Monday, April 28, 2008


The most significant recent event in the airline business was when the most important members of the SkyTeam Alliance won antitrust immunity. DAL, NWA and KLM-AirFrance are now authorized to share cost, revenues and profits on transatlantic flights. CAL, which is currently a member of the SkyTeam Alliance, did not seek or was not invited to join the application for antitrust immunity.

SKYTEAM and the Star Network (includes United) are the largest of the international alliances and the ONEWORLD ALLIANCE (includes AMR and BA) is number 3. AMR and British Airways have tried and failed to win antitrust immunity in the past. The open skies agreement between the US and Europe is opening up both markets. AMR, BA, and CAL will seek antitrust permission with the knowledge that the larger alliance has been successful. The grant of immunity to DAL-NWA-KLM-AirFrance makes it odds on that AMR-BA-CAL will succeed. The odds of a merger between UAUA and USAirways have increased. The carriers are a good fit. These two tried to merge some years ago but were denied permission by the justice department.


The increase in the number of city pairs is still the big prize sought by these airlines. If your final destination is London's Heathrow Airport, It is rational to fly from Houston to Newark on a Continental flight if Continental or one of its partners offers a continuation to Heathrow. Still, a simple example shows other savings that might be expected from an antitrust agreement. Lets say that AMR, BA and CAL all have a morning flight from Heathrow to New York and that each flight has been running 1/3 rd empty. Under a sharing agreement, it would make sense for one of the planes to stay behind. All the passengers would get to the destination and all three airlines would share the same revenues while cutting their cost by almost one third. The third plane could be repositioned to an new route where the profits are better, creating another long list of city pairs, or if the third plane is an old gas guzzler, the decision could be to park the plane until business conditions improve.

Again, I believe the market will applaud the management and board of CAL for deciding not to merge. Why pay for the headaches of dealing with the culture of UAUA when the alternative of forming a relatively simple partnership is available?