Saturday, May 17, 2008

Possible Alliance between American, Continental, and British Airways

With the proposed merger of Northwest Airlines and Delta Airlines, both members of the SkyTeam Alliance, Continental Airlines, also a member of the SkyTeam Alliance, is reconsidering its future with the team.

Continental recently ended talks with United Airlines for a possible merger and said it would not pursue any combination with another airline right away. Continental’s Chief Executive Officer, Lawrence Kellner said in a message to his employees that the airline would be better off without a merger:

"We have significant cultural, operational and financial strengths compared to the rest of the industry, and we want to protect and enhance those strengths -- which we believe would be placed at risk in a merger with another carrier in today's environment," Kellner told employees.

What Continental is considering however is an alliance with American Airlines, and possibly British Airways as well. With this, Continental would pull out of the SkyTeam alliance (as the new Delta will vastly outsize and outrank Continental), and join the OneWorld alliance.

The idea behind the alliance with American Airlines would provide many of the benefits of a merger such as cost mitigation by eliminating operations redundancy without many of the shortfalls such as the high cost of re-configuring aircraft, and the headaches of combining union staff.

Adding British Airways into the loop would give the trio a 60% market share of flights between London and the US. Because of this, the proposed alliance may encounter problems when trying to seek anti-trust immunity. American and British Airways have unsuccessfully sought immunity twice in the past, but the thought is that they have a greater chance now thanks to the recent US-EU Open Skies Act that granted such immunity to Delta, Northwest, and Air France- KLM, all SkyTeam members.

If the alliance were to go through, OneWorld would also have the majority market share of the New York area. American currently boasts a hub at John F. Kennedy Airport, as well as a dominant market share at LaGuardia. Continental dominates operations at Newark’s Liberty Airport. This New York domination would allow the carriers to drive up prices in the area, which could warrant anti-trust scrutiny from the DOJ.

The alliance would also mean the end of the codeshare and mileage earning agreements between Continental and Virgin Atlantic Airways. Next, restructuring of Continental’s OnePass loyalty program would most likely be necessary being that the program is currently not compatible with American’s AAdvantage program.

American’s top-tier level in the program, Executive Platinum, requires 100,000 flown miles in a calendar year, whereas Continental’s top-tier level, Platinum, requires only 75,000 miles. The requirements must be identical in order to provide fair benefits throughout the system. Continental also provides its complimentary upgrades in a very different manner than American. Continental’s system favors travelers who pay more for their tickets, whereas American’s favors travelers who book more in quantity and book in advance.

What I Think:
This merger would add value to the OneWorld network as many new non-stop routes will be available to OneWorld passengers. Anti-Trust approval will be difficult however because American and Contiental have overlapping hub-cities. New York will be dominated, as well as the Texas markets. American is based out of Dallas, and Continental is based out of Houston.

Adding so many more elites to the upgrade pool however, as well as Continental's rewards system that clearly values generated revenue over travel frequency, it just may become harder to redeem awards in the OneWorld system. Of course, this is one of the cost saving benefits the airlines will receive.

As an American Airlines passenger, I would look forward to being able to fly Continental's industry leading product in the OneWorld alliance.

Written By:

Alex Early
The Early Air Way, LLC

1 comment:

Anonymous said...


Do you (or anyone) think this will impact air prices for other airlines too?