JVs Alter The Skies: Buyers Face Fewer Transatlantic Options

The growing dominance of transatlantic joint ventures is fundamentally changing how airlines sell services to corporate travel buyers, as government approvals for antitrust immunity are converting nearly one dozen distinct transatlantic competitors into three dominant entities.

While the simple procurement principle that concentration of power on one side reduces negotiating leverage on the other has been a cause for concern among travel buyers, airlines are claiming a number of benefits in joint venture contracting, citing broader networks, account management through a single point, easier-to-manage contract targets and—perhaps counterintuitive for procurement professionals—better pricing.

"Buyers view this as a net negative because they've lost some negotiating power," said Scott Gillespie, a former airline contracting analyst and now operator of Gillespie's Guide to Travel+Procurement Web site. "I also would agree that airlines benefit from this because they can concentrate volume on basically fewer planes and with less competition."

Advito vice president Bob Brindley said the joint ventures could provide such benefits as closing gaps in network coverage, providing centralized—and possibly more efficient—account management and providing more robust frequent flyer benefits to travelers.

However, Brindley said, for many corporate customers the joint venture model takes away a degree of choice. "A client is going to pick a mix of carriers that work for them, irrespective of which alliance or joint venture they're in. Clients are going to have to accept more carriers than they'd like," he said.

In a 2010 forecast that counted the joint ventures as a top concern for corporate buyers, Advito said that "the deals bring them no benefits, with the discount from the whole being less than discounts previously offered separately by individual members of the joint venture. Worse still, there is evidence that joint ventures are using their newfound power to insist they are awarded citypairs currently operated by competitors."

Delta Air Lines senior vice president for global sales, reservations and distribution Jim Cron countered those sentiments.

"I believe it is more competitive under the alliance structure than it even was prior to that," Cron said. "With alliances and expanded networks, it allows carriers to compete for business in more markets."

Despite buyer concerns that joint ventures simply mean a concentration of power, Cron said, "It allows the customer to buy a greater percentage of their travel through a single contract. In many cases, it gives the customer more purchasing power because before, they were negotiating multiple airline agreements. Now they can bundle more of their business under one contract. The main benefits really are greater savings because, if they're bundling more of their business under a single airline contract, you can argue that they're bringing more to the table as well."

Lufthansa vice president for the Americas Jens Bischof similarly said in December (BTNonline, Dec. 7, 2009), "The value proposition for a customer who is willing to dedicate a relatively or absolutely high volume to an airline group typically is to get the better discount, and that is the nature of any business. There is a clear value in dedicating more to one entity."

Gillespie acknowledged that airlines could deliver on greater discounts under the new model.

"They will get higher loads and more flexibility to provide deeper discounts," he said. "Whether or not a particular corporate buyer gets the discount is probably a reflection of the buyer's overall strength of travel policy and ability to move marketshare."

Les Baker, vice president of Prism Group, provider of contract analysis software for 15 of the world's 20 largest airlines, said alliance and joint venture deals are the fastest-growing corporate contracting segment.

"These large corporate buyers have diverse travel requirements across the globe," Brindley said. "As great as is the breadth of coverage that these alliances have now—and it's much better than it was before—it's still usually not enough on an individual alliance basis to cover enough of a client's business."

Brindley said that what corporate clients gain in the sheer number of competitive citypairs under a single joint venture contract could mean a loss in convenience.

"While these three major alliances now have much greater breadth of service than they had as individual carriers, a lot of that is still connections or double connections compared with competitor nonstops," Brindley said. "In a corporate environment, where time is money, if there's convenient nonstop service, you can't get your travelers to take a circuitous connection on your preferred carrier."

Still in their early stages, airlines in joint ventures determine exactly how to structure corporate sales and contracting. Lufthansa this month confirmed that its four-way Star Alliance joint venture—dubbed Atlantic Plus-Plus—with Continental, United and Air Canada went live on Jan. 1, and the four entities are coordinating corporate contracts on the transatlantic. "We update the contracts as they expire or on request of the customer," a spokesperson said.

Cron said the principle of metal neutrality is guiding the sales forces of Delta and its SkyTeam joint venture partner Air France-KLM.

"In a contract, you eliminate any differentiation by carrier, so the discounts apply uniformly across the carriers," Cron said. "Of course, discounts and marketshare commitments vary greatly by route—but not by carrier."

Cron would not disclose detail on corporate agreements, "but it's comfortably over a thousand, and every one of them is a joint venture deal." Though Cron said Delta was leaving it up to customers whether they wanted to convert immediately to the joint venture or ride out their current agreement, he said the joint venture is the way the carriers are contracting on the Atlantic.

Delta president Ed Bastian this week said Italy's flag carrier and SkyTeam partner Alitalia would "soon" join its transatlantic joint venture that also includes Air France-KLM. DOT already granted Alitalia antitrust immunity with those airlines, but was not part of the original transatlantic joint venture.

Poised to be a part of the final alliance cluster to enter the joint venture fray, assuming the U.S. Department of Transportation finalizes last month's tentative approval of antitrust immunity with American Airlines and Iberia, British Airways CEO Willie Walsh told Business Travel News that approval of the Oneworld joint venture would offer buyers an immediate competitive benefit in the new era of antitrust immune alliances.

"Particularly where the corporate benefit is from true competition between the three alliances," Walsh said. "There's no doubt that there's a growing trend toward that, where corporates are looking to the alliances for a deal that will cover their requirements beyond the scope of an individual airline. Where Star and SkyTeam have been able to make proposals to corporates, we've been precluded by virtue of the lack of antitrust immunity. Approval of our applications means you'll see true competition between three alliances. Competition between three is better than competition between two."

Still, those three competitors are poised to control more than 80 percent of the North Atlantic market, according to DOT data. While that figure "might worry buyers on the face of it," said Gillespie, "that's a very common structure for other industries—three majors in most industries. Macro-level economic observations would tell you that's sort of a decent equilibrium."

Gillespie concluded, "At a macro-economic level, is it better for the industry or not? What you could argue is that the airline industry has not made a lot of money over the past 10 years, so it's not like they've been gouging the buyers. Does this help make the airline industry more profitable? Yes, probably. Is that a bad thing? No—up to a point."