World’s Happiest Airline

Effectively diagnosing MRO issues and prescribing solutions

Significant improvements to air traffic control systems

Afriqiyah Airways knows when and where to expand

6 32 80

A Conversation With … Enrique Beltranena, Volaris Chief Executive Officer and Managing Director Page 10.

A MAGAZINE FOR AIRLINE EXECUTIVES 2010 Issue No. 1

T a k i n g y o u r a i r l i n e t o n e w h e i g h t s

© 2010 Sabre Inc. All rights reserved. wearelistening@sabre.com

GLOVES OFF

By Lynne Clark | Ascend Staff

The tug of war over embattled Japan Airlines set the stage for a new order in global airline alliance negotiations and became a lightning rod for criticism by opponents of antitrust immunity, who are concerned that the three major alliances will act as mega-carriers, crushing competition in trans-Atlantic and trans-Pacific markets.

Pho

tos:

Air

bus,

Air

Can

ada,

Boe

ing,

Con

tine

ntal

, D

elta

Air

Lin

es,

Jupi

ter

ascend 39

ASCEND I INDUSTRY

arlier this year, as JAL flirted with mov-ing from oneworld to SkyTeam, the future of airline alliances stood at a cross roads. If Delta Air Lines had successfully con-

vinced JAL to join its SkyTeam alliance, it would have served to “redraw the alliance map and reshape the airline industry,” David Grossman, a former airline industry executive, wrote in a December 2009 column for USA Today. And although the effort was ultimately unsuccessful, Grossman wrote the “bold move signals a change in alliance recruitment etiquette where poaching from another alli-ance is no longer taboo. “Until now, alliance recruitment, though competitive at times, has been quite civil and orderly,” Grossman wrote. “In large countries, like the United States or China, there are enough major airlines to satiate all three alliances. And in a region like Europe, with three dominant airline families (Air France/KLM, British Airways and Lufthansa), each has joined a different alliance. But in most countries with a single major carrier, like Australia, Canada, Thailand or Turkey, only one alli-ance can win that prize.”

Key To SurvivalAlliances are a way to give carriers

backdoor merger benefits (revenue sharing on trans-Atlantic routes) alongside the effi-ciencies that come with aligned schedules. So it’s no wonder the white gloves have come off in recruitment. As the carriers see them, global alliances are key to survival, in an industry fraught with increasing financial pressures due to high fuel costs, environ-mental drives to reduce CO

2 emissions, limited landing slots and other challenges.

In 2003, the three main alliances combined had 29 member airlines. Their significance wasn’t realized until the 2008 open skies treaty that deregulated flying between the United States and 27 European Union countries. That opened the door for strategic alliances based on geographical locations.

Today, 80 percent of the world’s com-mercial airline capacity is affiliated with one of the three existing alliances, and all but two of the world’s 20 largest carriers are members of Star, SkyTeam or oneworld. The largest, Star, includes 25 airlines that range from names such as United Airlines, Lufthansa and Singapore Airlines to regional carriers such as Finland’s Blue1 and Shanghai Airlines of China. After the loss of Continental, SkyTeam is anchored by Delta and the Air France/KLM conglomerate, but also includes carriers such as Korean Air, Alitalia, Aeroflot and Kenya Airways.

Besides American Airlines, British Airways and Japan Airlines, oneworld

includes Cathay Pacific Airways, Iberia and Qantas Airways.

At their inception, alliances were a means to circumvent outdated global aviation regulations that limit cross-border deals by requiring airlines to be owned and controlled by nationals of the country in which they are based. Carriers were able to add a few more destinations to their route maps and sell tickets on the flights of another airline as though the flights were their own. The idea was to provide better and more

convenient service for consumers, and carriers were able to enjoy some cost savings.

In recent years, airline alliances have worked to take the process to the next level, ask-ing governments to grant members antitrust immunity to jointly plan services and fares over international markets served by the alli-ance. Antitrust immunity opened a panacea of revenue opportunities, helping steer profitable business travelers through enlarged networks that shared the spoils.

While Delta Air Lines’ bold move to recruit JAL away from oneworld to join forces with SkyTeam was unsuccessful, the message was clear … poaching from another alliance is no longer forbidden.

ASCEND I INDUSTRY

ascend40

The pervasive scope of alliance reach makes it difficult for non-aligned carriers to access growth opportunities. This reality is forcing even the strongest established national flag carriers to consider trading independence in favor of alliances.

Geoff Dixon, former Quantas CEO and one-world chairman, predicted the current volatile consolidation era. In his 2008 farewell profit-briefing message, he warned shareholders and regulators that the carrier must be freed of legislated ownership and operational restric-tions or it would lose its financial leverage to negotiate the creation of a super-regional airline alliance.

“It is inevitable,” Dixon said. “I will have moved on, but a new level of maturity and understanding will be needed when this debate takes place, as it inevitably will, because airlines cannot continue on the way they are at the moment. It is the way the industry has been going, and it is the way of the future. The ones that consolidate will be the big survivors in the future.”

Under The MicroscopeAs Asian and European governments

recently opened their air travel markets to greater competition, Delta, American and United — along with their alliance partners — began battling over lucrative routes that could reshape international aviation. The competi-tion is fiercest for control of routes between the United States and Japan. Last December, as Delta and American campaigned to partner with JAL, United and Continental moved ahead with a partnership arrangement with Japan’s other large national carrier, All Nippon. The U.S.-based carriers requested antitrust immunity in a Dec. 23 filing with the U.S. Department of Transportation. United also set in motion a bid for landing rights at Tokyo’s Haneda Airport once it opens to U.S. carriers as part of a trade treaty.

Alliances are coming together on trans-Atlantic routes as well. In January, United, Continental, Air Canada and Lufthansa began to coordinate passenger perks, plan sched-ules and prices, and share revenues on flights regardless of which carrier operates the flight. The arrangement is similar to a Delta and Air France/KLM partnership formed last year. In the meantime, American is waiting to hear if its twice-vetoed bid for a tie-up with British Airways will be approved by U.S. regulators.

In the past, regulators in Europe and the United States have supported partner-ships. Heated competition among alliances has generally resulted in lower ticket prices and enabled carriers to cut costs and generate new revenue.

However, the recent gloves-off competi-tion for new alliance partners has forced the debate over whether the benefits of

After becoming the newest member of the Star Alliance last October, Continental coordinates passenger perks, plans schedules and prices, and shares revenues on flights with alliance partners United Airlines, Air Canada and Lufthansa, regardless of which carrier operates the flight.

ascend 41

ASCEND I INDUSTRY

alliances outweigh the costs. Regulators are worried lax industry oversight could pave the way for the three alliances to act as mega-carriers, crushing competition in trans-Atlantic and trans-Pacific markets.

Most notable among immunized alliance detractors is U.S. Congressman James L. Oberstar, chairman of the Committee

on Transportation and Infrastructure for the U.S. House of Representatives. Oberstar introduced HR 831 last March, which calls for the comptroller general to study legal require-ments and policies used by the secretary of transportation to decide whether to approve proposed international airline alliances and grant them antitrust immunity. The bill, which was incorporated into the Federal Aviation Administration’s Reauthorization Act of 2009, also automatically invalidates any prior grant of immunity three years after the bill’s effec-tive date and prohibits renewal unless the secretary determines whether to adopt any recommendations by the comptroller general regarding new standards for authorizing inter-national airline alliances and granting antitrust immunity.

“I have become increasingly concerned with the decline of competition in interna-tional markets, particularly between the United States and Europe,” Oberstar told an audience at a March 2009 meeting of the International Aviation Club. “These markets used to be served by a substantial number of carriers from European coun-tries and the United States. Increasingly, the market has come under control of three alliances.

“If you believe that deregulation was and is sound public policy, then you can-not afford to be complacent about the threat to competition posed by immunized airline alliances. As the evidence indicates, these immunized alliances hold great mar-ket power and have the potential for

exercising that power to the exclusion of non-immunized carriers, thereby reducing competition in the international marketplace as well as disrupting domestic competi-tion. This legislation is an important step forward in determining whether the U.S. Department of Transportation’s antitrust policies are sound and whether DOT gives appropriate consideration to the impact that granting antitrust immunity might have on competition here and abroad. If these immunized mega-alliances are allowed to proceed unchecked, the end result may be trading government control in the public interest for private monopoly control in the interests of the industry.”

The bill passed in the House by a roll call vote of 277 for and 136 against on May 21, 2009. The U.S. Senate took up the bill in June and referred it to the Committee on Commerce, Science and Transportation where it remains.

In the meantime, talks began in February on the second phase of the U.S.-E.U. open skies agreement. The second phase, which concluded in March, further liberal-ized the trans-Atlantic air transport market. The agreement settled, in principle, the dispute on reciprocal liberalization of airline ownership and control. It also, pending some changes in the E.U. legal framework, granted seventh freedom rights to E.U. carriers.

“Today’s agreement strengthens our already close aviation relationship with our European partners,” U.S. Secretary of Transportation Ray LaHood said at the time of the agreement. “President Obama promised European leaders that we would reach an agreement this year, and today we fulfill that promise.”

European officials agreed.“This draft deal represents a significant

breakthrough in the process of normalizing the global airline industry,” said Siim Kallas, E.U. vice president of transport.

The draft agreement will be submitted in June by the European Commission for approval. If ratified, looser foreign owner-ship laws could likely pave the way to cross-border mergers along alliance lines and could lead to significantly altered domestic U.S. competition. a

Lynne Clark can be contacted at wearelistening@sabre.com.

Today, 80 percent of the world’s commercial airline capacity is affiliated with one of the three existing alliances, and all but two of the world’s 20 largest carriers are members of Star, SkyTeam or oneworld.

HigHlight

Rivalry is most fierce for control of routes between Japan and the United States as a result of the Asian government recently opening air travel markets to greater competition. Delta Air Lines, American Airlines and United Airlines, with their partner alliance carriers, began battling over lucrative routes that could reshape international aviation.