Global Alliances, Mergers & Acquisitions, and Miles
[Part 3 of a 3-part series on global airline alliances]

The Future of Global Alliances (and the Size of Your Mileage Balance) Depend on Two Trends.

August 30, 2000 - In the first two installments of this three-part article, we introduced the global airline alliances (Part 1) and considered their benefits to consumers (Part 2).

In this final installment, we concern ourselves with where these alliances are headed. And what's interesting is that they are headed in two opposite and incompatible directions.

The Global Get More Global.

First and foremost, the alliances are growing.

This is growth with a goal: global coverage. Every alliance aspires to offer a network of cooperating airlines which, as a group, can carry a passenger from any point in the world to any other point, and back, using one or more carriers in the network, and only carriers in the network.

So while the alliances are already global, they will become even more so, adding additional airline partners which meet three conditions. 1) They serve areas that are not served, or are underserved, by current partners. 2) They are not already partners in a competitive group. And 3), their image and service levels are consistent with the other alliance partners.

As we suggested in Part 2, there are real benefits to global alliances for international travelers--specifically, more opportunities to earn frequent flyer miles and, in particular, to earn elite-qualifying miles. And if global coverage is good for mileage accrual, more global coverage is better.

While we are more skeptical of other purported consumer benefits of alliances, a just-released study by University of Illinois economist Jan Brueckner concluded that alliances--especially when combined with code sharing (as is typical) and anti-trust immunity (less typical)--do result in significant cost savings for consumers. In fact, the study estimates that the Star Alliance will save travelers $100 million annually in lower fares on multiple-airline itineraries. (If you're interested, the report has been posted online at http://www.brueckner-report.com.)

The Big Get Bigger.

If globalization is the long-term trend, it may in the short term have less effect on the actual composition of the alliance groups than a related industry trend, consolidation.

Consider the following developments:

The world's largest airline, United, has offered $4.3 billion to acquire US Airways. The deal is subject to review and approval by the Departments of Justice and Transportation, and by the airlines' unions and stockholders. If achieved, it would be the largest airline merger ever, and would surely precipitate a wave of further get-togethers.

American Airlines reportedly offered $3.7 billion for Northwest--a bid rejected by Northwest's management.

Delta and Continental have had their own "wide ranging discussions," presumably including the former's acquisition of the latter.

And further down the food chain, TWA and AirTran flirted, but stopped short (for now) of a trip to the alter.

Outside the U.S., Air Canada's buyout of Canadian International is now a fait accompli.

And British Airways and KLM have publicly acknowledged that they are in merger talks which would, if successful, create the world's third-largest carrier.

Notice that, with the exception of TWA-AirTran, each and every one of the above-mentioned mergers would, if enacted, tend to fracture (if not shatter) one or more of the existing alliances. I.e., the mergers being pondered are completely at odds with the existing strategic alliances.

Cases in point--

· United is an anchor partner in the Star Alliance. US Airways has a reciprocal frequent flyer program relationship with American. And American is a linchpin in the Oneworld alliance, Star's primary competitor.

· Northwest has tied its fate to the Wings alliance (with KLM et al). So, if they were to be acquired by American, Wings would lose its key member. Or would American quit Oneworld and join Wings? Either scenario would amount to a major realignment among the alliances.

· Delta is a founding member of the SkyTeam group (Aeromexico, Air France, Korean); Continental is partly owned by Northwest. Therefore, a Delta-Continental merger would have a major impact on both of those groups--strengthening one, weakening the other.

· British Air is a critical component of Oneworld, as is KLM of Wings. If BA and KLM merge, either Oneworld or Wings loses its key European partner.

Globalization + M&A = ?

So, on the one hand we have the movement toward globalization; and on the other, the movement toward consolidation. While common sense might suggest that airlines would choose to merge with airlines they already have strategic relationships with, the reality has proven to be very different.

What does all this mean for the industry, for alliances, and for your miles?

The globalization trend is likely to continue under any circumstances. The big unknown is the likelihood of the various mergers and acquisitions coming to fruition. If they do, the ensuing realignment of the major airlines among the current alliances will take precedence over further globalization. And in lockstep with the changes in alliance partnerships, there will be changes to your frequent flyer program earn-and-burn options.

Consumers should track both trends, making any necessary adjustments in their choice of airlines and frequent flyer programs as developments dictate. (And even if no changes are required, there's real drama in the unfolding of this period in the history of commercial aviation. Don't miss it!)