Cathay's Alliance Poses Threat to Rivals in Asia

The Asian Wall Street Journal

Tuesday, September 22, 1998

Airline Industry Faces More Group Competition

By DIANE BRADY

Staff Reporter

HONG KONG – Cathay Pacific Airways' move to form a massive global alliance with four major international carriers could shake up competition in Asia and force rivals to find partners of their own.

After months of intense speculation, the Hong Kong carrier said Monday that it has joined forces with British Airways, AMR Corp.'s American Airlines, Canadian Airlines and Australia's Qantas Airways to form a aviation behemoth known as oneworld. Together with related carriers, the alliance will have a combined fleet of 1,524 planes serving 632 destinations in 138 countries. Hong Kong's Dragonair. Finnair and Spain's Iberia are also expected to join the alliance.

That makes oneworid a potent rival to members of the 16-month-old Star Alliance – UAL Corp.'s United Airlines, Lufthansa of Germany, Air Canada, Varig Brazilian Airlines and Thai Airways International – which has about 1,484 planes serving 640 destinations. Monday's announcement is also likely to raise questions about the risk of reduced competition and the fate of carriers that don't enter into alliances.

The agreement certainly makes it tougher for oneworld members to maintain bilateral agreements with airlines that have teamed up with another club. Cathay spokesman Andrew Herdman said that frequent-flier links with Air Canada and Ansett Australia, which are both connected with the Star Alliance will be phased out when Cathay launches its new program early next year.

At the moment, oneworld is promising only to give passengers smoother transfers, access to member airlines' lounges and joint frequent-flier programs beginning in early 1999. The initial partnership excludes cargo, as well as measures such as joint purchasing, shared flights or equity stakes in each other, which tend to get governments griping about anticompetitive moves.

Even so, industry executives and analysts argue that the formation of another major airline family could radically change the face of the business. Many foresee a world in which competition is largely between alliances rather than individual airlines.

Peter Harbison, Managing Director of the Sydney-based Centre for Asia Pacific Aviation, says Cathay's decision to align with British Airways could mean "Singapore Airlines falls into place soon as welt." Singapore Airlines has forged links with Ansett and Air New Zealand, which are set to join the Star Alliance, but it hasn't formally joined the alliance itself. That could change now that its Asian rival Cathay has joined a global club, he figures.

Despite Star's extensive network, Mr. Harbison says Cathay's membership makes oneworld a powerful rival. "This is the one that probably tilts the balance in favor of RA," he adds, referring to British Airways.

Not only does the participation of Cathay give oneworld members a highly strategic hub in Hong Kong, but it also offers broad access to the rest of China should Cathay affiliate Dragonair become involved. Laura Ayson, a Dragonair spokeswoman, said Monday that the Hong Kong regional carrier is "seriously considering participation in a global alliance" and that oneworld would "presently stand as Dragonair's preferred option."

Top executives of oneworld's five members were full of bold predictions for the alliance's success and its impact on international airline travel when they gathered in London on Monday for a presentation that was simulcast to news conferences in other cities worldwide. All pledged to uphold the task of fostering cooperation while maintaining their individuality.

"The idea is to have different types of service with a uniform standard," said Cathay Chief Executive David Turnbull, adding that the carrier had "thought long and hard about alliances, and which one we should join."

Cathay recently reported a loss of HK$175 million (US$22.6 million) for the first half of 1998 – its first loss in 22 years as a public company. At the very least, Cathay's new circle of friends should help boost the carrier's bottom line by increasing its access to world markets, improving efficiency and expanding Hong Kong's role as a hub for regional traffic.

"Asia is the biggest gap in our network," said Hong Kong-based Martin Symes, Regional Managing Director for American Airlines, which now flies from four U.S. cities to Tokyo. "Clearly the link with Cathay would Increase the profitability and attractiveness of flying into Hong Kong as well."

Share prices of oneworld member airlines were mixed in response to the news. In London, British Airways settled at 411 pence ($6.91), up 23.25 pence. In Hong Kong, Cathay Pacific closed up 30 Hong Kong cents at HK$6.75. Qantas closed at AS2.49 (US$1.471, down three cents in Australia. Shares of AMR, the parent of American Airlines, was trading Monday after-noon around 562.1375, down 37.5 cents, on the New York Stock Exchange.