August 15 - Memo to Oscar Munoz and Scott Kirby: Delta is using United to benefit itself


INDUSTRY ANALYSIS

By Kevin Mitchell 

 

Hobbling Air Italy will only strengthen Delta partner Alitalia, which it soon may partially own

In terms of yields, United Airlines had La Dolce Vita in the Washington Dulles-Rome non-stop market. During busy summer seasons when tourists flock to the eternal city like swallows to Mission San Juan Capistrano, United had a monopoly market. It took full and lucrative advantage of that pricing power.

So much for the sweet life of monopoly yields and fleecing consumers! In May, Alitalia launched year-round, non-stop Washington Dulles-Rome service. The result is first-time non-stop competition for United during the busy summer season and a competitive advantage for Alitalia in the winter season with a more attractive non-stop service offering. For those fortunate to spend Christmas in Rome, Alitalia’s 8:35 hour non-stop flight is substantially more attractive than 18 hours of total connecting-journey time with United and its Star Alliance partner Lufthansa. Rested and nearly half a day more in Rome!  

Worse yet, United’s new head-to-head competitor Alitalia is a perennial financial basket-case that unabashedly takes state subsidies with both hands, and keeps coming back for more. In fact, the European Commission currently is investigating Alitalia’s most recent infusion of state aid. In January 2018, the Government of Italy granted Alitalia a 900 million Euro (over $1 billion USD) state loan describing it as “rescue aid.” The Commission is investigating whether that loan violates European Union (EU) rules prohibiting state aid.

We know Oscar Munoz, United’s CEO, and Scott Kirby, its President, have a loud voice to complain when they believe there is unfair competition. For instance, in an interesting parallel, they recently lost their cozy, money-printing summer-season-only monopoly in the Newark-Athens non-stop market when Emirates Airline responded to urging by the Government of Greece to offer year-round, non-stop service. United cried bloody murder. It organized an employee demonstration at Newark to greet Emirates’ first Athens flight. Mr. Munoz and Mr. Kirby never miss an opportunity to complain about Emirates and make totally unsupported allegations about it.

However, when heavily subsidized Alitalia, operating under the cloud of an EU state aid investigation, ended United’s Washington Dulles-Rome lucrative monopoly, there was not a peep from United.  

This is where it turns from United hypocrisy - vocal protests regarding Emirates and total silence for Alitalia - to outright bizarre.   

Delta Air Lines has skillfully manipulated United to help bolster Alitalia - Delta’s partner and United’s competitor - and thereby strengthen its ability to attack other United hubs in the future. Just when you think United should be pushing back hard against Alitalia’s incursions by vocally complaining about it - through sleight of hand that would make the most skilled trickster marvel - Delta has somehow enlisted United to follow it in lemminglike fashion to try to hobble Air Italy, Alitalia’s upstart competitor in the US-Italy market.

Just to be clear, unlike Alitalia’s Washington Dulles-Rome head-to-head, year-round competitive overlap with United, there are none with Air Italy. This summer season Air Italy’s non-stop US flights from Milan to New York JFK, Miami, San Francisco and Los Angeles do not overlap with a single non-stop United flight to Milan from those same airports. The same will be true with New York JFK and Miami this winter season.

Yet, instead of focusing on the real and proven competitive threat Alitalia represents, Delta has managed to distract United into focusing instead on fledgling Air Italy.

Let that sink in!

To put this in context is to underscore just how bizarre it really is. Delta and Alitalia are members of the SkyTeam alliance. Alitalia is part of the Delta/Air France/KLM joint venture. That new, monopoly-busting, year-round Alitalia flight from Washington Dulles to Rome should make United’s blood boil. It is offered for sale on Delta’s website as code-share flight Delta 6686 operated by Alitalia. What about other flights that compete with United in the Washington Dulles-Rome market? Many are Delta/SkyTeam flights connecting over Atlanta, New York JFK, Paris Charles de Gaulle and Amsterdam Schiphol.

Add to this competitive witches brew the heavily reported rumor that Delta is looking to further deepen its commercial relationship with Alitalia by taking a 15 percent equity stake in it.

Yet, somehow, Delta has convinced Mr. Munoz the “real” competitive threat to United is small and struggling Air Italy, whose demise would significantly benefit Alitalia and by extension Delta. Under Delta’s apparent spell, United, as well as American Airlines, even recently lobbied President Trump in the Oval Office to clip Air Italy’s wings. The result would be less competition for Alitalia so it could offer more non-stop Italy-US Delta code-share flights like Washington Dulles-Rome. Remember, what harms Air Italy, bolsters its chief rival, and Delta’s partner, Alitalia.

One can only imagine Ed Bastian, the CEO of Delta, snickering. He went on vacation standing-up President Trump and, instead, Mr. Munoz and Doug Parker, the CEO of American, did Delta’s bidding by pleading with the President to block Air Italy’s US access so Delta’s partner Alitalia would be freed of a nuisance upstart competitor.

Just think about how brilliant Delta’s strategy is. Get your competitors, United and American, to help you strengthen your partner, Alitalia, by eliminating its chief US-Italy competitor so it can more effectively compete against United/the Star Alliance and American/the oneworld alliance.

Is it possible United and American are so gullible to fall for this competitive ruse? Can Mr. Munoz, Mr. Kirby and Mr. Parker not see the forest for the trees? Delta is skillfully using United and American to help it hobble Air Italy to strengthen Delta’s partner Alitalia.

It isn’t the first time United and American have been totally hoodwinked in the four-and-a-half-year, multi-million dollar lobbying campaign against Open Skies and much needed competitive choice offered by Gulf Carriers Emirates Airline, Etihad Airways and Qatar Airways. Mr. Parker and Mr. Munoz were outspoken advocates for ATC reform, which Delta vigorously opposed. American and United have younger, more advanced fleets that would benefit considerably more from a fully modernized ATC system than Delta’s older fleet. Delta feared, as a result, ATC reform would put it at a competitive disadvantage.

What did Delta do? It fatally distracted American and United. It spooled them up to lobby vigorously against Open Skies thereby distracting them from engaging in meaningful lobbying in support of ATC reform, which both companies said was their highest priority. It worked. American and United squandered a historic opportunity to help deliver ATC reform, something of substantial value to their shareholders. Mr. Bastian must have had a good belly laugh at that one too. While Delta lobbied against ATC reform, its two competitors that would have benefited the most from it, inexplicably focused their lobbying attention on Delta’s priority - thwarting Open Skies policy.

Memo to Mr. Munoz and Mr. Kirby: if you don’t like the non-stop, year-round Delta code-share flights Alitalia is now operating between Washington-Dulles and Rome, don’t keep helping Delta to further strengthen its partner Alitalia by knocking Air Italy out of the US-Italy market.

However, if you think it is in United’s best commercial interest to welcome more Delta code-share flights operated by Alitalia into your hubs, keep helping Delta attack Air Italy.

Isn’t it time to stop looking out for Delta’s shareholders by participating in a lobbying war against Air Italy, and instead start looking out for United shareholders?

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