CO-DL-NW Seek Pact: SkyTeam May Grow If Trio Isn't Bluffing

Many industry observers saw last month's alliance announcement between Continental, Delta and Northwest airlines simply as a means to focus regulatory scrutiny on the United-US Airways codeshare agreement, with the ultimate goal of derailing it. In recent weeks, the trio separately acknowledged the need to respond to the United-US Airways plan.

"I do not think Continental-Delta-Northwest have a serious belief their agreement will pass muster in its current form. The competitive issues are serious and long, and I cannot imagine joint programs permissible by DOT-DOJ," said Michael Boult, COO of Eclipse Advisors, the travel procurement solutions division of Rosenbluth International, summing up the prevailing view among skeptics. "The message to United-US Airways is that this is a spoiler tactic."

As initially proposed and if okayed by the U.S. departments of Justice and Transportation, Continental-Delta-Northwest may begin code sharing as early as next spring, first in the United States, Canada and the Caribbean and later in Europe, Asia and Latin America. They also will link frequent flyer programs and airport lounges.

However, the three airlines have not finalized with their European partners how the pact would affect international alliance agreements, though there is the potential for Continental, Northwest and their mutual partner KLM Royal Dutch Airlines to join Delta's SkyTeam alliance, anchored in Europe by Air France. KLM has been in discussions with Air France for some time and recently said, "there is increasing scope for cooperation." Continental recently ended a relationship with Air France when the latter integrated operations with Delta, but both Continental and Air France said their partnership had been a successful one. Air France "warmly welcomed" word of agreement between the three U.S. carriers.

"The potential additions to SkyTeam would make the alliance more competitive with the other major international alliances, Star Alliance and Oneworld," Delta said in a statement.

Continental and Northwest have had a codesharing agreement in place for four years, including linked frequent flyer programs and airport lounges. The duo, which has accepted carve-outs from its codesharing, notably hub-to-hub flights, also offers travel managers the only meaningful joint corporate programs between two domestic carriers. They would bring to Delta their combined networks, including a strong presence in mid-America, Asia and Latin America. Continental also wields a growing hub at Newark. For its part, Delta offers a well-entrenched north-south network on the East Coast, connectivity through its Cincinnati and Salt Lake City hubs, and a fair share of transatlantic routes. All told, the alliance would control more than one-third of total marketshare within the United States. Federal regulators will decide if the network overlap raises anticompetitive concerns necessitating concessions or outright rejection.

The impact on the airlines' corporate clients all depends on specific travel patterns. "If you had a contract with all three, this would be excellent," said Rob Callahan, corporate travel manager with SBC Communications. "If only one or two were your favorites, you might be concerned, because it makes it too easy to have a continuous trip on several carriers, only some of which give you credit on your spend. When I'm looking at this as a travel manager, I have mixed emotions. As a traveler, I'd be as happy as a pig because I can get where I need to go and do what I need to do."

"I see it as a positive," added one travel manager who asked not to be identified. "We have a huge Houston office and no agreement with Continental, and our travelers fly Continental anyway. If Delta has an agreement with Continental and that helps me, great. Being Atlanta-based, we're pretty locked into Delta, and it's hard to give any other carriers any piece of our business. This lets me get the discount in other ways."

The three airlines have not yet begun discussions along corporate contract lines, but a Continental executive said three-way joint contracts "would mirror existing Continental-Northwest contracts." Not all corporate travel managers are convinced. "They are turning all the dials, and wildly so, trying to find a combination that works," said a New Jersey-area buyer. "They will do almost anything to stem the tide of red ink."

Should this particular combination work, it must first overcome numerous challenges, ranging from pilot contracts and other internal integration pains to regulatory roadblocks and uncertainty among international partners.

No matter the hurdles, the rationale is clear. "The proposal will enable Delta, Continental and Northwest to compete on more equal footing with United Airlines and US Airways," said Delta chairman Leo Mullin. Securing a codeshare partnership has been on Delta's agenda since those carriers announced their marketing deal earlier this summer.

Continental-Delta-Northwest are targeting Nov. 1 for completion of DOT's regulatory review, with union support finalized about a month later. Meanwhile, DOT late last month extended its review of the proposed alliance between United and US Airways to Sept. 23.

Within the Federal Register, DOT said it has been consulting with DOJ and other parties but decided more time was necessary to determine if the agreement raises questions "that may require us to request modifications of the agreements or to institute an enforcement proceeding." However, DOT said the carriers do not need DOT approval to move forward once the 30-day extension expires.