Airlines are coalescing into three or four alliances. But the industry is still unstable and confused
 YOU are booked on the cheapest business flight from London to Seoul. You are going via Paris to pick up an Air France direct flight. On the way to Heathrow you discover that the flight from Paris is actually operated by its alliance partner, Korean Airlines, though the flight code said ``AF''. Instead of travelling with the airline you chose, you are about to board a plane with a carrier whose safety record has been sullied by crashes and near-misses. Welcome to code-sharing, the practice that shapes the route networks of most of the world's 500 airline alliances. Air France and several other international airlines recently decided to suspend their code-sharing with the Korean carrier, on account of its poor safety record. Yet, despite the dangers of putting your brand in someone else's hands, alliances have grown tenfold in the 1990s, as airlines seek to sell tickets to a wider range of destinations without actually flying to more. Partners in an alliance sell each other's flights and even book blocks of seats on each other's aircraft. By combining networks, airlines can feed extra traffic on to their trunk routes and reap economies of scale.
 Bilateral alliances once used to be notoriously unstable, but, until recently, they had seemed to be settling down. A study by the Boston Consulting Group (BCG) found that two-thirds of alliances today have lasted more than three years. In 1992-95 two-thirds fell apart.
 Moreover, three or four super-alliances have gradually been emerging, which between them account for about two-thirds of air travel (see chart).
 For years the industry expected most of the 200-odd international airlines eventually to consolidate into four or five mega-carriers. But bans on foreign ownership and lingering government control over routes and flights preclude international mergers and limit airlines' entry to new markets. In effect, these super-alliances are coming as close to actual mergers as aviation's byzantine regulations allow.
 However, these four emerging groups now face another wave of instability. The cause is a decision last month by Air France, one of the last big unaligned airlines, to join a group led by America's Delta Air Lines. According to BCG's John Lindquist, ``it may even have postponed for a time the endgame that seemed to be approaching.'' Immediately after Air France's decision to join Delta, SAir (the parent group of Swissair) decided to sell its 4% equity share in Delta and sign a bilateral code-sharing deal with rival American Airlines (AA). If Swissair (and its European sidekicks, Sabena and Austrian) sever all their links with Delta and Air France, the Franco-American team will have to build an entirely new alliance.
 Equally, the Oneworld alliance between AA, British Airways (BA) and others looks shakier following the American airline's deal with Swissair's boss, Jeff Katz (a former AA pilot). AA's commitment to Oneworld may be wavering: henceforth AA could have two European hubs: crowded Heathrow (through BA) and Brussels (through Swissair/Sabena). According to Keith McMullan of Aviation Economics, a London consultancy, BA's best response might be to bring Swissair into the Oneworld group, especially as both airlines concentrate on business customers.
 What's in it for me?
 Alliances purport to offer passengers seamless travel, with better connections, more airport lounges and frequent-flier benefits wherever they go, provided they stay within the alliance. Given that alliances sometimes limit passengers' choice by combining their marketing and even jointly managing capacity on some routes, you might expect reduced competition to lead to higher fares.
 Yet airlines insist that alliances actually reduce ticket prices, and their claims are backed up by recent evidence. David Marchik, of America's department of transportation, points out that since 1996 fares have dropped by 17% between America and the European countries with which it has ``open skies'' deals that scrap flight restrictions. These deals mostly coincide with routes flown by alliances, such as those between Lufthansa and United Airlines or NorthWest and KLM.
 The idea that alliances are at least partly to thank for these cheaper fares is supported by a study last winter by Jan K. Brueckner and W. Tom Whalen of the University of Illinois. They found that fares for transatlantic journeys involving several legs are 18-28% cheaper if done within the route networks of allied airlines rather than through non-aligned carriers. The reason for this, they say, is that alliance partners gain by practising ``co-operative pricing'' whereby they seek to maximise the benefit to all the members. This leads to a lower fare for the whole
 journey. An airline that is not part of an alliance inevitably tries to milk its one leg of the ticket journey for as much money as it can.
 Change from within. Despite the continuing instability, the alliances are thinking about how they can boost their revenues by moving beyond joint marketing.
 At the moment, 70% of alliances have code-sharing and 50% have frequent-flier programmes, but only 15%, according to the BCG report, try and save costs by sharing such facilities as catering, training, maintenance and aircraft-buying. As alliances begin to pool these activities, they will re-shape the airline industry from within.
 At the moment there are two extremes. BA is outsourcing as much as it can, turning itself into a virtual airline that concentrates on running flights and marketing--where it has quite enough on its plate. (Not only does the airline already face an antitrust investigation in America, but on July 14th the European Union fined it (euro)6.8m--$6.9m--for paying travel agents to create a barrier against other airlines. BA is appealing against the fine.) Specialisation creates scope for consolidation among companies that provide BA with the services it will buy in. Enter the airlines at the other extreme, notably Swissair and Lufthansa, which want to make money from services as well as flights.
 Consider again the Swiss response to Delta's French connection. Whereas most alliances now no longer involve equity stakes, SAir is buying stakes in several airlines. With the proceeds of its Delta sale it bought 20% of South African Airways; it also has stakes in five smaller European carriers, including Portugal's TAP and Portugalia and France's AOM.
 SAir uses these partnerships to sell airline services. It probably makes more money from its interests in airline catering (in which it owns 20% of world market), ground handling, maintenance and air cargo than it does from actually flying. On July 13th SAir bought another ground-handling business, Dynair, from Alpha Airports for $155m. SAir wants to use its equity stakes and its alliances to supply such services to its partners, and to build itself a global position at the unglamorous end of the airline business, making sure that the meals are there, that the luggage is loaded and that there is no empty space in the below-decks cargo hold. Most airline services command only thin margins (catering is one example), but a company that provides them across the world can
 achieve economies of scale. SAir's strategy is not unique. Lufthansa is doing something similar, by using its partners in the Star alliance as a market. 
The Lufthansa group includes the world's largest mainten- ance company, the largest airline caterer (with 29% of the market), the leading air-cargo operator and a big systems company. For BCG's Mr Lindquist, one of the ind- ustry's most revealing recent events was when the Star Alliance obliged Scandinavian Airlines Systems (SAS) to drop SAir's Gate Gourmet in favour of LSG Skychef, which is part of its German rival, Lufthansa. However they go about growing together, the super alliances have formidable challenges ahead. Are their members selling their own brand or the brand of the alliance? Ask most airlines and they lamely say "both".

But these alliances will become real mergers only if the liberalisation of intl aviation goes much further. America has signed 33 open-skies deals around the world, which free airlines to fly where and when they want without govt interference.

Until open skies are universal and limits on foreign ownership are relaxed, airlines will continue to live in the twilight world of shifting alliances rather than the clear day of global consolidation. Hubs and spokes. Share of world traffic, 1998, % ONEWORLD - 18% American Airlines, British Airways, Canadian Airlines, Cathay Pacific, Qantas, Iberia, Finnair, Lan Chile 

STAR - 16% United Airlines, Lufthansa, SAS, Thai Airways, Air Canada Varig, Ansett, ANZ DELTA - 12% Delta Air Lines, Air France, Austrian Airlines, Swissair, Sabena KLM/NW - 11% KLM, Northwest Airlines, Alitalia, Continental Airlines, America West Airlines OTHERS - 43%

Magazine: Economist; July 17, 1999 Section: BUSINESS FLYING IN CIRCLES

Passengers Win and Lose in Airline Alliance Game Flying: Three recent pairings make it easier to pile up frequent- flier miles. But redeeming them is not so simple.
 The last time this column looked in on the not-so-divine comedy that is the airline alliance game, the season was fall, and the air was abuzz with a new opportunity for domestic travelers: the chance to earn miles on one major US airline, then apply them toward a free flight on a second US airline.
 In a competitive rush, six of the country's largest carriers paired off into three alliances. By late August, American and US Airways were newlyweds, United and Delta were on the eve of strolling up the aisle and Continental and NW were nearing their eighth month of engagement, wedding date still unannounced.
 And what now of these wide-bodied, alliance-mad lovers? American and US Airways remain together. United and Delta have exchanged rings, but their relationship remains more shallow than first was pledged. Continental and NW, on the other hand, have not only gotten together at last, but have drawn so close that some authorities would like to douse them with cold water.
 In all three cases, the coupled airlines pledged that this cooperation would not just boost profits but bring many benefits for consumers. (The carriers have also rushed to ally themselves with foreign carriers.) Meanwhile, many passengers are still scratching their heads over what these new deals do and don't mean.
 Here's the bottom line: Though your choices in the U.S. airline marketplace may well narrow, it should be easier now to accumulate mileage credits on your favorite carrier.
 The tricky part is that accumulating miles is not the same as redeeming them. The airlines have made it easier to gather up piles of miles, but there aren't any more seats on planes out there than there were before.
 So it's more important than ever to plan a mileage-award trip far ahead (especially to high-demand destinations like Hawaii), leave yourself room to maneuver on dates and double-check what these airline alliances will and won't do for you.
 Does one of the three alliances stand head and shoulders above the others? Not really. Continental's OnePass frequent-flier program wins many polls among seasoned travelers, and the Consumer Reports Travel Letter labels the American-US Airways program "the most limited of the three." But your choice of airlines should include plenty of other factors, including where you're going and where most of your miles are stockpiled.
 Here, gleaned from half a dozen service centers, is an alliance-by-alliance update, with telephone numbers for airline frequent-flier service centers:
 American (AAdvantage, telephone [800] 882-8880) and US Airways (Dividend Miles, tel. [800] 872-4738). These two began allowing AAdvantage and Dividend Miles program members to claim awards for travel on both airlines on Aug. 1, and three weeks later began allowing travelers to pool their mileage from the two frequent-flier programs in order to claim award travel on either one. One catch: Pooled miles can be used for domestic or foreign travel on American or US Airways, but not on the carriers' nearly three dozen other partners. The two have also granted reciprocal airport lounge access since August.
 (It's been a busy winter at American, which bought regional carrier Reno Air in late 1998 and then had to cancel hundreds of flights in early February amid a pilots' sickout over a labor dispute.)
 United (Mileage Plus, tel. [800] 421-4655) and Delta (SkyMiles, tel. [800] 323-2323). This alliance was first advertised as a combination of reciprocal frequent-flier miles and code-sharing--which basically allows airline A to advertise and sell airline B's flights as its own. Much of the deal did go through, including the joint frequent-flier benefits (although this alliance doesn't allow passengers to swap miles earned on international flights, or to combine Delta and United miles in order to claim an award). But Delta's pilots resisted the code-sharing, and the airlines dropped it.
 The airlines have also tinkered with other program details to make their offerings dovetail: For instance, WorldPerks mileage credits that were formerly set to expire on Dec. 31, 1998, or Dec. 31, 1999, will remain valid.
 Continental (OnePass, tel. [713] 952-1630) and Northwest (WorldPerks,
 tel. [800] 447-3757). Since Dec. 6, Northwest's frequent fliers have been able to earn miles on Continental's program and vice versa, and lounge
 privileges are reciprocal. The airlines started taking bookings for awards earned that way on Feb. 1, for travel beginning on or after March 1. The reciprocity works on U.S. and foreign flights, and (unlike the two other alliances) this pact allows travelers to apply mileage earned on one airline toward elite status on the other. But this alliance goes far beyond that. In October, Northwest announced plans to buy a controlling interest in Continental. Alarmed by that move's anti-competitive possibilities, the U.S. Justice Department filed suit (still pending) to block it. The department's antitrust chief warned that the deal would bring higher fares and worse service for more than 4 million passengers who fly annually on routes dominated by those two carriers.
 Another part of this marriage is code-sharing. Thanks to a Continental-NW pact to cooperate on scheduling and sales of about 850 flights to 95 destinations, begun in early Jan, travel agents' computerized res systems and Internet booking services now show that Continental has added 400 flights (actually flown by Northwest) and that Northwest has added 450 (actually flown by Continental).
 Many consumer advocates argue that code-sharing is deceptive and anti-competitive while yielding relatively minor benefits for travelers. The airlines say it simplifies connections and scheduling.
 And last week, the US Dept of Trans fined NW $45,000 and Delta $25,000 for not telling travelers that part of their trip would be on another carrier. The DOT said it was boosting its study of joint svc agreements now that more airlines are trying to set up various alliances.
 By CHRISTOPHER REYNOLDS, Times Travel Writer. chris.reynolds@latimes.com.