Monday, July 14, 2008

Airline alliances: A game of musical chairs

More than a month ago, Continental Airlines announced that it would leave SkyTeam in favor of joining the Star Alliance. Everyone covered that announcement, but no one dug into why.

USA Today's David Grossman finally breaks it down for us:
  • Continental's Newark hub competes with Delta's Kennedy hub for transatlantic flights to Europe, whereas Star Alliance has no significant transatlantic presence in New York.

  • Continental couldn't make any big moves without approval from Northwest Airlines, which on account of a previous investment owns a "golden share" in the company and can veto any motion made by Continental's Board of Directors.

  • Once Northwest is acquired or merges with another airline, Continental can buy that golden share back for $100.
In other words, Continental has seen the value in leaving SkyTeam for a long time now, but it couldn't act on that desire until Delta and Northwest announced their merger.

What will this shakeup do to the industry? Well, as Grossman observes, Continental brings immediate value to the Star Alliance by adding a New York hub to the route maps. Continental also has a strong presence in Central and South America, which meshes nicely with United's strong Pacific presence.

At the short end of the deal is perennial loser U.S. Airways. With hubs in Charlotte and Philadelphia, my least-favorite airline has always been a bit pinched by United's hub in Washington D.C. Throwing Newark onto the stack makes U.S. Airways even less desirable.

Of course, U.S. Airways could make its own move, the most likely course of which would be to join American Airlines as a member of oneworld. There's been no word from CEO Doug Parker -- but now that alliances are in motion, does he want to risk being the only one standing when the music stops?

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