CO-NW Deals With KLM Further Transatlantic Alliance

Continental and Northwest airlines continue to operate the only domestic partnership offering enough scope and utility to attract corporate buyers. Considering Northwest's long-standing joint venture with KLM Royal Dutch Airlines and Continental's new relationship with KLM, the three carriers have the potential to become a formidable alliance player in the all-important transatlantic market.

For now, U.S.-based corporations can focus on what Northwest-Continental bring to the table: integrated single-document corporate contracts now numbering more than 100—with at least 200 additional unilateral Continental or Northwest deals that include elements of the other—extensive codesharing, electronic ticket interlining, an incentive program for smaller accounts, jointly operated and widespread self-service kiosks and such other customer conveniences as frequent flyer and airport lounge reciprocity. "The alliance is in its third year and while by no means mature, it is becoming more robust," said Fay Beauchine, Northwest vice president of sales and customer relations.

Still, the two carriers are strange bedfellows with differing management philosophies, fleet types and sales strategies, highlighted again in recent pricing moves. "Continental never met a fare increase it didn't start or match and Northwest never met one it didn't screw around with," said Terry Trippler, president of Trippler & Associates in Minneapolis.

The carriers said the dichotomy underscores the fact that they remain competitors. Nevertheless, years of courtship, though stormy at times, have shown they, when on the same page, can cooperate effectively. Moreover, the differences in their route networks drive the value of the partnership, not only within the domestic market, but also overseas. Indeed, Continental provides a Latin American presence, Northwest contributes its Asian strength and together they provide ample service to Europe. In many U.S. markets, the duo rivals the Big Three—American, Delta and United airlines—and therefore offers corporate buyers an attractive alternative, particularly in the Midwest. "Also on the West Coast, where neither one of us is big enough by ourselves to make a big enough splash," noted Dave Bartels, Continental senior director of corporate programs.

San Francisco-based Charles Schwab, for example, opted for a joint CO-NW contract. "They have a very global approach and the international add-ons are better within the joint deal," said Curt Mattos, Charles Schwab director of travel services. The company last summer agreed to a two-year contract extension after increasing its market share on the two carriers and receiving improved contract terms. Mattos also pointed to codeshare benefits and travel management productivity gains, including combined reporting. "Sitting down with everyone at one time has meant a consolidation of the time and effort involved," he said. "It basically is a buy one, get one situation." However, Mattos noted the downside of contract amendments: "When one carrier wants to make a move, the other carrier is by association impacted as well," he said.

Another ideal location is Indianapolis, a highly competitive market where CO-NW found their first joint customer, Thomson Multimedia. The company now is in its last year of a three-year contract and has seen both financial and traveler benefits. "The outcome has been exceptional," said Cindy Heston, Thomson manager of worldwide corporate travel. "Northwest and Continental have both been very supportive in agreeing to make changes due to economic reasons, schedules or travel patterns changing within our company. We have added five amendments, all of which have added value to the original agreement."

Heston added that savings "can be increased dramatically as more business is turned over to CO-NW." Since initially signing the deal (BTN, Sept. 20, 1999), Thomson's combined market share with the two carriers increased nearly 20 percent. Overall, Northwest's Beauchine said the two carriers together offer the most service in three of six domestic regions, and rank second or third in the other three.

A potential complication to integrated deals was Northwest's move last fall to eliminate corporate discounts on lower-bucket fares, but the carriers insisted it hasn't been a problem. "We have essentially done the same thing on all joint contracts," Continental's Bartels said. "In that way, we have maintained consistency."

The partners soon may see improved corporate contracting processes as the latter nears a deal with Albuquerque, N.M.-based The Prism Group for third party data aggregation. Continental already uses Prism to facilitate its Corporate Insight system. "It would help quite a bit in the goal-setting process and in administering contract measurement," Bartels said. "Now, it is a little tricky to ascertain those numbers for joint deals."

Beauchine agreed integrated contracts take time to understand and evaluate. "Measuring the opportunities and benefits takes real effort and dedication to data," she said. Northwest already licensed Continental's internally developed SalesInsight system for its salesforce and renamed it SalesNet.

When it was first announced in early 1998, the CO-NW alliance drew fire from government regulators. Citing concerns centered around Northwest gaining equity and voting control over Continental, the U.S. Department of Justice filed suit against the partnership. Nevertheless, the two carriers moved forward with customer service integration and by September 1999 signed the deal with Thomson. In late 2000, they finally settled with DOJ (BTN, Nov. 13, 2000).

Meanwhile, both carriers acknowledged the disadvantage in not having a brand name to sell against Star Alliance, Oneworld and SkyTeam. Though the Wings nickname has been bandied about for years to group together Continental, Northwest and KLM, the airlines have not cemented the trilateral partnership, opting to focus first on aligning processes and bringing consistency to the customer experience.

A key development came in December, when Continental and KLM began code sharing and linked frequent flyer programs and airport lounges. Interestingly, Continental late last month began daily nonstop service between its Houston hub and KLM's Amsterdam base. "There is a great deal of business between Houston and Amsterdam that we look forward to serving," Continental said in a statement.

"The vision is that we will work jointly with KLM in Europe, our salesforce and KLM's, which represents Northwest over there," Bartels said. "But we are not there yet. It would be a big step for us and something that needs to be negotiated very carefully."

In an SEC filing earlier this year, Continental said such integration is contingent upon "the receipt by Northwest Airlines, KLM Royal Dutch Airlines and us of an adequate grant of antitrust immunity." A request for three-way immunity has not yet been submitted.

Northwest last month cited a possible roadblock in one of its recent SEC filings. "The European Commission is considering imposing certain regulatory conditions that may restrict the areas of permissible cooperation," the company said. "If imposed, such regulatory conditions could adversely affect the alliance and Northwest's ability to maintain and/or expand transatlantic air service."

Considering the current state of the airline industry and the call for liberalization, it may be an opportune time to take the next step. "NW-CO-KLM would be the easiest one to get through regulators," Trippler suggested. "Its not AA-BA. The route networks are complementary and it works. If ever something is automatic, this is it."