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Delta Merger May Reshape Alliances

Pacts involving multiple carriers would be affected by consolidation, but to what extent?
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CHARLOTTE, N.C. -- The three global airline alliances have become increasingly important as international travel soars, and a reshuffling of the major carriers could bring about a vast disruption.

But that's not to say they can't realign if the U.S. airline industry consolidates.

"I don't know if international alliances would have to be undone," if there are mergers, says Morningstar analyst Marisa Thompson. "But there may have to be a lot of hog trading."

Last week, the board of


(DAL) - Get Delta Air Lines, Inc. Report

debated whether to pursue merger talks with






United Airlines, and now, discussions have begun with both,

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The wave of consolidation chatter pervading the airline industry often involves the roles of the three alliances -- Oneworld, Skyteam and Star. Because each group has one of the big three U.S. carriers as a leading member, the impact of change could cascade through the global transportation system.

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Airlines constantly make major decisions based on alliance pairings. As an example,



American Airlines moved into terminal two at Tokyo's Narita Airport a year ago, joining Japan Air Lines, which was about to become its partner in the Oneworld alliance.

The move made it far easier for American passengers to fly to Asia, enhancing its competitiveness with Skyteam and Star members.

"When you look at the three alliances, all three have about a third of the U.S.-to-Japan

market," Don Casey, American's managing director for international planning, said at the time. "That is why we are so excited about having Japan come into Oneworld."

In March, another key airport will get an alliance makeover, when

British Airways

moves to its new Heathrow terminal and

Air France KLM


takes over the space they now share.

"That means we can make terminal four a Skyteam terminal, and all of a sudden we will have a secondary hub in Europe," says Bart Koster, Amsterdam-based spokesman for KLM.

This past December, in another move with alliance implications, Star Alliance co-founder Lufthansa reached an agreement to purchase 19% of


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. JetBlue is the primary domestic carrier at New York's Kennedy, a key international airport where Star has almost no presence.

In terms of alliances, the most likely merger -- between Delta and Northwest -- would be a perfect fit. The two are partners in Skyteam. Their respective European partners, Air France and KLM, merged in 2004.

Last June, the four carriers jointly applied to the Justice Department for antitrust immunity, which both U.S. carriers already have with their European partners. In October, Delta and Air France said they would form a joint venture, similar to the highly successful Northwest/KLM joint venture.

"From an Air France KLM perspective, we would prefer that Delta would do something with Northwest," Koster says. But he acknowledges that alliances are just part of the consolidation puzzle. Those pieces must be aligned, he says, "and then you can see how to handle the alliances."

In Koster's view, the Air France KLM arrangement, in which the carriers operate separately, might serve as a model. Were Delta to merge with United, he suggests, the two could operate separately and remain in separate alliances.

After all, he says, "losing United is a bigger loss for Star than losing Delta would be for Skyteam, because we would still have two major U.S. carriers if Delta left, while they would keep only

US Airways



The third U.S. member of Skyteam is


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Another potential outcome, suggests Morningstar's Thompson, is that U.S. airline consolidation could be followed by alliance consolidation. "If the legacy carriers really want to box out the smaller carriers, who are nipping at their heels, they might be better off cementing a huge cross-border pact," she says.

Many major scenarios contemplate high levels of alliance disruption. For instance, many analysts speculate that were Delta to bid for Northwest, United and Continental might also seek to merge -- and American could try to preempt Delta and bid for Northwest. (It sought to buy Northwest in 2000, but found the price too high.) The potential outcome could disrupt all three alliances.

"These alliances, particularly Northwest/KLM, would be very difficult to unwind," says Bill Swelbar, a research engineer in MIT's International Center for Air Transportation and an airline industry consultant. "I think that is one of the biggest potential question marks about a potential Delta/United combination. But in the end, I don't believe the alliance structure is poured in concrete."