The U.S. Department of Transportation late last month gave Continental, Delta and Northwest airlines final approval for their tripartite codeshare arrangement but several conditions on joint corporate and travel agency bids to which the carriers agreed remain unclear.
Meanwhile, United and US Airways continued to align services, marketing and sales programs, including recent efforts to enhance corporate contracts. DOT also recently granted American Airlines tentative approval for limited code sharing with British Airways
(see story).The Continental-Delta-Northwest agreement, which included compromises on airport facilities and the total number of codeshare flights permissible, has raised many corporate contracting questions among travel buyers, agents and the airlines themselves.
"The wording is very soft and there are lots of loopholes," said Ed Tobin, an air procurement consultant with Eclipse Advisors, a division of Rosenbluth International. "It is hard to discern exactly how all this will play out."
"My perspective is that the carriers purposely wanted the language, as it relates to restrictions on corporate contracts, to be as open and fluid as possible," added Suzanne Fletcher, chair of the aviation committee for the National Business Travel Association.
Even the most straightforward of the conditions—joint bids must be requested in writing by the potential client—has caused concern. In its notice of final approval, DOT said certain comments filed during the review process suggested the requirement "may be ineffective because the alliance carriers may put pressure on corporations and travel agencies to request a joint bid." DOT encouraged those pressured in such a manner to contact department officials.
Additional restrictions are even more murky. The three carriers must exclude local-originating traffic from any joint contract with a company based primarily in a city in which Continental-Delta-Northwest control at least 50 percent of the market. DOT dictated as much to allow for some degree of competition in those markets. Many large local companies likely will continue working with the dominant carrier anyhow, in addition to or instead of, any other joint contract, because of available network coverage, traveler loyalty and other traditional hub market factors.
"From the buyers' perspective, if a company has a deal with Delta out of Atlanta, a deal with Northwest out of Minneapolis and a tripartite deal for travel from places like San Francisco, it will get very difficult to manage," said Michael Lynch, Eclipse Advisors managing partner of airline procurement services.
As an example, DOT said a joint bid can include traffic from a company's offices in California to Atlanta headquarters, as long as the traveling employees are based in California, but return travel by Atlanta-based employees must be excluded because Atlanta is a dominated market.
Beyond uncertain utility for corporate accounts, such restrictive terms seem difficult to enforce and tricky to interpret, creating the potential for confrontations between the airlines and both corporate clients and federal regulators.
Yet another condition stipulated by DOT requires the alliance partners to exclude from all joint bids corporate discounts or travel agency commissions "dependent on the satisfaction of minimum booking requirements in specific domestic origin and destination markets offered by one partner, unless the corporation or travel agency has stated in writing that it desires such an offer in order to compare it with a competitive bid from one of the other seven largest carriers or from another airline alliance."
Previously, DOT's condition did not allow such contractual terms, regardless of competitive alternatives offered to the potential client.
Though DOT likely insisted on such a provision to protect smaller carriers, sources questioned the necessity and practicality, considering competing bids undoubtedly would include such terms.
Each of three carriers previously indicated joint corporate contracts would be crafted similar to existing Continental-Northwest deals, with Delta services tacked on when and where appropriate. More recently, they opted not to elaborate, either themselves still uncertain of the specifics or unwilling to publicly divulge their working interpretations of DOT's conditions. Moreover, several airline, agency and buyer sources said joint Continental-Northwest corporate contracts are not necessarily as beneficial as some first assumed.
A Delta spokesperson said only that details were being finalized and "whatever we do with corporate contracts is governed by DOT and Department of Justice guidelines."
In a brief joint statement immediately following DOT's approval, the carriers said they will continue to "compete vigorously with each other" and that the alliance will "enable each carrier to access a greater number of customers and, in this weak economic environment, will preserve service to small communities and those communities' access to broad route networks."
Several smaller carriers, of course, objected to the trilateral alliance. "The fact of the matter is that if these airlines went to DOJ with the intent to merge, there is no way they would let them—and this is effectively a merger," said AirTran CEO Joe Leonard in an interview last month with Business Travel News. "At least with United-US Airways one could make the argument there is some improved network capability. You can't even make that argument laughingly that Continental-Delta-Northwest would provide better connectivity than what people already have."
The corporate travel community has been divided on the Continental-Delta-Northwest pact. On the one hand, some suggested competition will be limited, regardless of imposed conditions. "There is a concern on the part of the aviation committee predominantly related to the hub situation," said NBTA's Fletcher. "Continental-Delta-Northwest holds 37 percent of the lift, which is potentially problematic, especially if your company and offices are located in any of their hub cities."
Several sources further suggested the potential for higher buyer costs, with the carriers the only beneficiaries of the alliance.
"The conditions on joint contracting clearly will make it a difficult, arduous process," according to Steve Shook, vice president of strategic sourcing at Carlson Wagonlit Travel. "Has enough confusion been created so that people just won't do it? Customers want an individual deal with one or two of the airlines. From their perspective, it would be great to simply add the third carrier and get a little more in the way of discounts."
On the other hand, certain buyers saw the opportunity to cover under their corporate discount more of their company's travel, and sources suggested that overcapacity will continue to present buyers with leverage. The three carriers also said travelers soon will see improved schedules and seamless ticketing, checkin, baggage handling and frequent flyer programs.
Three-way frequent flyer mileage accrual and reciprocal airport lounge access likely will come first, as early as late spring, and an initial wave of code sharing could kick in by June, according to a Delta spokesperson.
United, US Airways Begin Corporate Contract Integration
Despite covering less of the country, the United and US Airways partnership seemingly has a competitive advantage in not being nearly as constrained in joint bidding.
"Without restrictions out of Charlotte, for example, United can piggyback on US Airways' dominance and US Airways can piggyback on United's dominance in San Francisco," said Eclipse Advisors' Lynch. "Their deals can be a lot more comprehensive."
US Airways senior vice president of marketing and planning B. Ben Baldanza acknowledged a leg up over Continental-Delta-Northwest from a corporate contracting standpoint, but said the advantage is offset by combined network size, of which the three carriers hold a sizable lead over United-US Airways.
"The DOT rules show they wield significantly more power in the marketplace, therefore the restrictions on joint corporate contracts were applied," he said.
"We have the ability to work with United from a discounting perspective to corporations across the country, within pre-established legal pricing parameters," added Steve Tracas, US Airways vice president of sales. "Our salesforces now represent one another."
Corporate clients of either airline have two options. They either can add services of one airline to their existing contracts with the other and cover more spend under a previously established framework or request a joint contract. Tracas said two-thirds of US Airways' existing customers already have added addenda to reflect the former while the latter—to be fashioned similar to Continental-Northwest joint agreements—still is in the early stage of development.
Dan Walsh, United vice president of sales, said United is adding US Airways services to client contracts "first where it is most meaningful," but noted very few, comparatively, already have been completed. "We have a substantial number in the pipeline and expect a big spike very soon," he said.
United and US Airways this month began reciprocal frequent flyer reward redemption, following integration of airport clubs and other elements of their loyalty programs.
The carriers currently code share in about 1,000 markets, including US Airways' East Coast shuttle network, with plans to expand into another 500 by July. United and US Airways also are beginning to coordinate airport facilities but, like Continental-Delta-Northwest, they stressed that they remain competitors.