Alliance Almost Like Merger
Wednesday October 17, 6:59 pm ET
By Joshua Freed, AP Business Writer
Alliances Like Delta's Can Be Almost As Good As a Merger
MINNEAPOLIS (AP) -- Domestic airline mergers are hard enough. And foreign ownership rules block overseas airlines from buying U.S. carriers.
But alliances like the one announced Wednesday by Delta and Air France-KLM are a sort of end-run around those obstacles.
ADVERTISEMENT
The joint venture forming between Air France-KLM Group and Delta Air Lines Inc. will allow them to share profits and estimated annual revenues of up to $8 billion on trans-Atlantic flights. The only other U.S. carrier involved in such a tight alliance with a foreign airline is Northwest Airlines Corp., whose joint venture with KLM began in 1991.
"That's as close to a merger as you can get without actually merging," said airline analyst Michael Derchin of FTN Midwest Securities Corp, referring to the deals of both carriers. "Because these guys can basically sit down and collude legally on pricing, scheduling, marketing -- act as one firm. It's definitely a powerful tool."
Collins Stewart analysts said the Delta-Air France deal is likely to inspire wider combinations, including BA and American and Germany's Deutsche Lufthansa AG, United Airlines of the U.S. and Britain-based BMI.
Meanwhile, codesharing is another options, falling at the low end of the airline cooperation scale. This practice allows one airline to sell seats on another's flights. There are also alliances that involve closer cooperation, such as one between United Airlines and Lufthansa. Finally, deep alliances like Northwest-KLM and Delta-Air France, include profit sharing.
With an antitrust exemption, airlines can coordinate schedules, fares and marketing, too. That's what Northwest and KLM do, and analysts said the Delta-Air France alliance is similar.
British Airways PLC has twice unsuccessfully attempted to combine with American Airlines on trans-Atlantic routes, but it hasn't received antitrust immunity.
American executives told analysts on Wednesday that the Delta-Air France alliance gives them a "renewed focus" on getting an antitrust exemption for its relationship with British Airways.
"They're trying very hard to do the same thing but they can't get antitrust exemption right now," said Calyon Securities analyst Ray Neidl. "They can't even get codesharing across the North Atlantic to London because the two airlines have such a predominant position there. It's something that everybody wants to do."
A new "open skies" agreement that takes effect March 30, 2008, will allow airlines to fly from anywhere in the European Union to any point in the U.S.
Carriers have been rushing to take advantage. Six airlines in the so-called SkyTeam Alliance have already applied to the Department of Justice for antitrust immunity for trans-Atlantic flights. They are Air France and KLM, Delta and Northwest, as well as Alitalia and CSA Czech Airlines. Currently, Northwest only has antitrust immunity with KLM while Delta has it only with Air France, Alitalia and CSA.
Northwest has stressed that it is not seeking antitrust immunity with Delta on domestic routes.
On Wednesday, Northwest issued a statement saying the Delta-Air France joint venture should not impact the SkyTeam antitrust application because it would not achieve the same benefits.
In addition, the Transportation Department last year sought to lift rules that cap foreign control of U.S. airlines at 25 percent of voting shares, but it backed down because of fears about jobs and security.
And while the 25 percent ownership rule blocks mergers of U.S. and foreign carriers, even domestic mergers are notoriously difficult.
Managers of combined airlines have to meld disparate fleets and routes, decide which hubs to keep, and persuade frequent flyers to stick around. Even more dicey is the integration of two -- usually unionized --staffs. Two years after it was bought by America West Airlines, pilots at US Airways Group Inc. still haven't settled on a new contract because of seniority disputes.
