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Oneworld and SkyTeam: justifying immunity September 2001 Download PDF

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Oneworld and SkyTeam have now applied to the US DoT for anti–trust immunity, moves that will eventually lead to complete transatlantic open skies environment and, probably, more intense competition between the alliances. First of all, however, the two groupings have to justify their applications.

The headlines of both applications are broadly similar:

  • Anti–trust immunity increases the quality and competitiveness of air services;
  • Carriers increasingly compete on a network basis; and
  • Alliances are pro–competitive and therefore pro–consumer.

Both filings quote a DoT study which states "alliance–based networks are the principal driving force behind transatlantic price reductions and traffic gains".

The governing principle, of course, for any international airlines gaining anti–trust immunity from the US DoT is that it will only be granted if there is an open skies agreement in place between the US and the relevant nation. Herein lies one important difference between the two filings in that the US and Italy and the US and Czech Republic already have open skies agreements in place and the US and France have already agreed the framework for open skies. The only stumbling block is on timing, with the French regulatory bodies willing to accelerate the pace of signing an open skies agreement if anti–trust approval is given.

The UK–US position is much less clear. The UK regulatory authorities have in the past taken a hard–line stance against the US open skies formula. However, the UK negotiators are believed to be willing to sign now because:

  • It is perceived that British Airways needs anti–trust immunity to compete with its European peer group across the Atlantic;
  • Bmi, (formerly British Midland), has filed a complaint with the EC which essentially claims that the Bermuda 2 bilateral is illegal under European law; and
  • If an agreement with the US is not reached soon, the EU may win the right to negotiate an agreement for the EU as a whole with the US which would take timing out of the UK’s hands (the preferred route for Virgin Atlantic)

The other complication for BA/AA is that this is not the first time that the airlines have been to the regulatory authorities to seek approval for an immunised alliance. The original alliance proposed in 1996 faced severe criticism from the regulators. In their respective 1998 judgements the EU asked BA to cede between 220–230 weekly slots at Heathrow and the US DoJ asked for 336 weekly slots to be handed over by BA. At that time BA decided that the regulatory price was too high.

BA/AA’s case

BA and American have refined their case for anti–trust immunity around six main tenets.

1. The world has changed markedly since 1996. The US has been able to sign open skies agreements with several European countries since that date (Germany in 1996, Romania in 1997, Italy in 1998, Portugal in 1999, Slovakia in 2000, Poland in 2001 and France pending), so that an open skies regime is now the norm and transatlantic alliance have been able to prosper in this regulatory context. AA/BA’s current position is "Now American and British Airways are looking to match what other airlines have in place in order to effectively compete with stronger alliances that have leapfrogged AA–BA in the marketplace". In some circles in Brussels this is acknowledged, and a strengthening of oneworld in order to increase competition with Star is thought to be acceptable.

2. Alliances have developed increasing competition across networks and have led to "explosive growth" at other European hubs. BA and AA quote growth rates since 1996 at Frankfurt of 67%, at Amsterdam of 48%, and at Paris CDG of 62%, compared to growth at Heathrow of 20%. Of course, BA’s downsizing policy might also have something to do with this.

3. An open skies agreement will terminate the highly restrictive Bermuda 2 agreement.

4. Competition has continued to increase in the UK–US market. New services have been introduced by Continental, Delta, US Airways and bmi.

5. Oneworld hold a weaker slot position at its prime hub than its European rivals have at theirs: Oneworld holds 47% of Heathrow slots compared to 55% for SkyTeam at CDG, 69% for Star at Frankfurt and 70% for KLM/Northwest at Amsterdam.

6. Heathrow is the only two–alliance hub in Europe, with the Star partners United, Lufthansa, SAS and bmi being prepared to combine their slot holdings.

The issue of slots remains at the heart of the BA/AA filing. Whereas the SkyTeam filing contends that no applications to operate services between the US and France/Italy and the Czech Republic will be turned down because of a lack of slots (although there is the possibility that peak slots may not be available) the oneworld filing has to approach the issue of slot availability tentatively

BA/AA points out that Heathrow is in effect full, and new slots are a rarity. However, given an open skies regime, those carriers wishing to operate transatlantic services will be able to do so through re–allocating partners' slots. The Star alliance partners have already announced a pooling of slots which would allow, say, bmi to switch a domestic slot for use on a transatlantic service. Similarly, Northwest could gain access to Heathrow slots through its partner KLM, and Delta through the pooled slot resources of Air France and Alitalia. Continental and US Airways, it is suggested, will have to wait alongside other new entrants who at least receive some priority in the slot distribution procedures.

The notion that BA (and AA) will not be asked to cede some of their slots by the regulatory authorities is very, very unlikely. The question is still how many and whether this number will acceptable. Demand for Heathrow slots will come not only from the US carriers currently excluded by Bermuda 2 but also from airlines wanting to switch operations from Gatwick to Heathrow.

Competitive statistics

Both groupings go to some length to find statistics to prove that "prove" that competition will not be adversely impacted by joint operations.

The SkyTeam application paints the alliance as being "mid–size" in global terms, quoting these US–European transatlantic passenger market shares: SkyTeam, 17.3%, Star, 18.3%, American/Swissair/Sabena, 14.1%.

In terms of competition by route the SkyTeam points out that overlap between the alliance partners occurs only four out of 22 transatlantic routes between the US and France/Italy. Also, it is interesting to note that in total American has twice as many weekly flights to France as Delta.

The overlap between BA and AA is on six transatlantic routes, five of which have alternative competition.

Objections will be raised over the SkyTeam anti–trust application, most notably on ensuring fair competition on the Atlanta — Paris route. Nevertheless, the amount of existing competition on an individual route basis and from other hubs should ensure that the application will go through relatively unscathed.

The same will not be true of the BA/AA application. The fact that American is teaming up with the largest player on the UK–US market will cause as much scrutiny this time as it has done in the past.

Still, it is likely that the application will receive approval, once again with conditions and with slot give–ups. The US wants an open skies agreement with the UK, and the UK has made a positive decision on the BA application a prerequisite. Brussels wants oneworld strengthened to challenge Star. With public criticism of high fare levels on the Atlantic (particularly business fares), the UK government will make clear that it expects lower fares as a result of an open skies agreement.

Marketing and sales Yes Yes
Scheduling and network planning Yes Yes
Code-sharing Yes Yes
Revenue and earnings sharing Yes Yes
Commission programmes Yes ?
Standard form contracts/joint purchasing Yes Yes
Accounting data/information systems Yes Yes
Service standards and procedures Yes Yes
Joint advertising and media programmes Yes Assumed
Use of joint identities Yes No
Pricing and inventory control Yes Yes
Cargo programmes Yes Yes
Increased transatlantic services Yes Yes
Improved on-line connections Yes
(40,000 city pairs)
Expanded access to beyond and behind gateways Yes Yes
Better co-ordinated hubs and transatlantic scheduling Yes Yes
Expansion of discount fares across the network Yes Yes
(up to 25%)
Greater availability of discount seats on transatlantic Yes Yes
Improved inventory control Yes Yes
Reduced sales and marketing costs Yes Assumed
Increased levels of equipment utilisation Yes Assumed
Integrated cargo network Yes Yes
Improved quality of service Yes Yes
LHR-US No. of %
  weekly flights of total
British Airways 180 36.4%
American 119 24.1%
United 112 22.7%
Virgin Atlantic 63 12.8%
Air India 10 2.0%
Air New Zealand 7 1.4%
Kuwait 3 0.6%
Total 494 100.0%
Overlapping BA/AA routes Other airlines offering Expected
from London non-stop service New entrants
New York Continental (LGW and STN) Delta, bmi
Virgin Atlantic
Air India
Kuwait Airways
Boston Virgin Atlantic (LGW) US Airways, bmi
Delta (LGW)
Chicago United Bmi
Virgin Atlantic
Air India
Los Angeles United
Virgin Atlantic
Air New Zealand
Miami Virgin Atlantic (LGW) Bmi
Dallas/Fort Wortd None
Overlapping SkyTeam Other airlines offering
routes non-stop service
Paris-New York American
Rome-New York Continental
Milan-New York Continental
Paris-Atlanta None

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