Airneth Column
October 2010
By Paul V. Mifsud

Despite the fact that international airlines fly to many parts of the world, they are not truly global enterprises. Airlines do not participate in the global economy in the same manner as other industries. Unlike other forms of international trade, the provision of international aviation services is substantially limited by restrictive trade barriers based on such things as nationality based safety oversight, limitations on foreign market access and cross border ownership. With a few recent exceptions, airlines continue to access global markets through a system of government negotiated bilateral air transport service agreements that provide access to “gateways” in distant locations, but not to the local air transport markets.

In the era of the global economy, airlines have been developing strategies to overcome the limitations of this bilateral system. As these strategies evolve, some airlines may find that they have taken the wrong path. One such strategy is participation in a Branded Global Alliance (BGA).  Today, there are three major BGAs known as The Star Alliance, oneworld and SkyTeam.¹ Nearly fifty of the world’s airlines participate in one or another of these alliances with varying degrees of integration. As a result of recent US Department of Transportation (DOT) decisions, the shape of these alliances may be undergoing significant changes that will affect participants in ways unforeseen when they first joined their alliance.

To understand these developments, it will be helpful to review the role of these alliances. In the somewhat distant past, when airlines were heavily regulated, airline passengers and shippers accessed destinations around the world from national market to national market through a system of interline transfers between airlines. This was the product of the regulated air transport system of the IATA era, when airlines set uniform fares with multilateral interline agreements. Such a system is no longer an effective or reliable means to serve today’s fast paced business travel or modern budget conscious tourism. 

The global trend toward airline local and regional deregulation, privatization of national airlines and growth of local low cost airline competitors has forever altered the old ways. Moreover, these trends have affected the former economic stability of the major national airlines and limit their willingness to support unprofitable routes and services.

Nevertheless, the demands of the global economy require convenient and reliable access to all the markets of an expanding world economy. Development of the BGAs has been a response to these changing circumstances. However, these alliances are an evolving strategy that is very much a work in progress.

These BGAs have grown from the original modern cross border airline alliance based on antitrust immunity developed by KLM Royal Dutch Airlines and its partner Northwest Airlines as part of the United States’ first Open Skies agreement that was negotiated with the Netherlands in 1992. Since that time almost twenty years ago, this business form has evolved into three highly competitive air transport networks of planetary scope that link travelers and shippers to the far corners of today’s world  markets. Airlines that participate in the BGAs are able to offer their customers easy and efficient access to and from destinations on these networks.

But as noted above, the nearly fifty airlines participating in these alliances participate at different levels of network marketing and operational integration. The more integrated participants have been granted “antitrust immunity” (ATI) from one of the world’s most strict competition regimes i.e. the US “antitrust” laws. Those airlines with ATI are able to set prices, allocate routes and otherwise operate as though they are one airline. Among the airlines with ATI, some are global in extent and some are limited to specific markets such as “The North Atlantic.”

1. Star Alliance is composed of 28 major airlines including United Airlines, Lufthansa, air Canada, ANA, Swiss, SAS, BMI, etc.; oneworld contains 11 major airlines including American Airlines, British Airways, JAL, Iberia, Qantas etc. and SkyTeam has 13 major airlines including Delta, Air France/KLM. Alitalia, Aeroflot, china Southern, AeroMexico etc.