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Monday
Feb082010

February 2010: Short on Days, Long on News

This month promises to be full of news in the airline industry, and potentially in a big way.  February is the month where we celebrate Groundhog Day.  And like the movie of that name, we’ll probably see some of the same stories emerge, over and over again.

Colgan, Congress and the Regulators

One of the biggest, in my view, is the ramifications of Colgan 3407, the subject of many megabytes on Swelblog.   The tragic crash of the Colgan Air flight came last year on February 12 and there have been a number of Congressional hearings since focusing on the safety of the airline system generally and the regional airline system specifically. Last week, Federal Aviation Administration Administrator J. Randolph Babbitt and DOT Inspector General Calvin L. Scovell III testified before the House on the status of the FAA’s response.. 

In its Call to Action, the FAA is looking at fatigue; crew training; pilot qualifications; training program review guidance; pilot mentoring/experience transfer programs; pilot records; and code share agreements.   

New scrutiny on code sharing comes courtesy of Reps. James Oberstar and Jerry Costello, who have demanded that the DOT IG investigate these widely-used agreements between airlines. The congressmen ask, at a minimum, that the investigation consider:

  1. Whether the DOT and the FAA have the legal authority to review code -share agreements between mainline carriers and their regional partners;
  2. How mainline carriers ensure that their regional partners operate at the same level of safety; and
  3. Whether the flying public has adequate information about code-sharing arrangements to make informed decisions when purchasing a ticket.

As if this story needed fuel to fire the debate, PBS Frontline will air an hourlong investigative report on the Colgan crash on February 9.   If PBS publicity on the subject is any indicator, then this piece will be will be as much about sensational journalism as it is about half-truths.  Already, Frontline is making much of the low salaries some regional pilots earn in a story centered on Colgan but that by all appearances paints all regional operators with the same brush. It will be important to parse the information offered and the story-telling in this piece. 

oneworld and an Immunized Atlantic (and Pacific?) Alliance

As STAR and SkyTeam fortify their alliances with new partners, anti-trust immunity and “metal neutral” joint ventures; American, British Airways, Iberia, Finnair and Royal Jordanian await word as to whether the third time will be a charm for oneworld to operate with immunization across the Atlantic. In a January article, Lori Ranson of Airline Business writes about some of the issues before the regulators.

This is only one big decision affecting AA – another is the continuing saga regarding whether Japan Airlines will stick with oneworld or submit to entreaties from Delta and join SkyTeam.  [NOTE:  JAL announces its intention to stay with oneworld on 2/9/10]  The media has been all over the board on this one, with this week’s predictions going oneworld’s way. This story has had more leads from unnamed sources than even the rumored merger talks in past years involving Continental and United, and United and US Airways.

But one thing is certain, and that is February 10, 2010, when four slot pairs become available to US airlines to serve Tokyo’s Haneda Airport under an “Open Skies” agreement between the U.S. and Japan. [DATE moved to 2/15 due to weather in Washington DC]  Initial applications for those slots are due this Wednesday, with final submissions due to the US Department of Transportation by March 1, 2010.  The winner could be flying as early as October of this year when the fourth runway at Tokyo’s downtown airport is scheduled for completion. 

As part of the pact, Japan also made immunized alliance relationships for JAL and ANA a condition of the deal. And it has long been thought that if applications for immunity were not made by mid-February then it would be difficult for the US government to complete the necessary analysis in order to meet the October deadline.  Few, if any, ATI applications have been approved in eight months or less.

United/Continental/ANA have already applied.  JAL is bankrupt but needs to pick a partner soon.  That means that the ongoing soap opera playing out in Japan may soon be coming to an end. 

The National Mediation Board and Airline Strikes

On January 21, 2010 the Association of Professional Flight Attendants (APFA) ended a two-week intensive bargaining session with American Airlines without reaching a deal. Leading up to these talks, the union had been working hard to rally its members, even going so far as to stage a mock strike with limited impact. Next up:  yet another round of mediated negotiations in Washington, DC beginning February 27.

Serious industry watchers may conclude that a a round of talks in Washington at this relatively advanced state of negotiations could mean that a “release decision” is imminent.  Another viewpoint is that the NMB might be more likely to put the negotiations “on ice” given the wide gap between what the union demands and the company believes it is able to provide.  Even in historically difficult times for the US airline industry, the APFA’s rhetoric suggests that the union will pay little to nothing in efficiency in return for the improved economics it seeks.  So these talks may be the next milestone marking how Obama’s NMB will deal with labor negotiations in the airline industry.

If nothing else, the APFA has been reckless in talking about a strike.  Long-term observers may recall that the union pulled off a coup in 1993 with a strike even the airline didn’t think would happen; and the union leaders seem to think they could do it again.  So as APFA’s strike talk continues, American did what a responsible airline must do, confirming in a media story that it is working with the FAA to prepare, if necessary, to train replacements if the APFA strikes.  Clearly the news story made a few APFA members nervous as, shortly thereafter, APFA President Laura Glading criticized the company, calling its contigency plans "an ill-conceived and doomed strategy." My question to Ms. Glading is:  How, then, is your strike rhetoric not an ill-conceived and doomed strategy not only for your members but for all employees at American Airlines?

As a footnote, last week the story took an amazing turn with news that former TWA flight attendants – nearly all of them furloughed after the APFA put them on the bottom of the seniority list following AA’s acquisition of TWA's assets -- would be willing to cross a picket line and work if the APFA went out on strike. Now I wonder how much time Glading is spending reliving the strike of 1993 when faced with the prospect of an airline ready with trained replacements at hand, including a group of flight attendants with an axe to grind against her union?

Finally, February may be the month we get a decision from the NMB following the effort of two Board members to change by fiat the law that governs labor law in the railway and airline industries and would make it far easier for unions to organize workers.  The decision has, however, generated a tremendous amount of comment and controversy, so we may be waiting until March Madness for that story to break.

Stay tuned. It may be a wild ride.

 

Wednesday
Jan132010

A Battle for JAL or the Threat of Competition?

In this post, I’m going to pick sides in the mighty contest for the JAL bride.

But before we begin, let’s dispense with some business.

First, let the record show that I have long been a fan of Delta Air Lines on many fronts, particularly how it went about its merger with Northwest.  I applauded the strategy CEO Richard Anderson led in demonstrating the benefits of an “end to end merger” versus the old model merger with “significant network overlap.” It is interesting to me how Delta is suggesting to the world that getting immunity for a relationship with JAL will be fairly easy.

Second, I was recently asked by to present at a one-day seminar on the subject of anti-trust immunity hosted by American’s legal counsel Jones Day.  I am not retained by American in this matter, but the airline did cover my travel expenses.

My views are my own. And they are based on a very firm foundation of data.

Now, let’s talk about alliances.

The North Pacific Market

In the U.S. – Asia market, the two most important Asian gateways are Tokyo Narita and Seoul Incheon.  And just as airlines compete, gateways compete for the same traffic. Tokyo and Seoul offer services that can facilitate 10.4 million U.S. – Asia passengers a year.  Of those, 10 million passengers can be accommodated by either Tokyo or Seoul, while only 400,000 are uniquely served through Tokyo’s Narita gateway.

Airlines form alliances to partner with other airlines and more effectively participate in traffic flows between world regions. Alliances permit a carrier to leverage its own network across its partner’s network to create benefits that would not otherwise be logistically possible or economically viable. 

Now Japan Airlines is the “it” airline in a global contest to win its favor and woo it from one alliance to another.  The troubled airline’s current partners in the oneworld alliance are determined suitors in their effort to keep JAL happy at home, while Delta is playing the part of home wrecker, posing and making promises that the opportunities are greater for JAL as part of the SkyTeam alliance.

If I am Delta…..

I would be pursuing JAL as well.  Why?  Because Delta has the most to lose from any new competition into the U.S. – Japan/U.S. – North Pacific marketplace.  Why?  Because of the extraordinary rights Delta has to fly beyond Tokyo and Japan and carry traffic that originates in Japan.  Why?  Because the route rights granted to Northwest (Orient) in 1952 came at a time when Japan was dependant on the U.S. in its post war recovery.

The bilateral agreement in place between the U.S. and Japan has been largely unchanged since 1952.   Both sides have thought the pact unfair, but little progress was made until 2009.  To Japan, the bilateral was imbalanced, with too many NRT slots held by U.S. airlines using them to provide local intra-Asian service.  To the U.S., the bilateral was viewed as anticompetitive as it restricted frequencies, favoring incumbents and preventing market-driven price discounts.  Those incumbents are Northwest and United, which bought the rights from the late, great Pan Am.

What complicates the DAL’s JAL play is that Delta in effect already owns most of the rights of a Japanese flag carrier as a result of the 1952 bilateral agreement.  Along with its immunized relationship with Korean Airlines, Delta already enjoys a commanding market position in what promises to be one of fastest growing markets over the next 20 years – the North Pacific.   

Those route rights now held by Delta as a result of its merger with Northwest give the carrier significant market power.  Those route rights have over the past six decades enabled Delta to build a U.S. – Asia network via Tokyo that could only be rivaled by United.

Only now, under an Open Skies pact between the U.S. and Japan, can that incumbent status be truly challenged.

Oberstar and the Fear Mongers Sure are Quiet

As this story unfolds, one thing we’re not hearing is the usual braying from Congress’ self proclaimed, air travel consumer protection cop James Oberstar.  Is it because the situation involves his former hometown airline?  Or is it because the Congressman is just waiting to pounce?  In either case, the man who has previously been quick to try to apply regulatory and legislative “solutions” to the airline industry’s complex challenges is atypically quiet.

As regular readers know, I am no fan of the Minnesota Congressman’s approach to competition in the industry.  But as we approach a situation in which the term “duopoly” will describe inter-alliance competition should Delta and JAL form a partnership in Japan – his silence is, well, deafening.

Today, American + JAL at Tokyo, Northwest/Delta at Tokyo and Delta + Korean at Seoul are competing for U.S. – Asia traffic.  There are 413 city pair markets in that region that involve 19 overlapping Asian markets served by each Tokyo and Seoul that have at least 5 passengers per day each way.  Currently, 83 percent of those 413 city pair markets either originate in or are destined to points behind a U.S. gateway to one of those 19 points beyond the two Asia gateways. 

It is these markets that represent a competitive disadvantage to the non-immunized alliances today – chief among them  American’s oneworld.  These markets also represent true opportunity for the immunized alliances of tomorrow – those, that is, that would now be permitted by the U.S. – Japan Open Skies Accord – and that’s what has the incumbent airlines looking nervously over their shoulders at the prospect of new competition.

Today both STAR and oneworld are limited in their ability to compete for this traffic by a lack of immunity with their Japanese partners.  Northwest/Delta, on the other hand, can coordinate schedules and set fares for traffic connecting over Tokyo Narita (as a result of the agreement negotiated with Japan in 1952) and for traffic connecting over Seoul with its Korean Airlines partner.

In fact, on 98 percent of the 413 city pairs we’re discussing, either Delta/Korean or Northwest/Delta or both “immunized” combinations have a larger share of this critical connecting traffic than does American + JAL. 

This ability to generate traffic and offer passengers a choice of carrier and gateway is just one of the important benefits that accrue to airlines and consumers as a result of a relationship that allows immunized alliance airlines to coordinate schedules and set fares.

Today Delta’s U.S. domestic network is roughly 2.5 share points larger than American’s, yet it is able to connect disproportionately more traffic from the U.S. to Asia.  Network economics suggests that this relationship does not make sense unless one considers the power of immunity.

The Threat of Competition

Today, both oneworld and STAR compete for the same traffic against SkyTeam.  Today there is certain symmetry among the three global alliances for U.S. – Japan traffic and U.S. – Asia traffic.

In the U.S. – Japan market, STAR’s share is 31%; oneworld w/JAL is 38%; and SkyTeam w/o JAL is 30%.  In the U.S. – Asia market: STAR’s share is 34%; oneworld w/JAL, 22%; and SkyTeam w/o JAL, 28%. 

Based on MIDT data American commissioned from Compass Lexicon and analyzed by me, if JAL were to be lured away by SkyTeam, the numbers would look very different.  In the U.S. – Japan market:  STAR, 31%; oneworld w/o JAL, 6%; and SkyTeam w/JAL, 61%.  In the U.S. – Asia market:  STAR, 34%; oneworld w/o JAL, 10%; and SkyTeam w/JAL, 30%.

Delta will likely challenge that analysis, claiming that it should not include traffic between Japan and the U.S. “beach markets” of Hawaii and Guam. I will leave that argument to the lawyers.  But last I checked, one was a U.S. state and the other a U.S. territory and each are therefore governed by the U.S. – Japan bilateral.

In simple terms, the real threat of liberalization in the U.S. – Japan market is the overnight competition Delta/SkyTeam will face from oneworld and STAR for the nearly 10 million U.S. - Asia passengers.  Do the math: If Delta is successful at luring JAL away from oneworld, then SkyTeam and STAR will have a 92% share of the U.S. – Japan market.  In most economic analyses, that share represents a duopoly.  And that should not be the result of market liberalization. But then again, do we have a duopoly on the Atlantic given that oneworld is not immunized there either?

Oberstar and the Fear Mongers have already protested the prospect of limited competition in three alliances hell bent on “gouging” air travelers.  So where are they when it comes to the prospect of just two alliances controlling so significant a share of the Asian market?

Duplicitous Delta and the Source of My Confusion

In late 2006, while Delta was in bankruptcy, U.S. Airways made a hostile offer to take control of the company.  Delta rejected U.S. Airways’ overtures vehemently and was ultimately successful in fending them off. “US Airways’ principle goal in its hostile takeover attempt is to eliminate its key competition,” Delta(Grinstein) said at the time. “In a pro-competitive merger, the two airlines’ routes do not overlap excessively; they are complementary. Joining complementary networks can enhance competition and create consumer benefits that result in lower prices and increased service option.”

Then in late 2007, Delta, on its own terms, began to pursue a merger with Northwest. Anderson argued time and again that the two airlines had “complementary instead of overlapping route systems” that would maximize synergies.

With the two airlines already connected through alliance relationships, Anderson said:  “Alliance relationships are valuable and very difficult to extract yourself from.”  He noted that neither Delta nor Northwest needed to pull out of its existing alliance, which would have “disrupted revenues and required tearing out significant infrastructure and then rebuilding someplace else.” 

Given regulatory restrictions regarding cross border mergers, an immunized alliance is a defacto merger in the sense that it gives the combination the ability to act as one airline in determining service levels, pricing, marketing.

On the surface, the size of Northwest/Delta’s North American network is slightly larger than American’s.  However, the fit of the network is more important than size.  The ability to leverage one network against the other in order to create new city pairs to sell is critical to any network’s success.  American and JAL would make for a true “end to end” combination whereas Delta and JAL possess significant overlap with each other – the very combination it suggested results in an anti-competitive combination.

On the surface, the solution is crystal clear - at least to me: Three alliances across the Atlantic and the Pacific that each benefit from anti-trust immunity and equally competitive tools.  Even if JAL ultimately restructures through bankruptcy, a partnership with American would still provide a true end-to-end partner that Delta itself contends is the very best way to maximize the synergies of a commercial combination.

But the more I study the data, a different picture emerges. Delta’s play for JAL is not about JAL at all.  It is about preserving Delta’s dual flag status in Japan.  For 58 years Northwest/Delta has been tweaking its US network to sync with its Japan-based network – and they have done it well.  Under Open Skies, Delta will realize new and more vigorous competition on many routes where it enjoys little to no competition today.  Self preservation is a strong instinct and I am all for consolidation in this industry.  But I am also for open and fair competition, particularly where all three alliances are concerned. 

Either way, Delta wins.  It wins by delaying anti-trust immunity for each American and United and thus preserving its legacy competitive position.  And it wins by potentially eliminating a competitor (JAL) where redundant flying can be removed. 

Competition loses.  If Delta lures JAL away from oneworld and the U.S. grants the Delta/JAL combination anti-trust immunity, then perhaps Oberstar finally has a position he can defend. Three way alliance competition is robust.  Institutionalizing duopolies in Open Skies markets is something else.

Tuesday
Oct272009

Swelbar on Airlines: Just Thinkin’; Just Sayin’

Southwest Airlines’ Media Day – All “Green”, All of the Time

I attended Southwest Airlines’ Media Day last week.  Prior to this, I had not witnessed a “Southwest Show” personally, other than occasional Congressional testimony.  My takeaways are many, but the main one was the pride the management and the employees have in their company.  That point resonated with me in a big way. 

The theme of the day was INNOVATION.   The morning was painted “green” and focused on the investments Southwest is making in aircraft interiors, engine washing, blended winglets and other programs that have an environmentally friendly end game.  Then the program moved on to describe how Southwest is investing in new air traffic technologies as they come available - putting their own money where their mouth is.  Of course, savings in flying time saves fuel, which contributes to helping the environment.  Southwest presented itself as an industry leader in promoting this agenda.   

The afternoon began with Southwest announcing its 68th destination, a “green” field airport serving Panama City, FL.  The innovation here was a unique financial arrangement made with St. Joe, a company that owns hundreds of thousands of acres in Northwest Florida, to backstop any losses up to agreed amounts.  Under the terms of the deal Southwest is assured of at least breaking even during the first three years of the service.   There is an environmental angle to this story as well as the new airport is among the very first LEED rated, Leadership in Energy and Environmental Design, terminal buildings in existence.

While it was grey outside, the Southwest message was innovating with green technologies.  I could only think how other airlines would be green with envy that Southwest is planning and investing in tomorrow while so many carriers are busy simply try to stay alive so that there is a tomorrow.

 

Another Thought on That Agreement between Southwest and St. Joe

One of the unique aspects of the deal between Southwest and St. Joe is an agreement that Southwest will not start air service within 80 miles of the new airport during the term of the agreement.  Should Southwest launch service at an airport that is between 80 miles and 120 miles away from Panama City, the terms of the agreement can be renegotiated.

I think the 80/120 mile bands accurately define the primary and secondary catchment areas around individual airports.  Service at one location impacts service at another when airports are located within a reasonable driving distance.  If one airport in a catchment area has lower fares, then it may prove to be the airport of choice for more air travelers. If a passenger chooses the lower fare rather than the closer airport, then that passenger is diversion within a region.  New demand is not created; rather a region’s demand is being accommodated by another airport with attributes the customer finds more appealing.

Herein lies the rub:  How many airports do we really need?  By my count, there are 451 airports receiving commercial air service.  100 of these accounts for 81 percent of all commercial air service seats.  200 of these (44 percent of the total) comprise 97 percent of all domestic origin and destination traffic.

Stated another way, should 56 percent of the airports – those that account for only 3 percent of US domestic traffic -- really be competing for funds that are needed at more congested airports?  The more congested airports lie in the nation’s population centers.  This is where air service providers need to be, not in Hays, KS or Joplin, MO or other points on Transportation Committee Chairman Jim Oberstar’s map.

 

oneWorld and Immunity

Where to start?  I just love it when regulatory authorities point to individual nonstop routes when evaluating commercial combinations ignoring the network architecture that describes the airline industry in 2009 versus 1969.  They cite fears about consumers being gouged.  But when exactly in the past 30+years has the airline consumer really been gouged?  

For the first nine months of 2009, passenger revenue on transatlantic routes for US carriers is down nearly 24 percent.  On those routes, passenger yield, or the amount of revenue the air travel customer pays per mile, is down 20.5 percent.  According to the Air Transport Association, to date, US carriers are earning 10.77 cents per mile -- only modestly more than the 10.50 cents the US carriers earned per mile in 1997.  And that’s not adjusting for inflation.  No competition?

Now Brussels is apparently stating concerns that American Airlines and British Airways, with their market power at London Heathrow, would raise first and business class fares if granted immunity to operate a Joint Business Agreement.  Well, I sure as hell hope that is the case because, without some increases in the price of premium travel, many of the iconic names in the sky today will land in the airline graveyard.  A monopoly in an Open Skies regime?  Sounds to me like Virgin Air Chief Branson and the Fear Mongers are trying to take a page out of the old playbook to take away slots from the incumbents.  Because that, after all, is the way it has always been done.  Money for nothin', slots for free. 

My bet is if first and business class fares were to get too high on BA/AA, the big winner would be Branson and his Virgin Atlantic as he is positioned in every major US gateway offering service to London Heathrow.  No one else has the same ability to impose discipline on the fares charged by two carriers than he does.  Or maybe he would be just as happy to raise Virgin’s fares too.  But, no, instead he will have us all believe that his sole concern is the customer and there is nothing mercenary in his opposition.  Just sayin’.

And before I leave this one, let us not forget that it was these first and business class fares and full Y fares that drove revenues (and helped keep wage rates high) in the past.  Now no meaningful yield premium exists in the US domestic market.  And we all know that the rapid deflation in first and business class revenue has been a major contributor to the global industry’s loss of $80 billion in revenue.  Yet certain US airline labor unions oppose the transaction-based on consumer issues?   

 

Third Quarter Earnings Calls

Given my travel schedule, I  did not get to listen to as many earnings calls as I normally do - that is why they have transcripts.  That said, was there a major theme?  We have said ad nausea that any recovery will be uneven – for carriers and geographies.  I did not read/hear much about a specific recovery, just that the worst may be behind us.  And I am encouraged by the good signal in the freight sector.  But if that’s a leading indicator, is the passenger sector recovery still 6-9 months away?  After all, it was nearly 9 months prior to the recession that plummeting traffic and revenues in the freight sector served as a warning.

By now,and unless you have not read a thing on the airline industry the past few years, there is little need to talk about revenue or rehash the direction of the price of oil or try to predict when a macroeconomic recovery might begin.  But what did catch my attention during the earnings season was the reference to items “below the line,” namely interest income and interest expense.  Think of all of the borrowing that has taken place at relatively high interest rates.  Net interest expense is going to take on a more important meaning.

With that said, it is time to perform a calculation that we should have been making for some time:  CASM including net interest expense and excluding fuel and transport related expenses. Just thinkin’. 

 

Concluding Thoughts

I am thinking I am ready to put 2009 in the books if for no other reason that the industry would lose less if the year were only 10 months.  What is there to say about the various happenings in the industry that hasn’t been said before?  So many recent events (labor squabbles, immunized alliances, failure to pass a FAA reauthorization bill, a passenger bill of rights, and how much liquidity is sufficient, to name a few) are cyclical reruns.  These are not long-term changes but rather predictable events based on history and the direction of the wind.

I am thinking it will be fun to see this industry finally recover from this economic malaise.  I am thinking that 2010 will be a lens through which we will be able to begin to evaluate which airlines have made the right moves in remaking themselves and which carriers have not.  Finally, I am thinking that nothing has really changed other than that a new administration is in place and some surface transactions transpired that hold promise only in theory.

If we are going to charge fees, when are we going to charge for the convenience of carry on?  Just sayin’.

After all, there are still two months before I can close out 2009.

Boo! And Happy Halloween. 

Thursday
Mar262009

The United – Aer Lingus Venture: The Chicago Tribune Perpetuating the Past

Since starting this blog and taking advantage of opportunities to be “media trained” over the years, I was told that I would never read the news the same again. How true.

I am a little late in weighing in on a March 16 story by Julie Johnnson in the Chicago Tribune: Clipping Union’s Wings; United – Aer Lingus Plan to Outsource Pilots on Overseas Flights, which I believe errs in just about every aspect in understanding what is really going on in the airline industry.

In the article, Johnnson suggests that the arrangement between United and Aer Lingus will spark an uproar as pilot contract negotiations begin next month. But what the author fails to mention is that the Airline Pilots Association (ALPA) knew of this deal long ago. And while I am not in the business of selling newspapers as the Chicago Tribune is, I do believe that negotiations that already stoke emotional fires do not benefit from stories that throw fuel on those fires.

I’ll start with the article’s assertion that the United-Aer Lingus deal would allow the airlines to “outsource” pilots and, in the process, clip the union’s wings. But this argument ignores the fact that the UA – AE venture is permitted by the UAL pilots’ collective bargaining agreement.

Indeed, there is no evidence to suggest that the collaboration between the airlines is equivalent to outsourcing or in any way a violation of the pilot agreement. Worse, the story goes further by suggesting that these flights would be flown by under qualified pilots.

The article also raises questions – unfairly in my view -- about safety, noting that it is unclear who would regulate an airline not based in the home country of a parent carrier. U.S. limits on foreign ownership would not apply because the partnership would be based overseas. The author’s raising of the safety issue is specious as established carriers like United and Aer Lingus would not put their reputations at stake by knowingly engaging in unsafe practices.

But the story does underscore a common slant of some newspapers that key challenges can all be distilled into labor issues. It is, perhaps, no coincidence that the story implies that the company is working against the best interests of it pilots, while failing to mention that United has begun paying bonuses to its employees for operational performance.

So let me say what the newspaper article didn’t. The real story is network economics.

In this alliance, United is considering Washington Dulles to Madrid for the initial route. Keep in mind that Madrid is a hub for Iberia, which is part of the oneworld alliance. And so the plot thickens, as industry observers know that several oneworld carriers (American, British Airways, Iberia, Royal Jordanian and Finnair) have applied for anti-trust immunity to fly between the US and Europe. United, meanwhile, is part of the STAR alliance. The majority of its transatlantic flying is gateway-to-gateway flying between North American carrier gateways and gateways of European partners.

The advantages of gateway-to-gateway flying are many. Foremost is the ability to sell not just traffic in the local market; but also traffic behind the US gateway to the European hub. And not just traffic from the US local market to points beyond the European gateway; but also bridge traffic traveling from points behind the US gateway to points beyond the European gateway.

The STAR alliance is not now well positioned geographically to serve Madrid and Lisbon and even some points in the UK and France because its primary gateways are located much deeper into the European market. So for United to make Washington – Madrid work by itself requires the carrier to rely only on local Washington – Madrid traffic and feed traffic to Madrid from cities connected to the Washington gateway. The route therefore has a limited pool of traffic and revenue as compared to Washington – Frankfurt or Washington – Munich. Moreover, the Washington – Madrid route is much different from Washington – London where the local market itself can support multiple daily flights.

Iberia currently serves Washington Dulles - Madrid. My guess is that United, and STAR, have identified this as a strategically important flight to its network. But as a stand-alone UA route -- with its inherent cost structure (labor or otherwise) – I would be surprised if United could turn a profit. All of which demonstrates how important it is for United and STAR to establish a presence in a strategically important city pair at a cost structure that will improve the economics of the route.

The United Pilot Collective Bargaining Agreement

Under the terms negotiated between United and its pilot union, Section 1 of the collective bargaining agreement explicitly states that, prior to entering into code sharing agreements with foreign carriers, UA will confer with ALPA.

The agreement further obligates United to negotiate with the prospective partner any labor protections that it deems appropriate to the circumstances consistent with its business judgment, including a commitment to negotiate as much reciprocal code share as possible taking into account limitations that are beyond the company's control.

In my read, there is nothing in the scope section of the UAL-ALPA contract that prohibits revenue sharing, cost sharing or branding, as long as the code share tests are met. The agreement also stipulates that the company cannot remove a scheduled non-stop flight from a joint international non-stop market unless it can demonstrate that the flight fails to pass what is known as “base rate of return” test – in other words a route must achieve pre-ordained financial results. Moreover, the pilots’ contract permits United or one of its affiliates to acquire as much as 50 percent of the equity of a STAR alliance carrier, contingent upon certain details.

 

Concluding Thoughts

Finally, the story concludes with predictable comments from the unions representing pilots at both United and American – the two carriers expected to face the toughest contract negotiations and where the unions are most openly antagonistic toward management. These negotiations capture some of the most difficult issues facing domestic airlines, where in many cases labor leaders have failed to acknowledge or address some of the core structural economic factors changing the industry. But the story, and its take on this development, would be greatly strengthened by providing more context regarding the global airline environment and the pressures on US airlines to build a truly global network and route structure.

The question, quite simply, is whether the US airline industry can compete with lower-cost and better capitalized carriers from around the world, particularly in this challenging global economy?

The reality is that United is doing nothing more than what it is permitted under its agreement with its pilots. Yes, there may be union leaders and airline employees who simply resent that the era of US dominance in global aviation is on the wane, but to ignore this reality does nothing to position any airline for a new global marketplace.

Perhaps the Tribune erred mostly by painting the challenges and opportunities facing United in the time-worn management-labor construct, rather than with the complexity the situation demands. The industry will change and change dramatically. And companies that fail to find new ways to create value through branding and revenue sharing and cost sharing could fail to exist.