SF Gate: Airlines teaming up to share routes, costs/Alliances help weather rough times

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Wednesday, February 4, 2004 (SF Chronicle)
Airlines teaming up to share routes, costs/Alliances help weather rough tim=
es
David Armstrong, Chronicle Staff Writer


   Trying to bolster a badly sagging bottom line any way they can, the
nation's major airlines are increasingly signing up in global alliances
designed to lure and pamper lucrative frequent fliers.
   Such alliances, airline executives say, can work well for carriers and
consumers alike.
   For the airlines, global alliances generate revenue, reduce operational
costs, eliminate duplicated services and extend air routes.
   For travelers, they promise smooth transfers between airlines on long-
haul flights, worldwide access to swank airport lounges, shared
frequent-flier programs and other attractions.
   That's in theory. In practice, glitches happen, and partners sometimes
blame each other for problems with systems that are not fully integrated.
Passengers, when changing airlines, sometimes find glaring inconsistencies
in service.
   Nevertheless, airline alliances can make for more comfortable travel for
consumers and pump up revenue for carriers such as United Airlines, which
has taken in several hundred million dollars a year from shared ticket
revenue.
   In the very early days, cultural differences between the airlines led to
conflict and unwieldy arrangements. But "after a very shaky start, these
things appear to be stabilizing," said Darryl Jenkins, director of the
Aviation Institute at George Washington University in Washington.
   The three global alliances -- Star Alliance, Oneworld and SkyTeam -- were
initially loose partnerships of a handful of carriers. More recently, the
alliances have become much larger and more tightly knit, as recession, war
and fears of terrorism have prompted member airlines to scramble for a
competitive edge.
   Such alliances, observed airline industry pundit Joe Brancatelli, allow
major carriers to retain a highly visible global presence even as the
airlines have cut back their international flights.
   "As they have retreated to code-share service with international carrier=
s,
the Big Six have withdrawn flights from dozens of overseas markets,"
Brancatelli observed on his Web site, www.joesentme.com.
   United Airlines, the world's second-largest carrier, sees its membership
in the Star Alliance as part of its plan to cut costs and raise revenue so
it can emerge from Chapter 11 bankruptcy protection.
   Star Alliance membership also proved helpful for crisis management, given
that many countries have no close equivalent of Chapter 11 and wrongly
equate filing for bankruptcy with liquidating a company, said Graham
Atkinson, United senior vice president
   "The alliance members did a great job sustaining our credibility when it
was being seriously questioned a year ago," said Atkinson, who also chairs
the Star Alliance management board. "The PR message they put out in
important places like Germany let people know we were still flying."
   Beyond the credibility issue, there is a matter of cold cash.
   United saves money by ceding unprofitable routes such as San Francisco-
Auckland to Star Alliance partner Air New Zealand and by directing United
passengers to jointly operated lounges, such as a sleek new Star Alliance
lounge in Zurich, Switzerland, according to United spokesman Stephen Roth.
   United also hopes to save money by signing on to a new Star Alliance Fuel
Co. This company will make joint purchases of jet fuel, whose volatile
prices often keep airline executives awake at night.
   Incorporated in Delaware, the fuel company should be up and running this
year, said Atkinson. A smaller joint purchasing program at London's
Heathrow Airport saved United $40 million last year, according to Roth.
   United, which entered Chapter 11 in December 2002, makes money by
splitting ticket revenue with alliance partners such as Japan's All Nippon
Airway. ANA ferries United passengers from Tokyo Narita airport to smaller
markets in Japan, where ANA is strong and United doesn't operate.
   Additionally, ANA operates daily, nonstop flights between Washington, D.=
C.
, and Tokyo that bear United flight numbers and carry many passengers who
book their flights through United, spokesman Tom Fredo said.
   Passengers can earn frequent-flier miles redeemable on any member airline
in the Star Alliance, which has 16 members, including Lufthansa, Singapore
Airlines and Air Canada.
   Eighty percent of the revenue typically goes to the operating airline, s=
ay
airline industry experts, while the remaining 20 percent stays with the
ticketing airline. Such arrangements can be lucrative. United earned $245
million in 2000 through ticket revenue splits with Star Alliance partners,
said Atkinson, noting the most recent figure "is considerably north of
that."
   United, which co-founded Star Alliance in 1997, is one of the most
internationally minded U.S. carriers, and counts its hub at San Francisco
International Airport as its largest source of international flights.
Additionally, the Bay Area has the largest concentration in the world of
members of Mileage Plus, its frequent-flier program, United officials say.
   The economics of the aviation industry, which requires a large labor for=
ce
and big reserves of capital, have made airline alliances necessary, said
Tony Tyler, director of corporate development at Hong Kong's Cathay
Pacific Airways.
   Cathay is a member of 5-year-old Oneworld, whose members include American
Airlines, British Airways and Australia's Qantas.
   In a rational world, Tyler said, big international airlines would be
allowed to pursue outright mergers and acquisitions. But concern for
national security and national pride won't permit regulators to go for
cross-border mergers. As a result, he said, an industry that has arguably
done more than any other to bring the world together is hampered in its
own attempts to globalize.
   The toughest opponent of aviation globalization, Tyler said, is the Unit=
ed
States, which limits foreign ownership of airlines to 25 percent.
   "This is from the same people always urging openness and transparency," =
he
said of U.S. authorities.
   Without outright mergers, airline alliances are the next best thing, said
Kevin Mitchell, chairman of the Business Travel Coalition, a trade
organization for corporate travel planners. However, they do run into
problems, he added.
   "Business class on one airline can be very different from business class
on another," Mitchell observed. "I know of one CEO who took a flight to
Japan on a partner of his usual airline and found there was no AC
connection for his laptop computer in business class. He was irate."
   Accountability can also be a problem, said George Washington University's
Jenkins. "If a bag gets lost, they don't know where to affix the
blame."Such problems are only growing pains for aviation alliances,
airline executives say. In any case, alliances are not going away anytime
soon. In fact, greater integration is in the flight plan.
   The Star Alliance, for example, plans to roll out electronic ticketing by
the end of this year among all its member airlines, which will grow to 17
when US Airways joins this summer.
   The alliance is also relocating its members to one central terminal at
Tokyo's busy Narita airport, the better to ease interline transfers as
airlines become ever more closely linked.

Global air alliances
   Star Alliance
   Founded: 1997
   Members: 16, including United Airlines, Lufthansa. US Airways will join
this summer.
   Network: 679 airports in 129 countries
   Oneworld
   Founded: 1999
   Members: 9, including American Airlines and British Airways
   Network: 570 airports in 134 countries
   Skyteam
   Founded: 2000
   Members: 8, including Delta Air Lines and Air France
   Network: 492 airports in 114 countries
   Source: Chronicle research
   E-mail David Armstrong at davidarmstrong@xxxxxxxxxxxxxxxx=20
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Copyright 2004 SF Chronicle

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