NW-CO Moves Forward Despite DOJ

<B> NW-CO Moves Forward Despite DOJ</B>

By Jay Campbell

On the eve of launching their marketing alliance, Continental and Northwest Airlines insist that even withoutantitrust immunity, they can legally offer joint discounts to corporate customers.

The airlines will move forward with the alliance under the watchful eye of the U.S. Department of Justice, which is suing both carriers to prevent Northwest from attaining a controlling stake in Continental--a move that initially had been planned for 2004 but recently has been extended to 2008.

The extension was one of a few conditions previously negotiated with DOJ (see sidebar, page 38) that helped prevent the agency from seeking a temporary restraining order on the deal.

Justice said it will continue to review some aspects of the alliance, but it wouldn't say which. Clearly, the Clinton Administration is opposed to the merger, not the alliance. On the very day DOJ announced its lawsuit, the Department of Transportation granted the carriers codesharing authority between Japan and the United States. DOT said it has no plans to take action against the alliance.

People familiar with the Justice Department suspect that one of the matters it continues to review is the nature of the two airlines' dealings with the corporate market. The airlines know which aspects are of concern, but said they could not elaborate, at DOJ's request.

"We anticipate that each airline will continue as an independent competitor to offer joint discount programs, but also will create a joint product that will give corporations the opportunity to sign a combined contract with both," said Jeff Smisek, Continental's executive vice president and general counsel. "So a corporation can deal solely with Continental, solely with Northwest or with both."

The idea, from the airlines' perspective, is that antitrust law addresses pricing, not discounting. Since the airlines would not be setting prices together--and would not be trying to tie a discount on one to usage on the other, but rather creating a third, combined product--they believe they can jointly discount off independently set prices.

Pointing out that the concept of "independently set prices" in the airline industry is something of an oxymoron, since price matching is so quick and so common, buyer sources said, the idea of two partner airlines discounting without price setting sounds fishy.

"I can't think of a precedent," said one top antitrust attorney. "In most industries, companies either merge or compete. Alliances are pretty unique to the airline industry, so it's not so clear."

US Airways' former general counsel Jim Lloyd, now with Bryan Cave in Washington, D.C., agreed. "Not to say this is a Section One Sherman Act problem, but I think it's a troublesome area," he said. "It's sufficiently uncertain that most carriers avoid this sort of thing."

Indeed, when announcing a marketing alliance with Delta earlier this year (<I>BTN,</I> May 4), United Airlines chairman and CEO Gerald Greenwald said the carriers "will not jointly go to corporations for sales agreements because we do not believe it would be possible without an antitrust waiver."

As part of their negotiations with the Justice Department that, in the end, altered several technical aspects of the carriers' plans, Continental and Northwest agreed to drop codesharing for passengers originating or terminating trips in their hubs. But it remains unclear whether joint corporate discounts can apply to passengers who are not traveling on a codeshare flight.

If so, then perhaps Delta-United and American-US Airways--which are not now contemplating codesharing--could reconsider joint corporate deals, although they have not indicated that they are doing so. All of these partners are offering joint incentives to frequent flyers, however.

Other Washington attorneys offered educated guesses as to the legalities of discount deals, but none were positive of anything. Richard Fahy, for example, thought the airlines would find it more difficult to offer joint programs on routes where they compete. Like the airlines, Mark Pestronk made a distinction on whether the purchased product is a joint product. A trip that involves flights on both carriers, for example, could be considered a joint product, as could the combined network of the two airlines. The latter concept struck a chord with Continental, which suggested the carriers may brand their overall corporate travel offering under a single name.

Ed Faberman, former vice president of government affairs for American Airlines, said, "There's a fine line between joint marketing and setting rates. Sales reps from both airlines could go in with a joint package that takes 15 percent off all services that either airline offers. But what's tricky is when you get into specific routes, like, what about the fare between Detroit and Newark versus Detroit and LaGuardia?"

Assuming the Justice Department won't stop Continental and Northwest from offering joint deals, the travel management community isn't exactly welcoming the possibility. But they said it's better to have that option than not.

"I would much prefer that they do deals rather than just offering shared frequent flyer programs," said Rob Calabro, manager of office services for the Princeton, N.J.-based Educational Testing Service.

Buyers in the two carriers' hub cities, particularly, recall Continental chairman and CEO Gordon Bethune's February statement that because the airline would have more to offer, it could reduce its discount levels (<I>BTN,</I> Feb. 23). As he did then, Bethune last week acknowledged that airlines are dominating their hub markets.

Companies located in hub cities will closely observe how or whether the two carriers' relative levels of aggressiveness--not to mention their service performance--begin to move closer to each other.

But in non-hub markets, CO-NW may increase competition by offering buyers a Big Fourth airline after American, Delta and United. "I'm looking forward to it because I've always been able to work closely with Continental and they've always been very eager, but Northwest hasn't," said Ann Judge, travel manager at the National Geographic Society in Washington, D.C. "Perhaps they'll come in now."

Another travel manager familiar with the airlines' frequent flyer plans noted that the program "will be one of the best out there--it's keeping the best features of both Onepass and Worldperks.