Continental Talks to AMR, BA About Alliances
By SUSAN CAREY, MELANIE TROTTMAN and DANIEL MICHAELS
May 1, 2008; Page B3
Days after it declared outright mergers too risky, Continental Airlines Inc., is reviewing its alliance options and already is talking to AMR Corp.'s American Airlines and British Airways PLC about opportunities,BA disclosed in a regulatory filing Wednesday.
But for now, the Houston-based airline's hands are tied. Existing contracts bind it to current SkyTeam partners Delta Air Lines Inc. and Northwest Airlines Corp. in the U.S. until next year, said a person familiar with the matter.
Continental's talks with AMR and BA could lead it to drop its current membership in the SkyTeam airline marketing group for more favorable status in oneworld, a rival club anchored by American and BA. American confirmed BA's statement and Continental declined to comment.
SkyTeamincludes Delta and Northwest, two airlines that have agreed to merge,creating a bigger carrier that may marginalize Continental within the alliance. Continental is expected to try to restructure its existing relationships or land a new deal to improve its clout and financial returns as a standalone carrier, said the people familiar with the matter.
These people said Continental likely will be wooed by all three of the world's big airline marketing groups, given its strong hub in Newark,N.J., next to New York and extensive Latin American route network from its Houston hub.
Alliances are ways for airlines to boost their revenue by sharing passengers and linking frequent-flier plans. The big appeal to airlines: The agreements avoid the labor tensions, service disruptions, heavy regulatory hurdles and high costs of merging.
The new 'open skies' treaty between the U.S. and European Union is pressuring airlines to rethink their partnerships. New transatlantic routes are open to increased competition from more airlines. Meanwhile,a new round of negotiations to start soon on that treaty could raise limits on foreign ownership of U.S. and European carriers.
Continental could wind up remaining in SkyTeam, despite its intention stated after the Delta-Northwest merger was announced of reassessing that relationship, if the terms were sweetened. But Delta and Northwest haven't yet proposed ways of encouraging Continental to stay put, said a person familiar with the matter.
Alternatively,Continental could consider a seat in the Star Alliance, the third and largest global group, one anchored by UAL Corp.'s United Airlines and Deutsche Lufthansa AG. Continental on Sunday unexpectedly passed over United as a potential merger partner.
But suitors will have to be patient because Continental has its hands tied for now by existing contracts governing its domestic code-sharing agreements with Northwest and Delta, said the person familiar with the matter.
Principally,Continental is tethered to Northwest and Delta in a three-way domestic code-sharing agreement that runs until 2012. Unless lawyers find a way out, a person familiar with the matter said, Continental can't jettison that contract until the Delta-Northwest merger transaction closes, and then only after giving at least nine months notice. In the interim, the contract has exclusivity provisions that would prevent Continental from code-sharing with others, this person said.
Code-sharing involves one airline putting its flight code on some of its partners' flights so it can sell them as if they were its own. Such arrangements,which have become widespread in the past decade, are reviewed by the U.S. Department of Transportation and can be blocked if they are deemed anticompetitive.
While Continental isn't yet the master of its own destiny, the current code-sharing brings extra revenue, and Continental's standing in SkyTeam also generates value even though the carrier isn't as deeply embedded in the group as Delta, Northwest and their main European partner, Air France-KLM SA, parent of Air France and KLM Royal Dutch Airlines.
Some airlines, such as Delta and Air France, have U.S. government antitrust immunity to jointly set schedules and fares and share revenue across the Atlantic. Northwest and KLM do as well. In late May, the four are in line to obtain final regulatory approval to act in concert over the Atlantic, whether the Delta-Northwest merger goes ahead or not.
Continental hasn't sought such antitrust immunity and thus isn't in the sort of joint venture within SkyTeam that would require it to share revenue with others from its flights. But that could change if Continental moved ahead with a new relationship with other rivals or with American and BA, whose current bilateral alliance within oneworld isn't as robust as some others because regulators have opposed giving the carriers antitrust immunity so far.
Write to Susan Carey at [email protected], Melanie Trottman at [email protected] and DANIEL MICHAELS at [email protected]
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