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Ties in the skies

There are also fears that alliances will eventually

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There are also fears that alliances will eventually impact on domestic markets. US antitrust regulators worry that two local allies within the same international venture may find co-ordinating on domestic routes too tempting to avoid. Trade unions meanwhile fear airlines will use alliance membership to staff their fleets with pilots and flight attendants from countries with lower wages. Airlines usually defend their alliances and ventures with a simple mantra: a healthy airline is good for employees, shareholders and passengers; stable profit growth lowers the cost of capital, which in turn helps keep fares low. Yet for all their potential benefits, many industry insiders say these ventures fall short of the savings they would reap if governments allowed cross-border mergers. At best, alliances and cross-border ventures can help carriers to fill empty seats while they bide their time for changes to foreign-investment laws. “Alliances are much more about the revenue side,” says Mark Streeter of JPMorgan Chase. “If you want to rationalise costs, you merge.” In a world with no regulatory barriers, he says, BA and American Airlines “would love to explore a merger instead of having alliances”. Alliances and ventures currently also lack a means of guaranteeing that vendors will be paid, or a way to back those obligations with real assets – restricting their collective business operations and thus their overall purchasing power. “Let’s say I’m Russia and I want to sell jet fuel to the Star Alliance,” says Vicki Bryan of Gimme Credit, a debt research firm. “Who do I go after if Star doesn’t meet its obligation?” Alliances “are big franchises that don’t own any stores”, she adds. Mindful that merger restrictions may still be in place for another decade or two, executives believe their ventures will continue to evolve in ways their predecessors would have never thought possible. Star’s immunised venture is seeking ways to harmonise technology processes, from reservations to baggage handling, while also cutting costs through the joint purchase of in-flight entertainment systems, catering services and fuel. In what Glenn Tilton, United’s chief executive, describes as the “next iteration of the discussion”, Star is also exploring forming a special-purpose entity to help the venture build a capital structure of its own. Backed by members, this vehicle could open up even more possibilities for volume discounts. The ability for airlines to forge closer ties with partners has only come after hard-fought battles to secure immunity from antitrust rules. SkyTeam’s Air France, Czech Airlines and Delta Air Lines won such immunity in 2002. Star’s Lufthansa and United formed an immunised joint venture in 2003. They will add five others, including Continental Airlines, this year. BA and American Airlines sought immunity to form a venture of their own in 1997 and 2001, only to ditch both efforts once they deemed the cost – regulators’ insistence that they surrender take-off and landing slots at London’s Heathrow Airport – too great. The carriers applied a third time last year and expect a decision by the end of October. Each venture could continue to add members as governments agree to liberalise routes to and from their
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There are also fears that alliances will eventually impact...

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