Canadian Carriers Are Loved Mainly for their Friends - moves by Canadian airlines could shake up global air alliances

Brandweek, Oct 4, 1999 by Mike Beirne

Bid for Air Canada, Canadian Air reflects increasing role of alliances in setting strategy.

If there was any doubt whether alliances are changing the airline industry, just look at the attention two carriers north of the border are attracting. Air Canada and financially floundering Canadian Airlines are the targets of an unsolicited merger offer from Canadian conglomerate Onex, backed by American Airlines parent AMR. Canadian is one of American's partners in the oneworld alliance and Air Canada belongs to the Star Alliance with United, Lufthansa and others.

Canadian was granted permission by its federal government to talk with its rival about pricing, routes, assets--whatever, so it could find some way to survive. In pre-alliance days, unless the government stepped in, the airline likely would succumb if it failed to clean up its act and competitors would pick at the leftovers. But that scenario leaves American, which owns at least one-third of the troubled carrier, without a Canadian partner. So American swooped in under the guise of Onex to merge both airlines, ostensibly so the surviving carrier would jump to oneworld, leaving United and Star without a Canadian partner.

Alliances are a boon to member airlines because of the revenue generating potential, and business travelers perceive a true benefit, said John Diefenbach, a partner at branding consultant Wolff Olins, N.Y. and London. Frequent travelers will favor an alliance because it has preferred international connections and mileage-earning opportunities, so oneworld could be of supreme value for travelers to and from Canada, he said.

"Yes, this deal is a financial play, but it could not have happened without the context of oneworld being in the picture," said Diefenbach. "The dilemma of the merger is to make the airlines work effectively, but it seems like that issue is taken off the table. It's not so much a financial question anymore because the alliances are in the picture."

Not lying down, United said its relationship with Air Canada is of "fundamental importance." Air Canada since has rejected Onex's bid and the holding company's chairman said he expects Air Canada to present a counterbid for Canadian backed by United and Lufthansa.

Alliance membership could turn into a fickle commodity. Although technically a relationship still exists, Continental lost the potency of its code-sharing arrangement with Air France when the Paris-based carrier joined Delta to form a yet-to-be-announced group dubbed Wings for now. The Wings partners were courting Austrian Airlines, currently a member of the European Qualiflyer Group with Swissair, Sabena of Belgium and others, but Austrian announced it will join Star. Meanwhile, British Midland, with its coveted slots at London's Heathrow, is on everyone's dance card.

Besides recruiting alliance prospects, airlines continue to battle the old fashioned way with price and schedules. After scaling back its West Coast position several years ago, American is offering north-south routes in the western U.S. again thanks to the Reno Air acquisition. United shored up its LAX battlement this summer by adding 30 daily nonstop flights from L.A., including more service to western cities, Hawaii, Atlanta, Houston and Washington. The carrier also raided American's once impenetrable Dallas hub by adding three round trip flights to L.A. Continental, Northwest and Delta also announced fare sales for Texas destinations.

United is waging war on another front: Washington's Dulles Airport, where US Airways built up MetroJet, a year-old regional carrier created to fend off Southwest and Delta Express. But rather than go head to head with the leaner Southwest in Baltimore as originally planned, US Airways went to the nearby capital. United responded in a big way during April making Dulles an eastern hub and partnered with Atlantic Coast Airlines for jet service to New York's LaGuardia. Last month, US Airways Shuttle shot back with hourly flights each weekday from Dulles to Boston and New York's LaGuardia.

Not that partnerships are exclusive. When Atlantic ordered 20 additional Bombardier aircraft, it also formed a wholly owned subsidiary to operate those planes and code-share with Delta.