Int'l Carriers Still Vying For Position

American Airlines and British Airways, for the second time in three years, last month backed away from antitrust immunization efforts after determining approval terms set by the U.S. Department of Transportation were too costly. The subsequent breakdown in U.S.-U.K. Open Skies negotiations further complicates matters for international corporate contracting. Pieces of the international aviation puzzle are falling into place, however, including antitrust immunity for SkyTeam allies and the resurrection of a premium Swiss national airline.

Flying under the simple moniker Swiss and to be registered as Swiss Air Lines, the reincarnation of bankrupt Swissair combined with elements of its regional carrier Crossair on April 1 will begin serving 126 destinations, including Boston, Chicago, Montreal, Newark, New York JFK, Los Angeles, Miami and Washington. Swissair and Crossair officially will cease service on March 31.

By then, Swiss said it will detail product improvements across all three classes, including completely redesigned economy and business products and slightly enhanced first class cabins, as well as seamless passenger processes on the ground. "Our vision is to be the premier airline," stated the airline's president and CEO Andre Dose.

To reach that goal, Swiss will have to regain the confidence of its corporate clients. "We lost many contracts when Swissair was grounded," Dose said, "and it will take a tremendous effort to rebuild."

Marcel Biedermann, the airline's vice president of North and South America, said Swiss may not be able to "follow all the strategies developed by our competitors" for reeling in corporate clients, but said, "We can build on the excellent relationships we have had and do not have to start from zero."

However, the carrier did start from scratch in terms of cost structure, "without any of the liabilities of the old Swissair." Dose said it refinanced its entire fleet at rates 40 percent below previous levels and lowered labor costs. Swiss expects to post a loss for this year but turn a profit in 2003.

Meanwhile, the airline is pursuing participation in either the Star Alliance, SkyTeam or Oneworld, and hopes to announce an agreement before the April 1 launch. "The fallback scenario would simply be bilateral partnerships with non-allied airlines," Dose said, adding it is in "intense negotiations" with American Airlines to restore codesharing.

In an earlier interview, American CEO Don Carty told BTN a revamped Swiss carrier could provide many connections through the Zurich hub. "The new airline should focus on being an effective regional airline in Europe and not duplicating Swissair's strategy," he said. "We would like to have them as a partner, but we have to wait and see if they can make the model work."

This past fall, AA began daily nonstop service between New York JFK and Zurich, meeting demand previously handled by former immunized partner Swissair. "In terms of Zurich, we recognized there were financial accounts in particular that need access to that market," Carty said.

Meanwhile, the future is a little less certain for Belgium. When its national carrier Sabena went bust, it left behind regional carrier Delta Air Transport to pick up the pieces. DAT received additional funding at the end of January, but also is exploring a merger with low-fare competitor Virgin Express. A decision is expected within a few weeks.

The collapses of Sabena and Swissair last year, along with severe service cutbacks at most other major international carriers, caused many headaches and taught lessons to multinational corporations that rely on foreign flag carriers.

"When Sabena folded, Swissair made no claim to represent them any longer, and their portion of our agreement was terminated without notice or any other information," said Gabriel Eshaghian, manager of global airline and car rental programs at PricewaterhouseCoopers. "We are in the process of filing creditor claims with both airlines in an effort to eventually recoup any losses."

However, PwC continues to book travelers on Crossair and surviving Swissair flights "to support a global preferred carriers in its time of need."

PwC, like many other large companies, turned to other carriers to fulfill travel needs on routes where service was disrupted. Of course, certain specific monopoly routes had no competing service and some travelers were inconvenienced.

In general, the cutbacks and chaos played out on the international aviation scene mirrored, and in many cases went beyond, domestic challenges.

"The bankruptcies, mergers and massive cutbacks in schedules have made virtually every deal negotiated a year or so ago impossible to manage," said Kevin Iwamoto, global air and car supplier manager at Hewlett-Packard. "It certainly has taken its toll on the ability to meet revenue hurdles and even market shares due to reduced schedules and routes."

Corporations with contracts including back-end rebates from financially strapped carriers particularly may have been impacted. Still, some foreign carriers benefited from the perception that U.S. airlines were more of a security risk.

Lingering trepidation about flying U.S. carriers likely is more prevalent in the consumer sector, but foreign flag carriers may become more aggressive in luring corporate clients. "They will be more flexible in their pricing at the city pair level, especially from originating points of Atlanta, Chicago, Dallas/Ft. Worth and San Francisco, where the competition is fierce against strong hub carriers," Eshaghian said.

United Airlines, for one, confirmed it has been losing traffic to overseas carriers. "The impact is mostly pronounced on the Atlantic, whether it is point of sale Europe or United States," said United president Rono Dutta during a conference call earlier this month.

Moving forward, multinational travel buyers will have to navigate an environment absent an American Airlines-British Airways alliance. Though the two carriers said they remain committed to one another and their larger Oneworld alliance—despite rumblings of possible defections by smaller members—they cannot offer corporate accounts the simplicity and potential savings of an integrated contract.

"At least for a while, travel managers won't have Oneworld to play off the Star Alliance," said Business Travel Coalition chairman Kevin Mitchell. "One important reason we supported AA-BA was to have a fourth viable global alliance."

However, Eshaghian said an AA-BA tie-up would have been "more of a hindrance than a benefit" for PwC. "There might have been 8,000 possible connecting flights where a fare decrease would apply, as joint pricing would allow closer collaboration for better prorate agreements," he said. "Proportionally, however, the eight point-to-point routes where fares were going to potentially increase by 30 percent—because AA-BA would control 60 percent of the slots—make up a much larger portion of most travel programs than those 8,000 possible connections."

The Star Alliance also lost out from the AA-BA decision. The U.S. Department of Transportation, as part of its AA-BA order, also granted antitrust immunity to Star partners United Airlines and BMI British Midland. Without a U.S.-U.K. Open Skies accord, that immunity was not approved.

Most of the SkyTeam alliance last month received final approval from DOT for antitrust immunity. Now Delta, Air France, Alitalia and CSA Czech jointly can set routes and inventory and coordinate sales—including corporate and agency contracts—frequent flyer programs, pricing, revenue management initiatives and other procedures. They also can vastly expand codeshare flights.

This latest flurry of alliance activity will force corporate buyers to reassess ways to leverage their high-yield business. "When the industry dust settles a bit more, it will require another round of comprehensive analysis," said Iwamoto, also president of the National Business Travel Association. "It can then be determined which carriers should remain preferred, which should be added and which should be eliminated either because they are no longer compatible with the corporation or in business at all."