BY DAVID FIELD and DONNA ROSATO
USA TODAY
The endgame of airline deregulation has begun.
Twenty years after Congress freed the industry from route and price controls -- and a decade after a wave of mergers created a new breed of megacarriers -- the nation's biggest airlines are choosing up sides for the last act. The objective: to be a player in one of the handful of global airline networks that will dominate air travel in the next decade.
That's why Delta Air Lines and United Airlines Friday are expected to announce a plan to link their U.S. flights, a day after US Airways announced it was linking up with American Airlines. The two rival alliances follow the pattern set earlier this year by Continental Airlines and Northwest Airlines, which proposed in January to ally domestically. They will coordinate schedules, but will not set fares jointly.
"I think this is the final consolidation phase of the airline industry," said Salomon Smith Barney analyst Julius Maldutis. Both deals will coordinate flight schedules and frequent-flier plans but fall short of mergers. Neither involves an equity stake or any exchange of cash or securities. Northwest is paying $519 million for a 14 percent stake in Continental.
US Airways and American don't plan to share flights in what are called code-sharing arrangements until they've won union approval. That, noted PaineWebber's Sam Buttrick, "requires labor leaps of faith" that the practice wouldn't result in job reductions. The issue will be addressed in further discussions between US Airways and its pilots, and between American and its pilots, the two companies said.
But American's and US Airways' basic proposal to link frequent-flier plans should be in place by late summer, even without immediate labor approval.
This plan would let a US Airways customer use miles racked up flying between Pittsburgh and Boston to pay for a trip to an American-served destination such as Hawaii, which is far beyond US Airways' East Coast territory.
The United-Delta plan, which is expected to involve code-sharing, would similarly allow a passenger to use United frequent-flier points earned between Chicago and Washington, D.C., for instance, to fly on Delta's strong Scandinavian or Eastern European connections.
It's not just the U.S. airlines that are forming partnerships. Airlines all over the world are doing it.
Sources familiar with the US Airways-American agreement insist that the domestic plan will not impede American's long-standing desire to form a parallel but larger-scale alliance with British Airways.
European Commission and U.S. congressional concerns about competition have kept that plan on hold since June 1996.
But other global alliances have continued. United Airlines has formed a worldwide pact with Germany's Lufthansa, the Scandinavian Airlines System (SAS), Thai Airways, Air Canada and Brazil's Varig. Delta has links with Sabena, Air France and a host of smaller European carriers. The Delta-United deal, say those familiar with it, does not contemplate changing these partnerships but focuses on domestic service.
Worldwide alliances will continue, Buttrick said. "There's only so much you can do in this country," he said.
"This is deja vu all over again," joked George Hamlin, Global Aviation Associates consultant, who compares the alliance proposals with the airline mergers of the 1980s. That wave brought medium-size carriers such as Western and Piedmont airlines into the fold of today's majors and created the "big three" of American, United and Delta.
If the three proposed alliances are consummated, the United States -- the world's most prosperous air travel market -- will be divided among three pairs of megacompetitors, each with coast-to-coast reach. Together, the three will control 77 percent of the U.S. industry's domestic traffic.
Almost every major U.S. city will be dominated by a member of an alliance, with Chicago being the leading exception.
But because the alliances would in effect divvy up the United States, Congress could move to block the deals, even though they are not mergers and do not involve equity investments, Global Aviation's Hamlin said.
"For the regulators, the timing of this may be a bridge too far," he said.
An already excited Congress will zoom in on possible antitrust concerns, PaineWebber's Buttrick said. The airline industry's future "is entirely a function of how far the government goes to allow mega-alliances. ... It's about re-dividing the pie. Nobody's trying to make the pie any bigger here."
Among the concerns of those charged with guarding competition will be fares and services on the "trunk routes" between major business centers that account for most of airline industry traffic and profit.
In the top 25 routes over 750 miles, American was No. 1 or No. 2 on 12 routes. United was No. 1 or No. 2 on 15; Delta was No. 1 or No. 2 on five.
For example: -- Between Atlanta and Chicago, the nation's 11th-largest route under 750 miles, Delta has 38 percent of the passengers and United has 23 percent. -- Between Detroit and New York, the 25th-largest route under 750 miles, Northwest has 66 percent and Continental has 25 percent of the passengers.
If the two new proposals go through, "the Continental-Northwest alliance will be less valuable, but more necessary," ING Barings Furman Selz analyst Ray Neidl said.
Labor objections, notably from Northwest unions, have delayed that transaction, and the Justice Department already has made a second request for documents from the two.
But backers of the American and US Airways plan stress that their proposal involves no board seats, as does the Northwest-Continental plan, and so raises fewer antitrust questions.
However, although the US Airways-American plan involves no exchange of cash and no board seats, it is thought that the memorandum does not bar future investment.
Northwest "is optimistic" it will consummate its deal by June, said Northwest Airlines Chief Financial Officer James Lawrence. Northwest spokesman Jon Austin insisted the airline will overcome union resentment that's grown since contract talks began in late 1996.
But what about airlines that don't have an alliance?
"They're going to be mighty cold," Buttrick said.
"TWA is the most likely to get left out. The others in one way or another will be part of an alliance because they have something to offer."
"Southwest now becomes the focus," Hamlin said. Southwest Chief Executive Herb Kelleher "is the one who can keep the industry honest" with his airline's low-fare formula.
"I'd expect an anti-alliance deal from Southwest (airlines). They've always marched to a different drummer," Buttrick said. Others such as Alaska "in one way or another will be part of an alliance because they have something to offer," he said. Alaska potentially "gives Northwest valuable presence and feed up and down the West Coast. America West has a nice system in the Southwest and may be a good fit for Northwest and Continental," which already has a limited service agreement with Phoenix-based America West. "If the economy remains good, TWA will be OK," Buttrick said. "Look at their main hub, St. Louis. It's in direct competition with all other major airlines: Chicago, Houston, Detroit-Minneapolis and Dallas."
Long-term, a foreign carrier may take interest.
"In the age of megacarriers, you have to do something with somebody," Buttrick said.
