<B> Allies Won't Negotiate</B>
By Jay Campbell
The latest pairings of gigantic domestic airline partners are leaving behind the very benefit to corporate buyers the alliance concept is supposed to bring: larger route networks under fewer negotiated agreements.
Delta-United and American-US Airways will not pursue such deals because they don't think they're legal, which calls into question Continental and Northwest's plans to set up joint deals. This, of course, assumes the U.S. government will allow the alliances at all, which is no foregone conclusion.
United chairman and CEO Gerald Greenwald said on Thursday that Delta-United "will not jointly go to corporations for sales agreements because we do not believe it would be possible without an antitrust waiver." US Airways said joint negotiations with corporations are not being contemplated by it and proposed partner American Airlines (<I>BTN</I>, April 27).
Delta CEO Leo Mullin affirmed Greenwald's comments. "We will independently determine sales discounts and override agreements. There will be no joint sales calls and no melding of field sales."
Without the ability to gain savings by shifting share to both partners, travel managers are faced with a compliance-threatening situation. For example, a company that has a preferred relationship with Delta theoretically would have a lot of Delta frequent flyers, and so both traveler and travel manager are happy. Once their frequent flyer programs are linked, Delta members will accrue benefits by flying on United, but companies cannot do a deal with both. The partnering carriers are sharing frequent flyer incentives but not corporate discount incentives.
While Continental and Northwest, the earlier domestic partnership that instigated the latest two (<I>BTN</I>, Feb. 23), claimed they will do joint deals, sources said they and the companies with which they negotiate would be risking both civil and criminal litigation. Immunity from antitrust law is not available to domestic alliances.
According to U.S. Department of Transportation assistant secretary of aviation and international affairs Patrick Murphy, "there is no clear policy in my mind, but I tend to lean toward Greenwald's view. We need antitrust lawyers to study the hell out of that one."
"Airlines will simply have to take advice from antitrust lawyers if they propose various forms of conduct," said Jeffery Shane, a partner with Washington-based Wilmer, Cutler and Pickering and the former assistant secretary for policy and international affairs at DOT. "Beyond that, all of these domestic partnerships conceivably could be seen as restraint of trade."
Indeed, it is up to companies, not airlines, to implement and enforce travel policies. But this news takes another chunk out of reputed benefits to Corporate America from alliances (<I>BTN</I>, April 27).
All of this is assuming these alliances go forward at all, which is still unclear. The Department of Justice's Antitrust Division has authority over all domestic alliances and, DOJ said, antitrust laws apply fully to all domestic code-sharing arrangements. Also, DOT on Thursday told Congress that "The potential size and scope of these domestic alliances warrant our close scrutiny," noting it had requested certain relevant details about the proposed alliances from the carriers. DOT already had been investigating the Continental-Northwest deal because it involves an equity stake.
Unlike Continental-Northwest, the American-US Airways and Delta-United partnerships have no equity stake and do not require "preapproval" by DOT. But Murphy said, "We will be investigating them after the fact. We have very clear regulatory authority to look into these things." Of particular interest, said DOT, is whether the alliances reduce competition, "either in specific markets or overall," or the ability of new carriers to enter underserved or overpriced markets.
Meanwhile, codesharing between AA-US and DL-UA also requires approval by their pilots, who will be discussing the issues over the next few weeks. The Delta-United alliance was thrown off track for almost a week because of concern among Delta pilots, but Mullin characterized the latest talks with pilots as "quite constructive" and Greenwald said United pilots are "openly" studying the issue.
Delta and United announced Thursday their tentative agreement for a strategic alliance that includes frequent flyer reciprocity, "seamless" one-ticket travel and codesharing throughout their networks, not including Europe.
The agreement is at least months away from implementation, even without regulatory or union scrutiny. Simply coordinating the frequent flyer databases would take 4 to 5 months, said Greenwald.
A full year after its launch, the Delta-United deal is estimated to generate $600 million, roughly split between the two carriers and reduced by about 20 percent after costs. That number could drop if the other alliances are approved.
The two airlines do not expect the U.S. government to challenge their alliance. Addressing competition, Delta claimed that "the alliance will enhance competition, as new competitive service options will be added at each of the 13 Delta and United hubs and gateways." Asked for clarification, a Delta spokesperson said, "You'll have both Delta and United fares on Delta flights, and Delta and United fares on United flights."
The two carriers said they may explore additional partnership arrangements with foreign carriers next year, but will not be working together in Europe because of the uncertainty and complexity of the European regulatory environment.