February 24, 2010 / 10:10 PM / in 9 years

AMR in alliance talks with China Eastern-CFO

NEW YORK (Reuters) - American Airlines parent AMR Corp AMR.N is in advanced talks with China Eastern Airlines (600115.SS) to bring it into the Oneworld alliance, AMR’s chief financial officer said on Wednesday.

Speaking by phone at the Reuters Travel and Leisure Summit in New York, Tom Horton said the company is making a big push in its alliance strategy and is also in advanced talks with a Brazilian carrier to join Oneworld.

That carrier is probably Gol Linheas Aereas Inteligentes SA (GOLL4.SA) (GOL.N), which entered a code-sharing agreement with American Airlines last year. It is currently not part of an alliance, while its main rival and market leader Tam Linhas Aereas TAMM4.SA TAM.N, is a member of the Star Alliance.

Gol was not immediately available for comment.

Airlines, looking for a way to cut costs and increase scale absent full-blown mergers, are seeking more alliances and figuring out ways to cut costs using current ones.

“There are some opportunities for cost savings, though not to extent one might be able to achieve with a full merger,” Horton said. “You can co-operate in areas such as procurement, co-locate at airports.”

Horton declined to comment on whether the airline was open to a merger, but said consolidation would help the industry.

“It would be a healthier industry if it were less fragmented,” he said. “On the other hand, mergers are very complex, there are a lot of impediments to mergers in this industry like capital, labor integration issues and antitrust.”

Sources had told Reuters that American Airlines had merger talks with US Airways LCC.N and alliance talks with Continental Airlines (CAL.N) in 2008, just after Delta Air Lines (DAL.N) and Northwest merged. Those talks ended as Continental chose to pursue an alliance with United UAUA.O.

Speaking separately at the Reuters Summit on Tuesday, US Airways and United said they were looking for a merger. When asked if American might resume talks with either airline, Horton declined to comment.

MORE ALLIANCES

The three major alliances — Oneworld, SkyTeam and Star — are global networks of carriers that allow members to streamline costs while sharing revenue.

Horton said two of the three global alliances would likely end up being stronger because some regions might not have three airlines to join an alliance each. The alliance with the most diverse geographic presence would be the strongest, he said.

He also said restrictions on foreign ownership of U.S. airlines are hindering global consolidation, making airlines seek more out of alliances.

“It is an impediment to cross-border mergers,” he said, referring to U.S. law that restricts foreign ownership of U.S. airlines to 25 percent of voting stock. “I think we are seeing an evolution, seeing these alliances become tighter-knit partnerships.”

“They started as loose marketing agreements, for code-sharing, frequent linkages, emergence of global alliance groupings. We are now seeing those groupings forming tight economic relationships,” Horton said.

Earlier this month, American Airlines and British Airways BAY.L won tentative approval from the U.S. government to jointly price, market and schedule international flights in their Oneworld alliance without antitrust prosecution.

BUSINESS TRAVEL COMING BACK

The airline industry has lost $50 billion in the past 10 years, including $11 billion of red ink in 2009 alone, according to the International Air Transport Association.

Business travel, which is the most lucrative for airlines, was especially hurt as corporations pulled back on spending.

Horton said demand for business travel has shown improvement. “We have seen some recovering in corporate travel,” Horton said, describing it as “slow and steady.”

He added that industry capacity is well-matched to demand. The airline industry downsized in 2008 and 2009, to counter skyrocketing fuel prices, a weak economy and growing competition from European carriers.

“It remains to be seen if there was enough downsizing,” Horton said. “Capacity is probably in the range of where it ought to be.”

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