Air Heats Up: AA-BA Try Again, Alitalia To Join SkyTeam

<B>Air Heats Up: AA-BA Try Again, Alitalia To Join SkyTeam</B>

By David Jonas

After months of domestic consolidation taking center stage in the minds of many, activity on the global alliance front once again is revving up, notably between American Airlines and British Airways. Other alliances, meanwhile, are structuring management and sales teams, further gelling customer service and, in some cases, adding new members. However, alliance corporate contracting remains challenging, even for the largest travel buyers, though the Star Alliance now has about 500 corporate contracts in the United States alone.

Renewed alliance expansion efforts between AA and BA are inexorably tied to ongoing air transport liberalization discussions between the United States and the United Kingdom. With one hinging on the other, the parties in the past could not come to an agreement, due primarily to BA's unwillingness to surrender valuable slots at London Heathrow Airport for use by other carriers (BTN, Aug. 2, 1999). Currently, only AA, BA, United Airlines and Virgin Atlantic can operate transatlantic flights in and out of the airport.

Now, however, the competitive alliance balance has shifted and both countries have restated their aspirations for a new aviation pact. Informal, but productive, talks between the two sides were held late last month, with formalized meetings expected in the fall.

AA and BA are expected officially to reapply for antitrust immunity this summer. Should a deal be consummated, AA-BA, which already control about half the market between Heathrow and the United States, would leapfrog past competing alliances and become the pre-eminent partnership across the North Atlantic.

Speaking last month at the Merrill Lynch Transportation Leaders Conference, American CEO Don Carty said, "We must continue the movement away from the antiquated and restrictive regulatory frameworks that have ruled global airline competition for more than half a century." The two carriers insisted that the competitive environment has been altered, particularly by the strengthening of the Star Alliance and its larger presence at Heathrow, obtained when BA's chief rival BMI British Midland joined the alliance.

Also, U.K. regulators may be more keen on securing a new Open Skies deal as other European hubs--notably Paris Charles de Gaulle and Frankfurt--cut into Heathrow's dominance. Closer ties between AA and BA and their respective governments could further smooth the path toward antitrust immunity.

"British Airways is in a position of disadvantage right now," said Michael Zea, a London-based vice president of Mercer Management Consulting. "They are relatively weak compared with Star because of a lack of antitrust immunity and tight alliances ties."

Meanwhile, CEOs from Continental, Delta and Northwest airlines sent a joint letter to U.S. Department of Transportation secretary Norman Mineta expressing "extreme concern" over potential AA-BA immunity. "The two most dominant airlines in the U.S.-U.K. market now seek to create the most powerful and anticompetitive alliance in international aviation history," wrote the airline leaders. "Unless the Department takes decisive steps to ensure significant access at London Heathrow Airport, Open Skies between the U.S. and the U.K. will damage competition and harm U.S. consumers."

BMI British Midland, which is the newest player in the transatlantic game, also seized the opportunity to state its desire to obtain some of BA's Heathrow slots that likely would be handed over in conjunction with an Open Skies agreement. "In similar cases, the EU has required a significant slot divestiture to meet competition rules," said BMI chairman Sir Michael Bishop.

BMI earlier this spring launched its first transatlantic service, linking Manchester, United Kingdom, with Washington Dulles and Chicago, and recently joined Star partner United Airlines in calling for Open Skies between the United States and the United Kingdom. However, the carriers said their support of a new pact is contingent upon their own approval for antitrust immunity either before or at the same time as AA and BA.

Meanwhile, the European Commission last month granted a six-year exemption for immunized cooperation between BMI British Midland, Lufthansa and SAS. The agreement provides Lufthansa and SAS with greater access to London Heathrow Airport while enabling BMI British Midland to extend its network throughout mainland Europe. The approval by the EC gives the Star Alliance a stronger position against British Airways and the Oneworld alliance.

However, the Star Alliance's immunized link between Austrian Airlines and Lufthansa, approved by the U.S. Department of Transportation, is under fire in Europe. The European Commission in May sent each carrier a statement of objections warning that it would not grant approval unless competition concerns sufficiently are addressed by mid-July. The EC noted that Austrian and Lufthansa control 100 percent of traffic on 33 routes between Austria and Germany and that corporate customers have complained of "very high fares."

Nevertheless, Star easily has the most antitrust-immunized links between members, enabling coordinated scheduling, pricing and other commercial and marketing opportunities. The alliance now has a U.S. corporate client roster of about 500 accounts, said Alexander Rahe, the alliance's director of sales for the Americas. Those contracts generally include immunized partners United, Lufthansa, SAS and, more recently, Austrian Airlines. Bilateral immunity between United and Air Canada also has produced a handful of deals.

Rahe said any such Star deals essentially are structured with uniform discounts while retaining the home market focus for the local carrier. "We first identified corporations that had well-established relationships with more than one of the partners, which generally included some of the larger corporations," Rahe said. "Now we are going down to smaller accounts. If you are a qualifying corporate partner and show the ability to steer business on a global basis and bring enough revenue, we are more than happy to sign a deal."

"The guys that have antitrust immunity can and do develop corporate agreements and those that are not immune are attached to the contract by way of a rider," noted Houston-based consultant Grant Caplan of Consulting Strategies. "They do a reasonably good job at aligning discount levels, given the circumstances."

The Star Alliance's sales organization began taking shape late last year and now includes a vice president of sales, a few project managers and three directors of sales/market coordinators, one each for Asia, Europe and the Americas. The salesforce will seek to build share in certain markets, including Philadelphia, which is not dominated by any of the alliances, and Paris, which is served by virtually every member carrier.

Internal squabbling between alliance members, however, remains a major stumbling block for more integrated corporate contracting, according to some travel buyers. The Star Alliance particularly, which has swelled to 15 members, oftentimes is plagued by disparate sales philosophies. Sources indicated Singapore Airlines, for example, is not always on the same page as its Star brethren, though it hinted that a new approach for corporate clients would materialize in the months ahead (see story, page 6). Singapore's inclusion in the Star Alliance also has been cited as a major obstacle and traffic drain for fellow member Thai Airways, which reportedly is looking to jump ship and sign on with a competing alliance.

Such problems are not confined to the ranks of the Star Alliance; any global partnership seeking to contract with corporations will experience conflict. "One of our clients recently was in negotiations with a carrier that included alliance partners, but two weeks in, another alliance carrier offered a completely separate deal," said Carol Salcito, president of Management Alternatives in Stamford, Conn. "It puts a bad taste in everyone's mouth." Salcito confirmed, however, that the largest travel buyers have had some success in securing alliance contracts.

"All alliances are somewhat tenuous by definition. Carriers have to look at their own best interest first and the alliance second," Zea said. "There always has been that tension and that is why alliances have not had stability in the past. And while there is still friction within current alliances, they have become tighter and more integrated."

For example, on the service front, Star this spring made available downloadable timetables for PCs and handheld devices from its Web site, staralliance.com. A global flight information and notification service is expected later this year.

Star's integrated IT system, StarNet, which launched last year (BTN, June 26, 2000), already links 11 of the 15 carriers and allows crucial data sharing and PNR exchanges. "Before StarNet, product launch was limited," Rahe said. "But now that the architecture is in place, the IT group will launch products on an ongoing basis." One such product will be unveiled Aug. 1, but details were not available.

Meanwhile, Italy's flag carrier Alitalia is headed to SkyTeam. The carrier last week signed memoranda of understanding with Air France and Delta, SkyTeam's leading airlines. Delta said cooperation would begin with scheduling, IT systems, frequent flyer programs and, possibly, transatlantic codesharing. Full SkyTeam participation likely will occur in the following months.

Christopher Korenke, Air France vice president and general manager in the United States, said Italy represents 10 percent of the carrier's U.S. point-of-sale volume, ranking it second only behind France. He said it may be possible to establish bridge deals for corporate clients who achieve contract targets with both Air France and Alitalia. Such bridge deals now are in place for several mutual Air France-Delta corporate clients, agreements Korenke called, "the best possible tool for our corporate salespeople, absent antitrust immunity." Though he would not divulge the number of accounts eligible for those agreements, Korenke said incentives either can be soft-dollar benefits or hard-dollar rebates. Incidentally, Delta and Air France are optimistic that antitrust immunity can be secured next year.

Alitalia's inclusion immediately will improve the alliance's European positioning against Star, Oneworld and Northwest-KLM. It also will add to SkyTeam's already strong transatlantic presence. Alitalia's U.S. gateways are Boston, Chicago, Miami, New York and San Francisco.

It is unclear what will become of Alitalia's existing codeshare arrangements with both Continental and Northwest. What is certain is that alliance participation will add to Alitalia's bottom line as it taps into the larger Air France and Delta networks. Air France said SkyTeam generated an additional $66 million in yearly net profits. The alliance, now more than a year old, earlier this spring launched SkyTeamNet, an intra-alliance communications network allowing member carriers to share scheduling changes and automate customer services, such as real-time flight info and frequent flyer mileage accrual. The IT system is similar to StarNet.

Korean Airlines, another SkyTeam member, expects by year-end to reinstate codeshare flights with both Air France and Delta following extensive safety reviews. K.S. Kim, Korean Airlines general manager of passenger marketing in the American region, said codesharing will lead to new corporate travel options. "We are targeting small and midsize businesses to contract for deals across the alliance, but those types of deals are with Korean only at the moment," he said, adding that antitrust immunity with Delta is a goal for 2002.

Inchon International Airport, located outside of Seoul, opened earlier this spring and will help Korean grow by a projected 10 percent annually during the next five years. Like Air France's Charles de Gaulle hub in Paris, Inchon is expected to become a major connection point in Asia.

Meanwhile, codeshare flights between SkyTeam member CSA Czech and Delta began this spring and include CSA's flights between New York JFK and Prague, and beyond-flights to Budapest, Dubai, Hamburg, Milan, Stockholm, Warsaw and Vienna.