AA-BA Sees Rejection

<B> AA-BA Sees Rejection</B>
<I>Other Alliances Further Joint Sales Efforts</I>

By David Jonas

Faced with imminent rejection of its antitrust immunity request from the U.S. Department of Transportation, American Airlines and British Airways last week acknowledged the defeat of their three-year effort to fully integrate sales and operations, though they remain committed to the larger Oneworld partnership.

Ironically, the AA-BA announcement that they were withdrawing their request came on the heels of recent disclosures by Continental-Northwest and the Star Alliance of progress in negotiating jointly with corporate clients.

Last week's development, expected to become official just after presstime, resulted from DOT's frustration with U.K. regulators during Open Skies negotiations. It stamps a question mark on the Oneworld alliance. In a joint statement, AA and BA said the lack of approval for a joint venture on transatlantic operations "will clearly be a matter of regret."

However, not everyone is ringing the alarm. "Both carriers will remain competitive, individually, in the marketplace in terms of corporate contracting," said Michael Boult, Rosenbluth International's vice president of supplier relations. "Very few corporations have concentrated transatlantic business to many markets, so they will continue to work with the carriers that are natural fits."

Many travel managers agreed, and some also indicated that the AA-BA setback won't affect their buying strategies since joint deals between the two had not been available before. Instead, they said, multi-carrier solutions have been coming from other alliances.

Continental-Northwest, also lacking immunity, is sticking to the strategy of offering corporate customers joint discounting programs and not collaborating on pricing, and therefore remaining on the legal side of the fine antitrust line. Continental president Greg Brenneman revealed to reporters last month that joint deals with Northwest are on the table at about a dozen corporations.

Kenneth Pomerantz, Northwest's director of sales development & analysis, confirmed that negotiations are progressing with several larger volume accounts, though nothing has been finalized. "At the request of the account, we can go in and structure a deal with an integrated discount on both carriers," he said, adding that some deals could encompass both worldwide networks, while others would cover only codeshare flights or a particular region.

"Discounts on a particular city pair will be the same," said Continental's vice president of market planning and revenue programs Mark Bergsrud. "We don't want to force the customer to choose between the two carriers. They need to be indifferent and unconcerned about meeting performance goals for it to truly feel like a joint deal." However, he added that a joint deal could include, for example, a larger Northwest discount to Asia and a larger Continental discount to Latin America. Discounts primarily will be front-end for now, though alternative deal structures, such as flat fares, will be explored in the future.

Corporations had been asking for joint deals since CO and NW announced their alliance last year, but the pace accelerated six weeks ago when the two ironed out a few of the details.

Meanwhile, the Star Alliance--which enjoys antitrust immunity between United Airlines and Lufthansa, SAS and Air Canada, but not with the rest of its partners--also is forging joint agreements. For example, Hewlett-Packard established a partial Star Alliance deal including some of the member airlines in situations where antitrust is not an issue. "It's been very successful and offers one-stop shopping," said Kevin Iwamoto, H-P's air and car supplier manager in Palo Alto, Calif., and chairman of NBTA's airline committee. He said the main buyer benefits are a simplified number of contracts and the elimination of conflicting market share goals.

Multi-carrier deals offer other opportunities for corporations with an appropriate mix of volume, market share and destinations. Buyers may need only one point of contact for six or seven airlines and can gain access to and discounts for more points on the map.

However, such global arrangements incur many difficulties. From the airline perspective, profit responsibility must take a leading role as every deal is not necessarily beneficial for every airline. "Airlines are used to working to maximize their own revenue. Maximizing the revenue of the alliance is a much different challenge," noted Randall Malin, principal in Malin & Associates of Los Gatos, Calif. "The idea of a corporation playing ball with six or seven airlines means they might not get the best deal since the interests of the various members can easily conflict, especially when one carrier gets a disproportionate share of the traffic."

Likewise, corporations, particularly multinational ones, must grapple with their own cost responsibilities since some departments or divisions may not benefit from certain agreements.

And, while NW-KLM and the Atlantic Excellence (Delta, Swissair, Sabena and Austria) receive high marks from many travel managers, they also benefit from antitrust immunity, an issue that continues to hang over the other airline alliances, as evidenced by the major blow dealt to AA-BA. The industry as a whole still isn't sure what is and isn't legal.

"Working together on discounting versus pricing is a distinction without a difference," said Tom Wilkinson, president of the Travel Management Group in Alexandria, Va., noting that a few Star Alliance members are working jointly in Europe and the United States, but complete Star Alliance deals have been stymied by government regulation.

Questions also surface regarding hub restrictions and which party initiates the negotiations (<I>BTN,</I> Nov. 2, 1998). CO-NW said it is working within the regulations since it moves forward only at the request of the corporation.

And many corporations actively are looking. DaimlerChrysler, for one, recently sent letters to all the major alliances soliciting feedback on potential worldwide deals. "With the completion of our corporate merger, I am now looking to negotiate on a global basis and see what each has to offer," said Charles Braswell, director of general services.

One travel manager said she already negotiated two multi-carrier deals, though neither involves discounting. "The first deal, which has been very successful, was prompted by one member airline and includes upgrading across the entire alliance," she said, adding that the operation thus far has been seamless for her overseas travelers. She said a second joint deal--which also includes upgrades and an account of soft dollars--resulted from one alliance member looking to strike a deal while her company had an agreement with another alliance member. "I didn't want two agreements competing within the same alliance. I refused to sign anything until the partners would cooperate."

Pomerantz said CO-NW deals also could include upgrades, frequent flyer benefits and other soft dollar programs. "However, the cornerstone of the alliance is to compete more effectively with American, Delta and United," he said. "In many markets, our combined strength can provide value for many accounts as their preferred number-one carrier." Since the CO-NW alliance does not include code sharing between hubs, companies in secondary markets may have the most to gain. "Combined, we have the scope of the big three and it should help us get business from corporations in spoke markets, such as Indianapolis and Louisville, where we individually cannot offer significant lift," Bergsrud said.

Indeed, Iwamoto said, "The alliances have a lot more to offer corporations than single entity contracts and the combination makes tertiary airlines that don't have the size and the scope of the big three more viable to the end user."

AA and BA officials said Oneworld was "developed as a world-class alliance without the need for regulatory immunity on specifc routes," and they will continue to cooperate in "ways which do not require antitrust immunity," including frequent flyer programs and other customer service initiatives.

Though Boult said AA and BA are still free to discuss prorations, discounts and interline agreements, "BA will take a step back because of the recent ruling on commissions (<I>BTN,</I> July 19). They don't want to be in this constant litigious cycle." While AA will have to limit or abandon an integrated approach to the corporate market with BA, it still can offer joint deals with other partners. "We have seen joint discount programs from AA and Canadian for quite a while," said John Heilner of Management Alternatives in Princeton, N.J.

Meanwhile, Aer Lingus became the latest carrier to join Oneworld. Though unclear exactly how the alliance will proceed, the Irish carrier provides yet another transatlantic link and highly sought after slots at London Heathrow.