June 20, 2008
United and Continental's New Alliance
Less than two months after merger negotiations were called off, Continental and United Airlines announced an alliance between the two which would allow for linking international networks, technology sharing, and honoring each other’s passenger benefits. Under the new agreement, Continental will join the Star Alliance, the world’s largest alliance network, which was co-founded by United and includes notable foreign carriers such as Germany’s Lufthansa and Canada’s Air Canada. In order to take full benefit of alliance opportunities, the carriers will have to receive antitrust immunity from both the United States and the E.U. Such immunity would allow for greater streamlining and collaboration, particularly on flight scheduling, marketing, and the choice of aircraft for particular routes.
Yesterday’s announcement, while no doubt a surprise in light of speculation that Continental was poised to announce a similar alliance arrangement with American Airlines, offers a few hints on the continued vitality of United Airlines. Despite not being able to pull off a substantial merger either Continental or Delta Airlines, clearly they remain enough of a competitive force to attract a deal which won’t even begin to pay dividends for nearly a year or more. (Before Continental can fully get on board, they must give nine months notice to their current alliance network, SkyTeam, and that will have to wait until the announced Delta/Northwest merger receives regulator approval.) As many analysts have pointed out, this also brings the carriers one step closer to a full-on merger. Should that go through, Continental and United would become the single largest carrier in the world—a prospect which may look less inviting in a market made volatile by spiraling fuel costs but may, in fact, prove opportune after the new alliance’s benefits are reaped.
With that said, it should not be forgotten that the alliance system is, in many instances, a necessary half-measure prompted by abiding ownership and control restrictions worldwide. While the EU has indicated during both stages of the “Open Skies” negotiations with the U.S. that it would be more than willing to relax restrictions reciprocally, the U.S. has held fast to the current foreign investment cap of 25% voting stock, 49% total equity. With mergers options essentially foreclosed at the international level, carriers like United and Continental are forced to look at a dwindling number of partners; assuming everyone is in the (relatively) same financially unstable boat, mergers appear not only risky, but outright dangerous. On the other hand, cash-rich EU carriers such as Lufthansa and British Airways, both far better insulated from rising fuel costs due to the relative strength of the euro in relation to the dollar, could greatly expand the merger horizon by offering greater stability and expanded international access. But dreaming of such things won’t make them a reality. For U.S. airlines trying to survive today, they’ll take what they can get.
June 17, 2008
The Alitalia Saga Continues
The airline industry’s version of Nosferatu, Italy’s Alitalia, is back in the spotlight following the opening of the European Commission’s investigation into whether a €300-million loan constitutes illegal state aid. This new source of lifeblood may keep the carrier animated, but for how long? Most analysts had concluded that the collapse of KLM-Air France’s bid to purchase Alitalia amounted to the proverbial stake in the heart. Not so, said new Italian Prime Minister Silvio Berlusconi, who made the continuing operation and control of Alitlia by Italians one of the components to his political platform. If that wasn’t enough to raise eyebrows, a new wave of concerns came forth following the announcement that Antonio Tajani, a longtime political ally of Berlusconi, was tapped to become the new Transport Commissions for the European Union following former commissioner Jacuqes Barrot’s transfer to become the Commissioner responsible for Freedom, Security and Justice. Prior to his departure from transportation duties, Barrot had been highly critical of the Italian loan.
The obvious question which remains is how willing Tajani will be to strictly enforce EU competition rules against the stated agenda of his former cohort. In short, does he share in Barrot’s vision for robust enforcement against States which try to distort the market? In Europe, at least, there appears to be at least provisional satisfaction that Tajani can remain objective despite his ties to the current Italian government. The European Parliament gave a vote of approval today, satisfied with his repeated insistence that the treaties of the EU must be respected and that EU’s "one time, last time" rule with respect to airline bailouts—in this instance referring to Alitalia’s 2002 subsidy—will be maintained. During his grilling before the European Parliament, Tajani is reported to have stated: "I am not pocketable by any lobby." He went on to stress that Alitalia was no exception to the EU’s competition rules and that an investigation was already underway.
In the coming months, the European Commission will scrutinize whether or not the Italian government’s loan is or is not illegal state aid. The European Commission’s document, Guidelines for State Aid to the Aviation Sector, OJ C 244 (Oct. 1 2004), mandates that the Commission look into whether a government loan constitutes illegal state aid or if it is not, rather, equivalent to a regular investment transaction, the sort which a private stakeholder would make. In the matter of Alitalia, it will no doubt be difficult for the Italian government to claim that its substantial loan was the sort a private investor would make, given the carrier’s longstanding history of losing money and the fact that it relied on the government only six years ago to save it from insolvency. Given that the Commission is allowed to take into consideration market developments and the position of the airline vis-à-vis that market, Alitalia’s days as an outmoded, undisciplined, participant appear numbered. While the Commission has eighteen months to conclude its investigation, it will be interesting to see whether or not Alitalia, which reported a pre-tax loss of €215-million in the first-quarter, will even be around to see it.