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Ties in the skies

Each venture could continue to add members as

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Each venture could continue to add members as governments agree to liberalise routes to and from their international hubs. Partners are also inching their way towards a situation where one carrier generates as much revenue from selling a seat on an ally’s flight as they do their own. It is an easier goal to achieve when each partner has complementary route networks. “You want to stop worrying about which carrier a customer is on and say, ‘how do we get more business in total?’ ” says Larry Kellner, Continental’s chief executive. For those carriers left outside the various ventures and alliances, the future looks more uncertain, leading to questions as to whether they can continue to go it alone or accept the need to join an alliance themselves. “If they do succeed,” says Mr Branson with reference to his arch-rivals BA and American. “I suspect we’re going to need a big brother.” ‘Their model is what we’re trying to achieve – they were pioneers’ The 1989 leveraged buy-out of Northwest Airlines , a troubled US carrier, would lay the framework for a new era in international air travel. Twenty years after the buy-out, the joint venture that the Minnesota-based company eventually formed with one of its investors – the Dutch airline, KLM – remains the “template” against which all other airline partnerships are measured, says Tom Horton, chief financial officer at rival American Airlines. “Their model is what we’re trying to achieve over the next 18-24 months,” says Glen Hauenstein, an executive vice- president at Delta, now the world’s largest airline and a venture partner with Air France-KLM. “Northwest and KLM were the pioneers.” Yet the two airlines were not always viewed that way. By the late 1980s KLM had grander ambitions than its limited domestic travel market could meet, and it soon sought ways to work in partnership with its newfound American investment. Northwest was an also-ran airline, too. The carrier’s hub cities in Minneapolis and Detroit were less than ideal for international routes, especially when compared to the coastal strongholds of peers such as American and United Airlines.
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But in 1993, the US reached a landmark Open Skies accord with the Netherlands, removing restrictions that had limited their airlines’ access to each other’s airports. KLM and Northwest sought immunity from US antitrust laws, and by 1997 had formalised a joint venture. The two airlines would soon come as close to operating one transatlantic network as possible without actually merging. They shared revenue on routes, merged sales forces, honoured one another’s frequent-flyer miles, co- ordinated fares and standardised business-class seats. By the time Northwest was sold to Delta last year, the venture had created $4bn in additional revenue and established the carriers’ most profitable routes – such as Amsterdam to Minneapolis – according to a former Northwest executive. Their success has inspired many imitators. “When you look at something, and say, ‘Hey, this is working,’ it spurs competition,” says Larry Kellner, Continental’s chief executive. “It says, ‘Hey, we better get on board.’ You see everyone else look at the model.” Copyright The Financial Times Limited 2009. Print a single copy of this article for personal use. Contact us if you wish to print more to distribute to others. "FT" and "Financial Times" are trademarks of the Financial Times. Privacy policy | Terms © Copyright The Financial Times Ltd 2009.
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