<B> EC To Restrict Deals</B>
<I>Rules U.S.-Europe Corporate Negotiations Must Be City-Pair Based</I>
By Amon Cohen
<I>Brussels</I> - Network-wide deals between corporations and the transatlantic alliances led by American Airlines and United Airlines are about to be banned by the European Commission.
There is some ambivalence in the Commission's proposals on how the alliances can sell to corporate clients, but it looks as if travel managers will have to negotiate transatlantic discounts route by route rather than across the board.
The proposals were published on July 30 in the Official Journal of the European Communities, which carries full details of the Commission's conditions for approving the alliance between AA and British Airways. At the same time, competition commissioner Karel Van Miert investigated United's existing alliance with Lufthansa and SAS, for which he has proposed identical constraints on corporate deals.
The Journal also revealed that the Commission intends to ban the members of both alliances from pooling their frequent-flyer programs across the Atlantic. Further, there are plans to oblige alliance airlines to interline with other carriers and to limit the number of entries of code-shared flights in the global distribution systems.
In July, the Commission released details of only one part of its conditions--the relinquishing of slots by both alliances, particularly at London Heathrow and Frankfurt airports (<I>BTN,</I> July 20).
The Commission report dealing with corporate customers of the alliance says: "The terms of fares offered to large customers established or buying transport services in the United Kingdom should be linked to annual turnover on the relevant markets, without a system of thresholds or a system which directly or indirectly rewards loyalty. The terms of fares, and especially prices, may nevertheless be negotiated between airlines and large customers, and may differ, provided Article 86 [relating to abuse of a dominant position] is complied with."
The wording for alliance relations with travel agencies is similar. Interested parties have until Aug. 29 to respond, with the Commission theoretically delivering its final ruling in the autumn--although given its record, whether that will be autumn 1998 or autumn 1999 is a matter of conjecture. Although the proposals will mean some re-negotiation with clients, Richard Lovell, Carlson Wagonlit senior vice president for Northern Europe, said he believes they will accelerate a change that's already happening. "One has to preface any remarks with 'if' because this is not the final verdict, but I suspect that any sort of deals with the alliances will have to be route-specific," Lovell said. "Instead of saying 'come and spend £5 million with us,' the airlines will have to see how much market share they can win on each route."
Such a ruling would "level the playing field to some extent because the alliances are not as powerful on some routes as they are on others," Lovell said. "This will increase the ability for corporates to negotiate but they will have to do it in much more detail by route. We have more leverage on routes where their market share is poor or profitability is very good."
The outlawing of threshold systems also points to the end of that mainstay of airline incentives, the override deal--but Lovell said the all-embracing override was on its way out in any case. "Overrides are already more region-and route-specific," he said. "There is not much point in offering incentive deals on aircraft which are already full."
Lovell also speculated that the Commission's ruling will hasten the development of net fares, which side-step the incentive issue.
While it is rare, the regulation of dealings between airline alliances and corporations to protect competition has been considered before. In granting antitrust immunity to the Delta-Austrian-Sabena- Swissair alliance (<I>BTN,</I> June 10, 1996), the U.S. Departments of Justice and Transportation consulted with corporations and travel agencies and determined that after 18 months, the antitrust immunity granted on seven monopoly city pairs would be reviewed. DOT specified that three of the hub-to-hub routes--Atlanta-Brussels, Atlanta-Zurich and Cincinnati-Zurich--were restricted from immunity except for promotional and corporate fares. Corporate fares would lose that exemption if they account for more than 25 percent of a company's travel with the four carriers after the 18 month period.
"These carve outs applied to corporate fares in order to make sure there's competition for smaller accounts," said John Lindekens, vice president of North and South America for Sabena.
"That review is ongoing, even though the 18 months were up in January of this year," said DOT spokesman Bill Mosley. "Thus far, there have been no problems that would lead us to reconsider and the alliance continues to operate."
But competition is an issue even for larger Delta accounts such as Proctor & Gamble, which this year contracted with other carriers for services to Europe (<I>BTN,</I> July 6).
Lindekens joked that he was upset BTN reminded DOT of the 18-month review, but the airlines targeted by the European Commission aren't laughing. In fact, they're furious with what they regard as bureaucrats interfering with accepted commercial practices. A BA source said: "If you scrap our loyalty bonuses, you would have to scrap everybody's, and that would extend to beyond the airline world, where paying incentives is the norm."
United, which thought its two-year-old link with Lufthansa and SAS was long accepted as a fait accompli, is even more irate. It has filed a complaint with DOT, asserting that the European Union has no jurisdiction over bilateral aviation deals concluded by the United States with Germany and Sweden. "We are not sure these are real-world conditions," said a United source. "Where is the consumer interest in denying us the opportunity to give our best customers a discount?"
United believes it is a pawn in a wider battle for hegemony between the EU and its member states. The conflict also is surfacing in the United Kingdom, where the Office of Fair Trading wants AA-BA to be allowed to sell the 267 slots that the Commission wants them to relinquish. The Commission insists the slots be given up without compensation.
However, BA has built up a stockpile of slots at Heathrow, and Lovell believes the alliance will be checked more effectively by the proposals regarding corporate and agency deals and frequent-flyer programs. BA and AA had heralded the pooling of their frequent flyer programs as a principal benefit of the alliance for consumers.