Carriers Are Dancing Closer To World Beat

<H1> Carriers Are Dancing Closer To World Beat</H1>By Jay Campbell

More than ever, airlines are solving the problem of how to consolidate globally amid a restrictive regulatory environment by setting up international alliances.

This year already has seen 71 new alliances-everything from code sharing to baggage handling to sweeping marketing arrangements-and now, according to figures compiled by <I>Airline Business</I> magazine, more than 170 airlines around the world are working together.

Not only is the number of alliances continuing to increase, but the partners involved are getting closer under the U.S. Department of Transportation's official policy of allowing U.S. and foreign carriers to skirt antitrust laws in exchange for open skies. The practice, starting with Northwest in 1992, has accelerated this year with approval given to United, Delta and American and their respective partners.

No alliance has received more attention than the planned alliance between American Airlines and British Airways. This partnership has underscored the debate over what such alliances mean for competition and quality of service.

Proponents of airline alliances say the partnerships provide cost savings that would be passed on in the form of better fares. But critics say that because alliances reduce the number of competitors, they can and will result in higher fares and are intrinsically anti-consumer.

An analysis prepared by travel consulting firm Topaz Enterprises showed that since KLM and Northwest were granted antitrust immunity in 1993, fares between Amsterdam and Detroit have risen by up to 40 percent.

Few doubt that the partnerships will provide enhanced global service, creating new city pairs as shown in CRS systems and enabling carriers to serve new destinations or increase service on existing ones. Since starting its partnership with KLM in 1991, for example, Northwest has increased its daily flights to Amsterdam from four a week to two a day.

Perhaps the truth is that fares could go up, but that the benefits of alliances are worth it and would help sell travelers on a given airline group. "The airlines can't undertake cross-border mergers," said Jon Ash, managing director of the Washington D.C.-based consultancy Global Airline Associates. "They need to undertake joint ventures to make worldwide travel efficient and effective, and to do that, they need immunity. Fares may be higher, but more services will be available."

According to airlines and some corporate travel managers, one of the biggest benefits to business travel will be the ability to set up multinational if not global deals with a single entity representing multiple carriers. All of the alliance airlines newly ordained with antitrust immunity have set up working groups to coordinate areas such as corporate sales, but, while some deals have been set up, the airlines have not yet ironed out what form deals will take.

"On corporate accounts, we're still in the talking stages," said Delta spokesman Dean Breest of the carrier's partnership with Austrian, Sabena and Swissair. "We have no deals yet, and a new formula has not yet been developed." He said, however, that the issue will be worked out by fall.

United and Lufthansa are "combining our individual approaches to the customer-for example, in how we'll propose to an RFP," said United's director of sales and business markets, Joe Laughlin.
"We are

working to make it a coordinated approach, as if we were a single carrier."

But according to Hanna Murphy, manager of corporate travel and fleet arrangement for Germany's Siemens Corp., the international airline industry isn't quite ready for global deals. "We have a global tracking system through our corporate card, and we've engaged the best travel agencies in each country," she said. "But I don't have a global program because I don't know of a truly global airline."

Michael Platt, director of commercial affairs for U.K.-based Hogg Robinson, agreed. "There's no such thing as a global deal because there's no such thing as a global airline," he said. "There are bilateral deals and multinational deals, but these alliances could result in global deals."

Platt said BA told him it has 10 multinational arrangements, five of which are with U.S. companies. He added that while one year ago, 10 of the world's top 20 airlines were considering global deals, now 16 are actively looking at them.

Richard Johnson, regional vice president of corporate and agency sales for Northwest, said his carrier and KLM have "less than a couple dozen truly global deals. There are a lot of joint deals over the Atlantic, though."

Laughlin said United and Lufthansa have negotiated deals covering large numbers of city pairs (<I>BTN</I>, June 10), but he too said global deals have not yet proliferated.

Joint multinational deals based on code sharing arrangements can take shape in an umbrella scheme where partner airlines make their own separate arrangements with companies, and if buyers make their quotas for each or all carriers, they get an additional percentage discount that can even be applied retroactively. A source at Qantas said his airline and BA started an experimental umbrella program 18 months ago. Now there are "a few dozen such arrangements, one or two of which include USAir," he said.

In a simpler arrangement, some code sharing partners are allowing segments purchased on the foreign partner to count toward corporate deals with the domestic airline.

Although the airlines have a lot of work to do in coordinating their global sales teams, corporations, too, are for the most part not yet ready to consolidate worldwide travel and mandate policy outside the United States. Corporations looking to capitalize on any form of airline partnership should keep several things in mind, Platt suggested. "Suppliers are looking for deals that will stick for at least two years and reduce cost, and they want the companies to have a good international spend of over $20 million to at least two or three major destinations, to have consolidated data and to have a single point of contact through an agency."

What corporations can get through a multinational air deal appears to add 5 percent to its existing air discounts, but if concerns about price hikes are legitimate, this may not prove to be an incremental savings. Hard dollars, however, are not the only benefits that buyers can gain from such deals.

"Five percent sounds comfortable to me, " said Howard Brooks, director of expense management and travel administration for New York-based Sony Music, "but also soft dollar benefits are important to the travelers because it makes them feel they're getting something too."

Soft dollar benefits, such as seat upgrades, airport club memberships and drink coupons, certainly aid travel managers' efforts to boost compliance. So too do the service benefits that alliances can provide.

"That means fewer times checking bags, quicker connections and use of shared facilities with the dominant carriers at respective hubs-the best facilities at those hubs," said Delta's Breest.

According to United's Laughlin, the partnerships also "provide the local flavor of the destination, as nobody can do better than the local carrier."

For the airlines, partnerships enable them to do what they've realized they can't do alone-be everything to everybody. As one airline executive said, "alliances are developed to mask weakness."

While American and British Airways would shy away from admitting it, most industry observers are convinced their link is a special case. The two carriers duplicate each other's service on more routes than any existing alliance does, have a larger share of travel between their respective countries and give BA a feed from nine U.S. hubs when combined with its code shares with America West and USAir.

In contrast, American said, AA-BA have fewer online city pairs than United-Lufthansa, where the relevant market is United States-Europe, not United States-United Kingdom, and the alliance is the best hope for opening the U.S.-U.K. marketplace.

Like the other alliances, BA and AA would provide better service. For example, they will adjust the timing of their services from Heathrow to New York and Chicago to create an hourly shuttle. But with the elimination of a competitor comes the potential for higher fares.

The DOT's answer to higher fares has been the increased opportunity for entry through open skies, but London is problematic because it's harder to get slots there-harder, American said, but not impossible. "AA has increased its Heathrow holdings 33 percent since 1991," said AA managing director of international relations Robert Britton. "To say that one cannot acquire and build slots at Heathrow is simply wrong."

Competitors disagree: "You can open the open skies door, but not the Heathrow door," said David Tait, executive vice president and director of Virgin Atlantic. "There are slots, and there are prime slots. To serve North America, only 17 hours out of 48 are usable because of environmental and residential concerns. BA has 80 percent of those slots."

Kevin Brady, vice president of travel and executive services for Merrill Lynch, purchases $20 million per year between New York and London. "It will put upper pressure on fares for sure, but it's to my benefit that the airlines are more efficient," he said. "I think there are enough safeguards in place to keep prices down."

Fred Swaffer, corporate travel manager at Hewlett-Packard in Palo Alto, Calif., said the AA-BA alliance "gives BA a huge domestic feed. The jury's still out, of course, but it looks like [American's] Crandall has pulled a coup."

The most interesting and surprising development through the ongoing rhetoric for and against the BA-AA link was USAir's filing of a lawsuit against the two carriers (<I>BTN</I>, Aug. 5). USAir said its part-owner and code sharing partner British Airways failed to fulfill its fiduciary duties under the carriers' contract. The suit also attacks the BA-AA plan for being monopolistic, giving competing airlines and alliances something big to smile about. "If British Airways' own partner is taking this attitude, then every regulatory authority in Europe and America cannot help but draw the same conclusion: that such a merger is anticompetitive and not in the air travel consumer's interest," said the official Virgin Atlantic statement. AA and BA made terse statements on the filing, BA noting that it has no intention of divesting its 25 percent stake in USAir as demanded by USAir.

It's unclear whether the USAir suit will have any effect on the alliance's chances for approval. It is not unusual that regulatory bodies would incorporate information divulged in a lawsuit to help them make a decision on approval for something like antitrust immunity. In fact, one source said the Department of Justice is soliciting information from the discovery stages of the Virgin-BA suit, which alleges monopolistic practices by BA-and is filed in New York with the same judge as USAir's suit. The Department of Justice would then have access to information the carriers themselves don't even know about each other.

But attorneys interviewed were skeptical about what effect the lawsuits would have on any DOT or DOJ decision. "USAir's litigation strikes me as problematic," said Paul Dempsey, professor of transportation law at the University of Denver. "The court could just say that antitrust is within the jurisdiction of the DOT, and it will be making that decision directly."

While the regulatory decision on BA-AA remains to be seen, the lawsuit filed by USAir does bring up once again the question of whether such alliances, whether based only on code sharing or antitrust immunity, can work in the long run.

USAir's move followed by a matter of months a Northwest suit against KLM over ownership and control. Both USAir and Northwest had accepted the investment of their respective partners to bail them out of the recession, giving the foreign partners 25 percent voting control. "USAir was in no position to negotiate when they set up the BA deal," said a former USAir exec who was at the carrier when the partnership was signed. "Now they're saying, 'let's renegotiate. Give us the same deal you're offering American.' "

While from a business perspective, an equity alliance may seem beneficial, some carriers are avoiding them for fear of a nasty divorce. "The big difference for us is that there's no equity swap," said Lufthansa's regional sales manager in Florida, John Kottcamp, referring to the United deal. "We're still separate, and in some cases competitive, so you won't see any board battles."

Carriers try to balance the benefits of an alliance, but it doesn't always work. In the cases of USAir and Northwest, it's the European partners that have benefited more in terms of additional revenue, because North America represents 50 percent of travel in the world and the United States 30 percent. "Foreign carriers gain more out of these deals than U.S. ones, and that's unfortunate," Dempsey said. "I believe code sharing relationships and other alliances are anti-consumer, but DOT policy has gone in a different direction than I would prefer, and I guess I'm not saddened that some of these partnerships are breaking up."

Dempsey and others are questioning whether the governments involved are concerned with consumer benefit through competition or the best interests of the airlines, particularly concerning the BA-AA proposal.

Why is it, for example, that the United Kingdom did not push for open skies before BA asked it to? "The recent comments by the British government that there will be a detailed review of the proposed alliance is more of a posturing tactic to begin the negotiating process [for the alliance] than a meaningful inquiry into the possible anticompetitive effects of the alliance," said travel attorney Jeffrey Miller.

The U.S. government is no saint, either. Many are asking why the United States clings to regulations-in a "deregulated environment"-that limit foreign investment, disallow travel by government employees or contractors on foreign carriers and restrict fifth freedom rights for foreign carriers.

Furthermore, why is it that the DOT-the agency charged with promoting air travel-has final say over the DOJ, which protects consumers?

Looking beyond these protectionist practices, most agree that at least the DOT has the best of ultimate intentions in that it wants to help provide, as BA chairman Colin Marshall states, "a global air transport system to serve a world market."

Even that, however, is contentious, because nobody is really sure what global means. "We have hundreds of airline agreements," said Siemens' Murphy.

Murphy believes five or six multinational deals would cover travel for the world's largest companies, and that matches well with what observers say will be the future of the global map of airline competition.

"What you'll end up with globally is less than 10 networks that will serve 80 to 90 percent of worldwide traffic flow, plus niche carriers," Ash said. "The guy in the middle is potentially in trouble." It will be interesting to see who gets left out.