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WILL AIRLINES GO BEYOND ALLIANCES?

It appeared early in the morning between the meter high cactuses of the Camelback Mountain in the blue skies of Arizona - a hot air balloon. Some early risers might have thought, "Richard Branson will make an appearance now". For days the shadow of the British adventurer, airline owner and billionaire had been on everyone's minds. It had especially entered the discussions of the more than one hundred experts from all over the world, who had come to the noble Phoenician Resort near Phoenix. After all Branson stands like no other person for the breaking with old conventions. And this is exactly what the top-flight conference at the beginning of this summer was all about. What will happen after airline-alliances? Will the air traffic industry change into a multinational industry like the car or telecommunication industry or will this development be hindered by outdated restrictions imposed by governments?

That morning Richard Branson was not sitting in his balloon basket. He had sent his deputy Barry Humphreys to put forward his interests in Phoenix. Humphreys summarised the discussion about ownership of airlines as follows: "The public does not mind whether a carrier is run by Europeans, Americans or Martians".

Branson's plans were on the top of the agenda in Phoenix. The Englishman would love to found Virgin America modelled on his airlines in Europe. However, protectionism of the US Government prevents this. For the last ten years the Transport Ministry in Washington has been prescribing, that foreign investors can only acquire a maximum of 49 per cent of shares in American carriers. They would furthermore not be entitled to have a say in the running of the company. It is allowed to buy a maximum of 25 per cent of shares.

In Europe, however, things have progressed further: Since the third liberalisation pact came into effect in 1992, investors outside the Union are permitted to buy up to 49 per cent of shares in EU airlines, including veto rights. Things are also changing even in the traditionally protective Asia: the respective governments want to privatise the Indonesian Garuda, (up to 50%), Air India (up to 60%) Indian Airlines (up to 51%) and Pakistan International (up to 50%). Foreign investors are welcome to apply. Moris Garfinkle, Company Advisor and Airline Expert from Washington claims, "Things are moving. Multinational airlines with international input will be a big topic, as soon as the industry asks itself: "What will be the next step after liberal agreements, open skies and alliances?"

"The topic "Alliances" has heated up the temperature during discussions. All of a sudden airlines are convinced that certain things are relevant for their survival to which they had previously paid very little interest", says Frederick Reid, member of the board of directors at Delta-Air-Lines. He adds, "global intertwining is unavoidable in the airline industry."

It is becoming more and more obvious that the alliances, which are currently being forged all over the world, are simply auxiliary constructions, which are being used by airlines, because they are not allowed to function according to international rules. "Alliances are only the second best solution", says Barry Humphreys of Virgin Atlantic Airways. Ulrich Schulte-Strathaus, Head of Company Traffic Policy at Lufthansa envisages an evolution, "the trend was for single airlines to form alliances, and it will develop further into a global airline". Up to now the existing alliances are surprisingly stable. "It is important to have the option to fuse, because alliances only allow lowering of costs and prevent long term planning", explains the Lufthansa strategist.

The "almost fusion" of Alitalia and KLM, which had the blessing of the EU Commission, could be taken as a model. It is, however, not touching on existing taboos, since it is taking place between two EU carriers.

However, not everyone in the industry thinks that fusion means salvation. Randall Malin talks about his experience, "Fusion is hell, it is the most traumatic ordeal any airline manager might have to go through". Malin used to be in charge of marketing at US Air, which is nowadays known as USAirways, during the time when the company fused with Piedmont Airlines. Mark Gerchik, US Vice Transport Minister, on the other hand does not expect any reservations when today's rules are being slackened. "The effect of lifting restrictions would be negligible for today's alliances".

It is a fact that the global development towards privatisation and reduced governmental influence on air traffic cannot be stopped or undone. Reid from Delta claims, "these days governments tend to have fewer shares in airlines and are increasingly becoming less important".

There were, however, fears that because of the economic crisis in Asia the protectionism, which had only just been overcome, might begin to flourish again. Shelley Longmuir, Senior Vice President at United Airlines has this to say, "they have eaten once from the forbidden fruit of airline competition. This is why market forces make sure that the Asian companies will not change course". Asian governments have recognised that there is no turning back. Mahidol Chantrangkurn of the Thai Transport Ministry explains, "as a government run company Thai Airways is not able to compete with Singapore or Cathay Pacific".

However, the market's main interest is focused on the American market, which leads the way because of its size. American domestic flights alone make up almost one third of all global air traffic. This explains the interest of foreign investors like Richard Branson to become involved. What will a slackening of the existing restrictions in the USA have in stall for the government, the industry and the customer? Although the all American airlines are privately owned, the government still shows a lot of interest in the airlines. The reason is national safety and the need for travel of American civil servants. Both sides of the medal are inter linked. Whichever airline wants to have a piece of the travel budget of the authorities, which amounts to $2bn annually, has to give the assurance to make aircraft available for the military in an emergency. To come in on this relationship of dependency, which has been operating for years, would be difficult if not impossible for foreign companies.

The program is called Civil Reserve Air Fleet, CRAF for short, and is the backbone of American troop transports in a crisis. In all 725 previously designated transport aircraft and four complete crew for each of these are at the government's disposal within a maximum of three days. Within 24 hours 87 jets have to be ready should the Pentagon request this. This is no easy task for the airlines, which are involved. In a crisis these companies have to combine their schedules in order to free the required capacity. Until now there has only been one such occurrence, the Gulf War in 1991. 110 civilian aircraft carried out 4,700 flights and transported 310,000 soldiers, which corresponds with 63 per cent of all deployed troops. Civilian aircraft also transported a quarter of all deployed weapons, vehicles and machinery.

Mary Lou McHugh of the US Defence Ministry explains that, "the ownership of American airlines have a direct bearing on national safety". 93 per cent of the entire troop transport capacity are made available by civilian airlines. If the military had to take on this task, investments of $50bn in its own aircraft fleet would be necessary. "The airlines participate voluntarily and these matters are decided on every year", says McHugh.

American and United Airlines had quit the program during the Gulf War because of bad experiences. Now they are taking part again. They had to experience in '91 that foreign airlines were gaining ground on international markets, while the Americans were supporting their country.

"CRAF is an extremely expensive way to warrant national safety. We could achieve the same results by chartering foreign companies when the need arises", is Clifford Winston's opinion, scientist with the Brookings Institute. Even Richard Branson would be prepared to get involved in CRAF, if he could found a US Dependence in turn. However, the Pentagon does not trust foreigners. It might be possible that the respective governments would not allow their airlines to take part in military operations, which they might not support. Mary Lou McHugh, "we should not ignore this possibility. Patriotism is definitely a factor for CRAF". William Ris, Vice President at American Airlines has a different view, "civilian aircraft do not have to be ready for troop transportation at all times, there are plenty of willing airlines at home and abroad, which would help out if needed. In the Gulf War the Dutch KLM and Martinair flew, in Kosovo Russian Antonows were used".

Not only the military but also the unions are mobilising against change. The Union Boss in charge of cabin crew, Patricia Friend is not ready to compromise, "foreign ownership of US companies is useless and threatens economic stability, American jobs and flight safety. It would mean that cost is given a higher priority than safety". Mrs Friend is also worried that the crew of airlines, which are in foreign ownership, might not be able to join a union. Scott Gibson, scientist at the Economic Strategy Institute, says, "all this is just fear of change. It is obvious that American airlines, which have foreign owners, will employ local personnel and will keep to US safety standards. After all McDonalds in Japan does not employ Americans to serve behind the counter". Gibson also points out that in the USA many airlines had been under foreign influence before the Civil Aeronautics Act of 1938. Non-Americans were permitted to buy up to 49 per cent of shares in the company in question. Even recently there were cases, which pushed this topic into the limelight. Despite restrictions KLM owned more than 50 per cent of Northwest Airlines, SAS was expanding its share in Texas Air - the mother company of Continental Airlines - and British Airways was buying into USAir.

There remains the important question what the Americans can demand in return for an opening of their market as well to foreign customers as well as for Kabotage. "An appropriate service in return is important; we cannot open the entry to America for Kabotage rights in the Netherlands", claims American Airlines Manager William Ris. "The market, which is opening for us, should be at least as big as the EU. The barriers imposed on us in Europe should be taken down". With these demands he is not far off the latest suggestions from Brussels. René Fennes, Transport Politician of the EU Commission declared the following in Phoenix, "we are for a common air traffic market between the EU and the USA. Our model is the common European internal market". As in Europe the questions of contribution, market entry and safety would be sorted out unambiguously and liberally. Fennes thinks that, "this joint aviation area EU-USA could become reality within two years once the mandate has been awarded to the Commission by the EU States. However, currently England is still opposed to this plan". The much-praised mutuality is essentially not for free trade. "This need not be a good idea", thinks Tony Fortnam, Boss at British Airways. "It is a point of view, which is typical for the producer, not necessarily for the customer". Nevertheless, the common market of the EU and the USA is an alternative. Rutger Jan toe Lear, manager at KLM, suggests another alternative, "the 32 countries, which have signed an open sky agreement with the USA, should allow airlines from another country, which is not one of these 32, to participate in an airline of its own nation".

Michael Levine, former second in command at Nortwest Airlines and now lecturer at Yale, "foreign participation does not solve any problems, and raising capital has never been a problem in the USA". Kevin Mitchell is the only one to take up the cudgels for the flying public and for more openness. He has the interests of big US companies, who require a lot of travelling, and promises, "Virgin America would be supported straight away by many important firms. If foreign investors like Richard Branson commit themselves here, it can only be of benefit to the customer, since this will give him more choice and alternatives. It is imperative that the newcomers are innovative to be able to compete efficiently with US carriers. This can only be beneficial for competition".

However, the race for new market chances might develop quite differently than expected. The American Manager William Ris says, "I bet that if the restrictions are taken down, more Americans will be investing in Europe than Europeans in America".

From page 28 of FLUG REVUE 11/99