Air Duo Bucks Alliance Complaints

<B> Air Duo Bucks Alliance Complaints</B>

By Jay Campbell

Northwest Airlines and KLM this month made a number of moves that may help distance them from negative impressions about airline alliances widely held by corporate travelers and travel managers: Service from alliances is uneven at best and there are few benefits in negotiating with them.

The two on April 1 turned over all North American sales and operations functions to Northwest, and those in Europe to KLM.

Now, doing a deal with Northwest by default means doing a deal with KLM. In fact, all KLM contracts in the United States already have been transferred to Northwest staffers and the Dutch carrier closed its 50-year-old U.S. sales offices.

"We tried to match their deals as much as possible," said one Northwest sales manager. "There were some issues. For example, we stress segments as the target and KLM stresses market share, but we worked through those issues."

The carriers have even gone so far as to streamline their ticket plating, so that agents in North America must ticket on Northwest stock for KLM flights (except for travel in foreign countries where code sharing is not permitted) and vice-versa. Meanwhile, KLM's U.S. and Canada ground handling operations were transferred to Northwest, and vice versa in Europe. Both eliminated their frequent flyer programs on the other's continents, moving all American members into Northwest's WorldPerks and all Europeans into Flying Dutchman.

These moves will save Northwest and KLM over $50 million in overhead, said KLM's U.S. general counsel Paul Mifsud. "We're saying it's not about 'our passengers' and 'our issues,' but about the alliance as a whole. You certainly can't be telling passengers, 'Oh, that's the other airline's problem--we can't handle that here.' And we're just starting down that road. From what I hear about the Star Alliance, any airline can make a decision out of self interest at any time."

Indeed, the Star Alliance does not yet have plans to integrate the sales forces of its members, acknowledged United Airlines director of business markets Joe Laughlin. "and we may not ever do that. Our objective is to retain our individual identities. I'm not sure we'd be well represented in Germany, and vice versa for Lufthansa."

Northwest/KLM last fall agreed to give up their own individual identities--after years of ownership disputes--and signed a 10-year alliance agreement (<I>BTN</I>, Oct. 6, 1997). Before that agreement, and in contrast to what's happened since, the two carriers were engaged in infighting of their own. Said one travel manager, "When they first came in they bid together as one, but then KLM came back later--sort of under the table--with a different deal."

Other alliances, while not as integrated, also are making progress in the realm of contract negotiations. But corporate buyers still are finding that, in many cases, alliance members are not working together, their objectives are not consistent, and, in the end, their customers may well be better off negotiating separately.

For travelers, airlines have touted dozens of benefits of alliances, but thus far, only some of those are working in all cases. On the plus side, carriers have managed to shorten connection times, combine mileage programs, share airport facilities such as lounges and initiate new international services to previously unserved regions.

But several high volume corporate travel managers and other sources said additional supposed benefits are not yet universally available. According to traveler feedback, they said, alliance carriers are not always fulfilling their promises of selling and exchanging tickets for travel on their partners, checking baggage and issuing advance seat assignments through to the final destination, resolving problems on behalf of their partners and recognizing each other's high-level frequent flyers.

"Travelers are saying it's incredibly inconsistent," said Will Tate, travel manager for Dallas-based Dresser Industries. "Travelers expect certain levels of service and recognition from airlines because of our agreements with them. But sometimes that's not being recognized as partner airlines in other regions of the world see the corporate fare as just another discounted ticket."

According to Alex Houston, manager of corporate travel and administration for Cooper Industries in Houston, "Not only does the traveler not know who's operating the flights, but he also doesn't know how he's going to be treated."

Thus far, there is little empirical evidence on whether or not passengers like alliances. Last year's International Air Transport Association corporate air travel survey found that of 354 North American travelers, 42.3 percent "did not mind" their experience with code-share flights.

But 25.4 percent of respondents said they were "confused," 19 percent were "angry" and only 3.5 percent were "pleased." While 38.1 percent said better connections were the main benefit of alliances, 28.2 percent said the biggest drawback was inconsistent service quality.

The key to quality alliance service clearly is integration. Part of the issue with integration at the airport comes down to technology. "Without computers talking to each other adequately, it's not seamless," said Don Carty, for now president of American Airlines (see story, page 3). "We and Canadian Airlines are on the same platform. And we and British Airways have already spent multiple millions to build links between our systems." But even with Canadian, Carty acknowledged, there's more work to be done in terms of processes and procedures.

Patricia Friend, president of the Association of Flight Attendants, pointed out recently that alliances also need to streamline their policies on safety and security rules. United and Lufthansa, for example, at first adopted United's more permissive carry-on baggage policy, resulting in "too much and too heavy cabin baggage worldwide." The carriers have since resolved that issue.

Although corporate buyers believe the airlines are addressing these problems, the fact that they exist at all is discomforting--especially in light of travel buyers' bigger concerns that alliances will result in higher fares and diminished negotiating leverage, since they have been exempted from antitrust law by the Dept. of Transportation (<I>BTN</I>, Aug. 25, 1997).

"As a preliminary result of alliances we've seen some reduction in competition and perhaps a reduction in the number of services," said Julius Maldutis, airline analyst for Salomon Smith Barney in New York. "But there is no clear evidence of traffic stimulation and there's no answer yet as to whether they are deceptive or beneficial to the consumer. But they are very beneficial for the airlines and the countries they come from."

Even airline sources acknowledge that, as one Star Alliance sales manager put it, "The whole promise of 'one deal, one worldwide discount' is a difficult expectation, even though we might have promoted it a little bit. In general, expectations may have been set too high. For corporate travel managers, at this point, things that were touted might not be there yet. I don't know if we'll meet everybody's expectations, but we're honestly looking to do that."

The Star Alliance (with Air Canada, Lufthansa, SAS and United immunized from antitrust law) has been talking to a lot of corporations, but it is unclear how many of those conversations have ended in signed contracts. Although the Atlantic Excellence alliance (Austrian, Delta, Sabena and Swissair) had been slower, one travel manager said, "They're now over their big hurdle." Swissair reported that the alliance has opened a lot of doors in terms of blue chip corporate accounts, particularly this year. And like Northwest/KLM, American and Canadian merged their sales forces last August.

These alliances do have at least a few deals negotiated jointly with corporate customers. "They're finally getting up off the floor and standing, although I don't expect them to be running marathons," said John Guarneri, manager of corporate travel services for Bayer Corp. in Pittsburgh. Although Guarneri is "now feeling more comfortable" about dealing with alliances, like many of his colleagues from other multinational companies, he has in the past turned down alliance offerings.

The most noted problem, sources said, was that partners are inconsistent in their bids. "For some clients we've worked with, the carriers really have given them the same offer on both ends," said John Heilner, a consultant with Stamford, Conn.-based Management Alternatives. "But more often than not, it's not the same on both sides of the ocean."

This could be a function of the different competitive landscapes in their respective countries. Because of that, sources said, certain accounts can be relatively more or less important to partner carriers.

There also is a quirky risk for airlines in making a joint bid. For example, Merrill Lynch recently chose American and Continental over United as its domestic partners as part of a global contract bid. But since United had made its bid as part of the Star Alliance and was not chosen, all its partners were turned down as well.

Beyond these issues, some alliance bids simply haven't been very good. "We're seeing the bringing together of deals where improvements in terms of economics aren't really there," added Heilner.

Another, larger, issue also is at play here, according to Rolfe Shellenberger, senior consultant for Runzheimer International in Palm Desert, Calif. "The opportunity for an individual alliance to feed the needs of everybody is compromised by the economic reality that their planes are full anyway," he noted. "Besides, you can't expect to talk to an airline on behalf of its partner except in the broadest possible terms, a systemwide deal. You can't get as much of a discount as you will on a city-pair deal."

Agreed Ed Gilligan, president of American Express Corporate Services, "Very few alliances have offered better deals as one than what they would have separately. In fact, it may be better for buyers to pit one part of an alliance against another."

Further, many questions remain as to how an alliance contract works. For example, are there different measured targets for each airline or for the alliance as a whole? Which airlines monitor the deal? And what do partner carriers do when one of them is seeing benefit from the deal and another isn't?

Most alliances seem to be taking the approach where one of the airlines, likely the one whose national home is shared with the corporate customer, is the lead carrier and plays a coordinator role.

But travel managers would like to know whether that's the case with traveler service as well. "They can't deal with me 'seamlessly' until they do so with the traveler," said Philip Dunphy, manager of corporate travel for Pfizer in New York. "Until then, nothing else will fall in line. But I do think it's being addressed and for now, you just have to go in with an open mind.