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Airline competition has become an international team game

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Continental Airlines was deep in merger talks with United Airlines in April 2008 as soaring fuel costs seemed to threaten their survival.

A linkup of the two carriers would have allowed them to combine networks and consolidate airport operations, trim flights and staff and gain pricing power with suppliers and consumers.

It would have put them in better position to compete with the soon-to-be-merged Delta Air Lines and Northwest Airlines.

But Continental abruptly pulled out of negotiations after earnings reports showed United’s financial position had weakened.

Since then, Continental, the top carrier at Newark Liberty International Airport, decided to do what may be the next best thing from its perspective: combine forces with United and other members of the so-called Star Alliance of airlines, and get the federal government to waive antitrust laws aimed at prohibiting price fixing and other forms of collusion.

Continental also sought antitrust immunity so that it and other Star members can act as one carrier by coordinating schedules and fares.

Continental’s decision to leave the SkyTeam alliance and join United, Lufthansa and others in Star is part of a larger trend: Rivalries increasingly are between international teams of airlines positioned to take advantage of less-restrictive international open skies treaties and not between individual carriers.

In the early 1990s, the global airline industry was comprised of individual carriers competing on routes connecting one city to another, said Kevin Mitchell, chairman of the Business Travel Coalition in Radnor, Pa.

“Now, public policy has given us a new model of networks competing with each other on a network basis, and it’s a whole new world,” he said.

The way the new battleground is shaping up since the United States and European Union entered into an open skies agreement early last year, Star competes with SkyTeam and both compete with the the 10-member Oneworld Alliance, which includes American Airlines, British Airways and Qantas.

The Department of Transportation granted antitrust immunity last year to Delta, its merger partner Northwest and four other SkyTeam players — Air France, Alitalia, Czech Airlines and KLM Royal Dutch Airlines. Oneworld carriers are waiting for a DOT ruling on their request for expanded immunity and a closer relationship between American Airlines and British Airways.

Continental’s inclusion in the Star Alliance, approved last month by DOT, will give Continental “more flexibility to serve their better customers,” said Raymond Neidl, an independent airline analyst. The arrangement should also make Continental better able to hold market share in the New York metropolitan area as Delta creates a domestic hub at La Guardia International Airport.

“Long term it should be beneficial for Continental and United,” Neidl said.

Transportation Secretary Ray LaHood said in a statement that the alliances “will benefit consumers, enhance competition and preserve jobs.”

Specific routes that will be operated cooperatively have not been identified, but Continental said Monday in a statement announcing it will join Star on Oct. 27 that the hub at Newark Airport “will play a particularly important role.”

The expanded Star agreements approved by DOT allow Continental to cooperate with nine Star Alliance members: Air Canada, Austrian Airlines, British carrier BMI, LOT Polish Airlines, Lufthansa, Scandinavian Airlines (SAS), Swiss International Air Lines, TAP Air Portugal and United. The DOT also approved a trans-Atlantic joint venture called Atlantic Plus-Plus, which involves Continental, Air Canada, Lufthansa, and United.

The four participants in Atlantic Plus-Plus expect “to operate a substantial portion of their international air services within the venture,” the DOT said in its final order, which gives the carriers 18 months to launch the effort.

“The venture, as well as the broader alliance, will create substantial new service options and fare benefits for consumers,” the department said.

However, the Department of Justice had voiced objections to parts of the expanded Star Alliance that it viewed as anti-competitive.

The DOT, which had the final say, acted on some of the criticisms, denying the airlines’ requests for immunity on routes where it would result in little or no competition. These “carve-outs” in the trans-Atlantic corridor include routes connecting New York (and Newark) to Copenhagen, Stockholm, Geneva and Lisbon, Portugal. Carve-outs also will be required on routes connecting New York and Ottawa.

The DOT’s approval, even with the carve-outs, allayed consolidation-minded airlines’ concerns that the White House would turn sharply away from the previous administration’s pro-merger and alliance stance, said Mike Boyd, a Colorado aviation consultant.

“For New Jersey business travelers (the agreements) will provide a convenient extension of routes from cities that we can fly to non-stop out of Newark,” said Sara Bluhm, assistant vice president for energy and federal affairs at the business and industry association, which represents more than 22,000 New Jersey businesses.

Travel will be “more seamless,” she said, adding that Continental’s greater reach from the Newark hub “makes New Jersey a more attractive place for foreign companies to come and do business here.”

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