Airlines Form Competing Alliances, Potentially Reshaping Industry Landscape

Strategic Insights -

The nation's largest airlines are forming alliances that could dramatically change the industry's landscape. American Airlines and US Airways have announced a marketing alliance, while Delta Air Lines and United Airlines plan to announce a similar alliance. Although these arrangements do not involve equity investments, they continue a process of consolidation accelerated by Northwest Airlines' agreement to take effective control of Continental Airlines.

Key Takeaways:

  • The formation of two alliances by the nation's largest airlines could lead to significant changes in the industry landscape, with potential benefits including linked frequent-flier programs, airport club access, and code-sharing.
  • The alliances may provide further ammunition for smaller carriers to claim anti-competitiveness and abuse by the big carriers, potentially hindering the process.
  • Through code-sharing, carriers can reap many of the benefits of mergers without some of the associated challenges, such as work rules and pilot contracts.
  • The planned alliances could strengthen the market power of the Big Three carriers, including United, American, and Delta, as well as US Airways.
  • The alliances may raise questions about the viability of smaller carriers, such as Trans World Airlines, America West, and Alaska Air Group.

Statistics:

  • 22 mergers were attempted in the 1980s, with only one resulting in a positive outcome (Delta's acquisition of Western Airlines).
  • 60-70% of the revenue benefits of a merger can be achieved through frequent-flier program combinations and code-sharing, without the need for a merger.
  • The proposed alliances would potentially control 80% of the market, raising concerns about competition.
  • US Airways has been struggling with high labor costs and a route system heavily skewed towards the Northeastern United States.

Sources:

  • "Airline Mergers: A Review of the Evidence" by Salomon Brothers, analyst Julius Maldutis
  • "City Airline Merger Scenario" by Morgan Stanley Dean Witter, analyst Kevin Murphy
  • "Northwest Airlines' Acquisition of Continental Airlines"
  • "Paine Webber's Airline Analyst Samuel C. Buttrick"