CASE: Connecting within Oneworld Following 2010 approval by U.S. and Japanese authorities for antitrust immunity, American Airlines (AA) and Japan Airlines (JAL) began sharing routes in 2011 that connect mainland North America with East Asia through a nonequity joint venture. Flights between Honolulu and Japan are not included in the agreement. This joint venture is similar to one forged among AA, British Airways, and Iberia for trans-Atlantic travel that began operating in 2010. In both cases, the agreements allow representatives from each airline to jointly manage capacity, sell and promote space on flights operated by each other, divide revenues, and schedule connecting flights. The major thrusts for these ventures are to cut operating costs by better controlling capacity, avoid disruptive price competition among them, and schedule so that there are more and better departure times and connections for passengers. The proposals are merely extensions to a historical series of alliances linking international airlines. In fact, the airline industry is unique in that its need to form collaborative arrangements has been important almost from the start of international air travel because of regulatory, cost, and competitive factors. In recent years, this need has accelerated because of airlines’ difficult profit performance. In effect, the airlines have been squeezed. First, costs have been rising, particularly because of oil prices and the requirement for greater security since 9/11. For instance, the International Air Transport Association (IATA), which represents most global carriers, predicted a three-quarter decrease in profits from 2010 to 2011 because of crude oil prices. While pre-departure airport passenger-security checks are well publicized, some other costly airline security processes are not. These include, for example, providing governmental agencies with advance passenger information and working with freight forwarders and supply-chain operators to ensure the safety of cargo shipments carried on passenger aircraft. Second, there has been a long-term trend toward greater price competition, which hinders airlines’ ability to pass on increased costs to passengers. This situation has been exacerbated by the emergence of discount airlines and customers’ ability to search the Internet for lower fares. Third, the global recession has affected passenger demand negatively, and the airline industry has responded by adding capacity sparingly. Fourth, the Japanese nuclear disaster along with North African and Middle Eastern political turmoil have softened air passage demand to these areas. Although the growth in international passenger jet travel has been a major factor spurring globalization, no airline has sufficient finances or aircraft to serve the whole world. Yet passengers are traveling the whole world and perceive advantage in booking on airline connections that will minimize both distances and connecting times at airports, while offering them reasonable assurance of reaching their destinations with their checked bags more or less on schedule. Thus, airlines have increasingly worked together to provide more seamless experiences for passengers and to cut costs. The above discussion, however, should not imply that all cost cuts necessitate collaboration. For example, in recent years, airlines have implemented a number of cost-saving changes that cover the gamut from passengers’ ticket purchase to their arrival at destination. Online purchases of electronic tickets have largely replaced airlines’ need to pay hefty commissions to travel agencies and to issue and maintain costly inventories of paper tickets. Self-service check-in at airports reduces the need for agents. On board, especially on short flights, less is included in the price of the ticket, such as food, pillows, and headphones. In fact, the trip may be on one of the airlines’ discount subsidiaries. A Bit of History: Changing Government Regulations Historically, governments played a major role in airline ownership. Many government-owned airlines were monopolies within their domestic markets, money losers, and recipients of government subsidies. However, there has been a subsequent move toward privatization. What Governments Can Regulate Despite the move toward privatization, governments still regulate airlines and agree on restrictions and rights largely through reciprocal agreements. Specifically, they control: * Which foreign carriers have landing rights. * Which airports and aircraft the carriers can use. * The frequency of flights. * Whether foreign carriers can fly beyond the country—for instance, whether Iberia, after flying from Spain to the United States, can then fly from the United States to Panama. * Overflight privileges. * Fares airlines can charge. There have been several notable regulatory changes in recent years. First, the U.S. domestic market has been deregulated, which means that any approved U.S. carrier can fly any U.S. domestic route in any frequency while charging what the market will bear. Once deregulation was instituted, many U.S. airlines (such as Braniff, Eastern, and TWA) were competitively forced out of business. Within Europe, similar deregulation helped cause the demise of Sabena from Belgium. Second, there have been several open-skies agreements, which permit any airline from countries in an agreement to fly from any city in one signatory area to any city in the other signatory area. Further, these flights have no restrictions on capacity, frequency, or type of aircraft. For instance, the United States and Japan signed an open-skies agreement in 2010, which spurred AA to begin service between New York and Haneda International Airport in Tokyo, which is closer to downtown Tokyo than the airport at Narita. Third, European countries have permitted cross-national acquisitions, such as those by Air France of KLM and Lufthansa of Swissair. Why Governments Protect Airlines Four factors influence governments’ protection of their airlines: 1. Countries believe they can save money by maintaining small air forces and relying on domestic airlines in times of unusual air transport needs. For example, the U.S. government used U.S. commercial carriers to help carry troops to and from Iraq. 2. Public opinion favors spending “at home”—especially for government-paid travel. The public sees the maintenance of national airlines and the requirement that government employees fly on those airlines as foreign-exchange savings. 3. Airlines are a source of national pride, and aircraft (sporting their national flags) symbolize a country’s sovereignty and technical competence. This national identification is less important than it used to be, but it is still important in some developing countries. 4. Countries have worried about protecting their airspace for security reasons. This is less of a concern today, because foreign carriers routinely overfly a country’s territory to reach inland gateways, such as JAL’s flights between Tokyo and Chicago. Further, overflight treaties are quite common, even among unfriendly nations. For example, Cubana overflies the United States en route to Canada, and AA overflies Cuba en route to South America. Regulatory Obstacles to Expansion Even if airlines had the financial capacity to expand everywhere in the world, national regulations would limit this expansion. With few exceptions, airlines cannot fly on lucrative domestic routes in foreign countries. For example, JAL cannot compete on the New York to Los Angeles route, nor can AA fly between Tokyo and Nagoya. Further, the U.S. government limits foreign ownership in a U.S. airline to 25 percent of voting stock. Thus, airlines cannot easily control a flight network abroad that will feed passengers into their international flights. For example, JAL has no U.S. domestic flights to take passengers into Chicago for connections to Tokyo, but AA has scores of such flights. However, JAL has an advantage within Japan. Finally, airlines usually cannot service pairs of foreign countries. AA cannot fly between Brazil and South Africa, because the Brazilian and South African governments give landing rights on these routes only to Brazilian and South African airlines. To avoid these restrictions, airlines must ally themselves with carriers from other countries. Collaboration Examples Related to Motives Cost Factors Certain airlines have always dominated certain international airports. They have amassed critical capabilities in those airports, such as baggage handlers and aircraft-handling equipment. Sharing these capabilities with other airlines may spread costs. For example, BA has long handled passenger check-in, baggage loading, and maintenance for a number of other airlines in London’s Heathrow Airport. The high cost of maintenance and reservations systems has led to joint ventures involving multiple airlines from multiple countries, such as ownership in the Apollo and Galileo reservation systems. Actually, the reservations systems are motivated by more than cost savings, inasmuch as the pooling of resources allows customers to get better service. Connecting Flights Given that governments restrict domestic or regional routes to their own carriers, airlines have long had agreements whereby passengers can transfer from one airline to another with a through ticket. However, there is a tendency for people to select from among the first routings that show up on computer screens, and routings from one airline to another often appear on screens after those involving only one airline. Further, when passengers see that they must change airlines, they worry more about making those connections across great distances within ever-larger airports. To help avoid this worry, airlines have agreed to code sharing—a procedure whereby the same flight may have a designation for more than one carrier. For instance, the same flight operated by BA from New York-JFK to London Heathrow is listed as AA 6143, BA 178, and Iberia 4618. Hence, AA passengers originating in, say Tampa, and connecting at JFK to Heathrow, may worry less about the JFK connection because they see themselves on the same airline all the way. However, these passengers may still need to go from one terminal to another to make the plane-change. In such a situation, airlines must adhere to a longer minimum connecting time when showing a through/connecting flight. The oneworld Alliance The oneworld Alliance comprises 12 airlines (AA, BA, Cathay Pacific, Finnair, Iberia, JAL, LAN, Malév, Mexicana, Qantas, Royal Jordanian, and S7). The adjacent picture shows the tail fins of these 12 airlines in alphabetical order going from the right to the left. Three other airlines (Air Berlin, Kingfisher, and Malaysian Airlines) are in process of becoming members. oneworld competes largely with two other alliances, Star and SkyTeam. Airlines in these alliances cooperate on various programs, such as allowing passengers to earn credits for free or upgraded travel on any one of them. In the case of oneworld, all members flying into Narita Airport in Tokyo have moved into terminal 2, which shortens legal connecting times among them. They also advertise their affiliation, and you may have seen aircraft painted with the airline’s name and logo along with the oneworld name. These alliances allow for considerable cooperation, such as code-sharing; however, antitrust regulations prohibit their members from coordinating routes, schedules, and prices. Thus, anti-trust immunity allows the advantage of performing this coordination.

The Trans-Atlantic Joint Venture The three airlines—AA, BA, and Iberia—have a combined network of over 400 destinations in over 100 countries and account for more than 6,000 daily departures. When their joint venture and anti-trust immunity were approved, they had collectively 48 different routes between Europe and North America that included 22 North American and 13 European cities. Of these 48 routes, they competed directly on only nine. In the short time since the airlines entered this joint venture, they have been able to coordinate schedules better for the convenience of passengers. For instance, AA and BA used to have flights leaving between New York-JKF and London-Heathrow within minutes of each other. They now operate 16 flights per day between those two airports and have been able to coordinate departure times so that the flights leave approximately one hour apart. This gives passengers more options in finding a departure time convenient to them, and it allows for more connecting flight alternatives in either direction. Further, the participating airlines can now designate their own flight numbers on domestic connections when they connect to trans-Atlantic destinations. For instance, Iberia shows one of its routes as San Diego to Madrid, even though both the San Diego–Chicago and Chicago–Madrid flights are operated by AA. Because of dual or multiple designations and the sharing of revenue, more than one airline’s sales force is trying to fill seats on the same route. The result is boosted sales, which allows the joint venture members to offer new routes, such as non-stop service between Chicago and Helsinki and between New York and Budapest that have come about since the joint venture’s formation. The AA–JAL Joint Venture JAL is also a large airline, serving 85 cities in 20 countries and territories. Its joint venture with AA has the same advantages and objectives as the joint venture across the Atlantic. Although at this writing, it is still in a fledgling stage, some changes are already quite notable. By altering each company’s flight times between Chicago O’Hare and Tokyo Narita and tweaking schedules of connecting flights in both cities, many more passengers can make connections within two hours. For instance, 22 more flights from 20 more departure cities can make such connections for travel from O’Hare to Narita. JAL has moved its Chicago O’Hare flights from the international terminal to be adjacent to AA. Meanwhile, AA has moved its Japanese offices to JAL’s headquarters building, a move that will ease communications between the two airlines. For example, the two airlines are helping each other with cultural questions such as JAL’s help with AA’s public address announcements in Japanese to make them more meaningful to Japanese passengers. Meanwhile, plans are afoot for greatly increasing code sharing between the two airlines, especially to points beyond gateway cities, such as showing a JAL flight as Tokyo–Salt Lake City and as an AA flight beyond Tokyo to JAL-served cities such as Hanoi. Why Not a Merger or an Acquisition? To begin with, governmental regulations, such as the ownership requirements we have discussed, would prevent a merger or acquisition. However, even if they did not, there are daunting problems in fusing companies together, especially airlines from different countries. For example, the respective pilots’ unions are strong and operate under different operating and compensation systems. The proposed joint venture, however, allows each company to keep its own identity and to operate independently except for the coordination of the trans-oceanic routes. In addition, each of the airlines in the joint ventures as well as the other airlines within oneworld has developed its own culture and brand to appeal to its own nationality. For instance, BA is still strongest with British passengers as is JAL with Japanese passengers. By keeping separate identities, despite sharing flights, the member airlines can capitalize on the differences. Nevertheless, there are natural extensions that are possible by strengthening collaboration, such as having check-in counters worldwide that handle all oneworld passengers and combining more airport lounges as a cost saving measure. It is probably safe to say that future cooperation will strengthen rather than weaken among oneworld members. QUESTIONS 1. Both the Star and Sky Team alliances have depended more on mergers and acquisitions (M&A) than has the oneworld alliance. For instance, Delta and Northwest (Sky Team) have merged, as have Continental and United (Star). What are the advantages and disadvantages of M&A versus non-equity alliances in this industry? 2. Some airlines, such as Southwest, have survived as niche players without extensive international connections. Can they continue this strategy? 3. Why should an airline not be able to establish service anywhere in the world simply by demonstrating that it can and will comply with the local labor and business laws of the host country? 4. The U.S. law limiting foreign ownership of U.S. airlines to no more than 25 percent of voting shares was enacted in 1938. Is this law an anachronism, or are there valid reasons for having it today? 5. What will be the consequences if a few large airlines or networks dominate global air service? 6. Many airlines have recently been no more than marginally profitable. Is this such a vital industry that governments should intervene to guarantee their survival? If so, how? 7. What methods could JAL and AA use to divide revenue and expenses on code-shared routes?