Foreign Carriers Up U.S. Corp. Pursuit

<B>Foreign Carriers Up U.S. Corp. Pursuit</B>

By David Jonas

Though you don't see the overcapacity issue rearing its head too often anymore across the Atlantic, competitive deals for buyers still abound. U.S. carriers have not noticeably hardened their discounting strategies and foreign carriers, both solo and in conjunction with partners here, have intensified corporate contracting efforts, maintaining a positive negotiating environment despite record traffic numbers and generally busy long-haul carriers.

Of course, alliance uncertainty, fuel costs and messy Open Skies discussions between the United States and the United Kingdom detract from an otherwise healthy atmosphere.

"The transatlantic is just as competitive as it has been and we have not seen any decrease in the discount rates in current negotiations," said John Heilner, a consultant with Management Alternatives/MSIG in Princeton, N.J. "Most of the foreign carriers, coming from a position of relative weakness with no domestic system to offer, have always tried to be aggressive in the U.S. market. But it does seem that they have stepped up activities."

Heilner added that buyers increasingly are looking to foreign flag carriers for specific regions and that "global thinking is helping companies see value without sticking to provincialism."

Whether tied to global alliances, such as Lufthansa and KLM, or going it alone like Virgin Atlantic, overseas carriers are going all out. "From a pricing standpoint, it is intense. The value of deals offered to companies is very good and you won't hear complaints on the discount levels that are being offered out there," said Chris Rossi, Virgin's assistant vice president of sales. "More carriers jumping into the pool only enhances that for corporate purchasing on the transatlantic."

Keith Rogers, director of sales development at Delta Air Lines, said, "The discrepancy in the U.S. dollar has helped drive demand, and the distortion in yield from one side of the pond to the other, has put a lot of pressure on the airlines. The foreign flag carriers remain competitive because they are after that high value of the dollar."

Rogers also cited the increase in premium class seats. "Many carriers have expanded business class capacity. We now only have 148 seats in coach because the demand for business class is so high," he said. "And now the foreign carriers are realizing just how good our business class product is."

Perhaps more than any other region, the transatlantic continues to be a fundamental necessity for carrier partnerships (see chart, this page). To that point, Lufthansa, along with antitrust immunized Star Alliance buddy United, has stepped up multinational contracting across the Atlantic.

Thomas Winkelmann, Lufthansa vice president of the Americas, said Lufthansa and United had the good fortune to start an alliance early on and get a headstart in global contracting. "Most of the very large corporations want global deals and the total number with one now in place is in three digits and growing fast," he said.

The number of existing U.S.-based corporate accounts is "literally thousands," Winklemann added. "Considering our partners, we have such a variety of departures from New York each day, for example. And corporates want the network." For instance, Star Alliance partner SAS will add weekly evening flights from Copenhagen to New York, bringing the total number of flights between Scandinavia and New York to 27.

To handle buyer requests, Lufthansa recently altered its sales organization by dedicating people in the five main regional offices--Dubai, Frankfurt, London, Paris and Singapore--to global contracting. It also brought in a new director of sales, Mathias Friess and added two global sales managers in the New York office. "Also, we are moving away from credit revenue calculated by country," Winkelmann said. "For example, General Motors' European unit Opal has been handled in our Frankfurt office. But if the customer prefers to centralize it somewhere, like Detroit in this case, that is fine."

Lufthansa next year expects to add 13.4 percent more capacity across the Atlantic, including service to new gateways in Denver and Phoenix and bigger planes to Detroit and the West Coast. It also is sticking with three-class service, while competitors have transitioned to two-class configurations. "Our load factors have been healthy and we still see a very strong market for premium travel," Winkelmann said, citing premium class load factors above 90 percent in four of the past five months. "The premium cabins always will be an excellent incentive for corporations who want to give their travelers a chance to upgrade."

For its part, United on Feb. 15 will begin daily nonstop flights between Chicago O'Hare and Amsterdam. It will be United's fifth European destination served nonstop from Chicago.

Like Lufthansa and United, the Northwest and KLM combination, despite failures by the latter to develop links in Europe, remains one of the most well-entrenched alliances.

"The North Atlantic is still highly competitive and, in general, individual competitors are building up their corporate contracting focus," said Michiel Verhaagen, KLM's director of global account management. "But the partnership between Northwest and KLM is strong and long standing. We believe we are positioned at the top of the global corporate contracting business."

The two carriers have formalized the process for working with multinational buyers by streamlining communications and meeting regularly (BTN, Oct. 16). "We need a responsive global accounts team that can answer questions and requests from corporations as fast as possible," said Fay Beauchine, Northwest's vice president of sales and customer relations. "We have been working hard with KLM to make sure we win at this alliance game."

Beauchine added that transatlantic operations are extremely busy with very high load factors, but Northwest still is cutting very competitive deals. "We must always consider the long term," she said.

Meanwhile, Northwest's domestic partner, Continental Airlines, on May 1 will launch daily nonstop service between its Newark hub and London Stansted Airport, the carrier's seventh destination in the British Isles.

Delta and Air France strengthened their global alliance last month, particularly in central and eastern Europe, by adding CSA Czech Airlines. The founding members of the SkyTeam alliance also are reported to be in talks with British Airways which, if productive, dramatically would alter the balance of power in the alliance game.

The SkyTeam partnership, which also includes Aeromexico and Korean Airlines, said CSA Czech's Prague hub will complement Air France's Paris hub to solidify the European network. "SkyTeam certainly had a big gap in central and eastern Europe, so their network fits in very well," Rogers said. "Many U.S.-based corporations have a lot of traffic in that area because of the expanding economy."

CSA Czech, which flew 2 million passengers last year aboard 28 planes and pulled in $2.8 million in profits, is set to officially join next spring. Delta on March 25 plans to begin code sharing on CSA Czech's service from New York. Meanwhile, Air France is interested in buying a stake in the Czech carrier as it moves toward partial privatization.

Founding members Air France and Delta do not have antitrust immunity, but have been adding codeshare flights at a rapid pace. "Within the alliance we have an agreed-upon strategy that each carrier will actively sell its own product first, including all codeshare flights, as long as they are booked through Delta, for example, and then to encourage the other partners in regions where we ourselves do not offer service," Rogers said.

SkyTeam overall already implemented an alliancewide designator within the GDS and now is working on mutual PNR access for real-time customer support. "On the sales front, we have been sharing concepts on how we track and measure performance on corporate agreements so no carrier goes so far out with existing technology that we'd have to double back once antitrust immunity is in place," Rogers said. Delta and Air France also continue to beta test bridge agreements with travel agencies.

The alliance, which is considering partnerships with Alitalia, Thai Airways, Air India, China Eastern Airlines and Swissair/Sabena, also developed a wide-reaching cargo alliance, while pilots from the four current members formed the SkyTeam Pilot Alliance.

CSA Czech's participation in SkyTeam underscores the trend in Europe toward consolidation and growing alliance rosters. British Airways, KLM Royal Dutch Airlines and Alitalia are the biggest players still hunting for partners.

In fact, printed reports place British Airways in alliance talks with cross-Channel rival Air France and Delta. Should such a development pan out, SkyTeam's size and scope would approach that of the Star Alliance, while American Airlines and the Oneworld partnership would be seriously disadvantaged in Europe. BA already showed willingness to abandon American as it discussed a merger with KLM predicated on maintaining the KLM-Northwest Airlines partnership.

AA did not wait around for a deeper BA partnership when it established an immunized alliance with Swissair and Sabena. Immunity was granted in August and now the trio are free to work jointly with corporate clients.

Meanwhile, new nonstop routes to nonhub destinations could affect buyers as they seek out transatlantic needs. "The Newark-Tel Avivs, Newark-Munichs and other beyond points are getting real interesting. Everything traditionally has flowed through London, Brussels and Amsterdam, now there is an increased frequency to these beyond points, and that is a threat to point-to-point carriers like ourselves, and certainly British Airways who is trying to funnel everything through London," Virgin Atlantic's Rossi said. "People, when given the choice, will take the nonstop flight over anything else."

Winkelmann acknowledged that destinations beyond Germany, for example, are one area of focus for the U.S.-based corporate sales team. Also, Lufthansa in the spring will begin six weekly flights between Washington Dulles and Berlin, which is not a Lufthansa hub.

As many carriers target corporations with expanded flight schedules, a few others have scaled back transatlantic capacity for financial and competitive reasons. Sabena in April will suspend flights to Newark, and TWA in January will erase Lisbon and Milan from its route network. However, the carrier is targeting a spring startup for St. Louis-Frankfurt flights.

The environment will change if the United Kingdom and the United States can hammer out a new aviation agreement. The talks to this point have been fruitless as U.S. negotiators push for increased access to heavily guarded London Heathrow Airport. "We need complete Open Skies, and maybe even cabatoge, to make it easier for new entrants to get involved in the transatlantic market and to have true, long-term competition," said Charles Braswell, global travel management and business services at DaimlerChrysler AG. "Overall load factors suggest it is definitely no longer a buyer's market, though we still have been able to take advantage of corporate deals where it makes sense."

Virgin Atlantic, which already operates from Heathrow, likes its positioning should a new agreement materialize. "If legislation dictates that there is a major liberalization of traffic between the major companies in Europe and North America, he who has the best toys wins," said John Riordan, Virgin's vice president of sales and marketing for North America. "And right now, we are winning on the product side. And by being small, we have the flexibility and mobility to do something relatively quickly."

British Midland also is pushing hard for a liberalized environment so it may use its slots at Heathrow for transatlantic services. For now, it plans to launch service in April from Manchester, U.K., to both Washington Dulles and Chicago O'Hare. "Passengers from Heathrow will be denied the benefits that true competition brings, until the Bermuda II agreement is liberalized and we are allowed to enter the transatlantic market from Heathrow," said British Midland chairman Sir Michael Bishop.

Despite alliance connections and more options from foreign carriers, maintaining the integrity of a domestic deal may be paramount when shopping for transatlantic service. "About 90 percent of our clients that have a domestic carrier as their primary vendor don't entertain deals from foreign carriers, even if the discount is higher," said Steve Weiner, vice president and general manager for Maritz Travel Co. "In the right situation, foreign carriers may be a secondary opportunity, but not at the expense of the domestic relationship, particularly for larger corporations."

Indeed, Delta's Rogers said corporations flip flop back and forth between going with a foreign flag carrier or working with current partners in the United States. "In the end, most come back to the carriers that can cover the most of their travel needs," he said.