GAO, Justice, Buyers Show Concern Over Alliances

<B> GAO, Justice, Buyers Show Concern Over Alliances</B>

By Jay Campbell

<I>New Orleans</I> - Just as alliances and competition topped the airline banter here at the Association of Corporate Travel Executives conference, key U.S. federal agencies detailed concerns about the three proposed domestic partnerships and the pending deal between American Airlines and British Airways.

The General Accounting Office on June 4 became the first federal organization to outline the competitive implications of major domestic alliances, when director of transportation issues John Anderson told Congress that 100 million passengers a year--25 percent of the domestic total--could see reduced competition on the routes they fly, while only 30 million would enjoy potential benefits.

Also, the Department of Justice on May 21 said the Department of Transportation should ensure that competitors receive slots for 24 daily roundtrips to London Heathrow before DOT grants antitrust immunity to the proposed AA-BA alliance. That should include eight new daily roundtrips to Heathrow from New York, two each from Boston and Chicago, and one each from Miami and L.A, DOJ said.

At ACTE, meanwhile, corporate travel buyers rivaled the government agencies in their concern about airline consolidation through alliances.

Ren&eacute; Trullemans, European financial services manager for Hewlett-Packard, was particularly wary of the way partner carriers are taking advantage of their newly created monopoly positions when they sit down to negotiate with buyers.

Star Alliance partners Lufthansa and SAS, and Atlantic Excellence Alliance partners Sabena and Swissair, he said, are no longer discounting on routes where they are the only carriers.

"Alliances have created monopoly situations where customers no longer have a choice, such as between Germany and Sweden and between Belgium and Switzerland," he said. "Most of these segments now are excluded from corporate deals, and our only alternative is to take a connection. But that's not seamless. I do see a lot of good things about alliances, but only if we can move toward one worldwide negotiation."

Two informal polls of travel managers at ACTE gauged the buyers' collective mindset on alliances. BTN found that of 24 travel managers, eight said alliances are a positive development, nine were unsure and seven said the partnerships could hurt travel departments or the industry as a whole. A previous poll of 15 business travel buyers indicated respondents were evenly split on the subject (<I>BTN</I>, March 16).

Asked whether existing alliances are providing what airlines call "seamless travel," 15 travel managers said no and none said yes--though eight said they believed alliances eventually will provide that kind of service.

Airlines executives, meanwhile, emphasized their commitment to integration and acknowledged that it has taken some time to integrate their partnerships. "We're striving very hard to achieve consistent service, but at the moment alliances are perhaps benefiting the person in the seat more than the corporation," said Joe Laughlin, director of business markets for United Airlines. "We realize that our challenges are to demonstrate true cost savings for corporations, to utilize economies of scale, to harness our technologies and to offer simplified policies and operations."

Asked about the state of corporate negotiations at the Star Alliance, Dan Walsh, vice president of United's East Region, told BTN at a press conference in New York that, "Frankly, we're not ready. We are moving through that process very slowly. Even so, there are a number of companies on the East Coast--more than 10 but less that 100--with which we are discussing corporate contracts."

Star Alliance managers said that one thing holding up the negotiations is the fact that the six carriers still are working on getting their revenue accounting on the same platform. Summing up the amount of work that remains, United director of customer service planning Greg Couper said that "each trip on a Star Alliance partner shows 10 things accomplished with 50 things that need to be done."

Delta Air Lines manager of agency and corporate relations Doug Field, who noted that the Atlantic Excellence deal has contributed over $100 million in incremental growth, said at ACTE that Delta and its partners are "moving towards" a single point of contact for companies negotiating with the Atlantic Excellence alliance.

Even when alliances do negotiate, one issue for buyers is that they do not typically offer a single discount level for all pieces of the pie. Airlines are reluctant to do that, said Field, because, "Market conditions vary by region and by country. There are now probably very few deals out there where one discount applies to all parts--and I'm not aware of any."

Lufthansa global corporate sales manager Margit Napier referred to these point of sale differences as an explanation for Trullemans' issue of no discounts between Germany and Sweden. "These routes are not excluded from the German point of sale program. The reason it may be excluded from the Scandanavian side is prices are 35 percent higher in Germany."

But Colin Brain, director of Brain & Company, a London consultancy, said that "with Lufthansa and SAS, contracts that existed in 1996 were reduced in '97 and virtually eliminated in '98." Further, he said, "In corporate contracts, Delta is forcing companies to sign an agreement promising they'll do deals with Delta's partners."

Of course, before any company can negotiate with an alliance it must get its own house in order. Janan Johnson, corporate travel manager for Computer Sciences Corp. in El Segundo, Calif., pointed out that she doesn't have an alliance deal --but acknowledged that is not United's fault. "We need to bring in our German division. This is partly a CSC issue," she said, joking that employees often call the company Collection of Small Companies.

Still, some corporations ready to negotiate alliance deals continue to run into problems. Joyce Bembry, manager of business travel for Du Pont de Nemours & Co. in Wilmington, Del., said she was all set to sit down with Lufthansa and United, but Lufthansa pulled out at the 11th hour.

Defending the proposed Delta-United domestic partnership, Field cited a Delta statement to DOT including an example of reduced pricing. Now, he said, certain passengers using an interline discount fare in markets such as Little Rock-Chicago on two segments would pay $511 ($236 to Delta for Little Rock-Atlanta plus $275 to United for Atlanta-Chicago). That same passenger traveling on a Delta ticket all the way would pay only $295, over 40 percent less than the interline fare, even though the second part of the trip is actually on United.

Delta said that without its United alliance, the two carriers would have no incentive to negotiate an interline pro-rate agreement that would permit United to offer a competitive online fare between those two cities.

Expressing travel buyers' frustration, Du Pont's Bembry responded to Field's example by saying, "We're always told where it's going to save us. But we're looking for an example where it is saving us ... do you have one of those?" He didn't.

The GAO recommended to government that in reviewing the proposed domestic alliances, policymakers should determine whether the airlines' claims about passenger benefits are realistic. Also, regulators should determine whether the alliances reduce or retain incentives to compete on price.

Focusing on the domestic alliances such as Delta-United, the GAO had analyzed 1997 data accounting for more than 90 percent of total domestic traffic. Anderson said the number of airlines could decline on 1,836 routes. The Delta-United partnership makes up 1,038 of them, followed by American-US Airways in 439 markets and Northwest-Continental in 359. The three partnerships would control 70 percent of the domestic market, he said.

But Anderson did acknowledge there are some benefits to the pairings, notably the effect of creating more competition when two carriers with smaller market shares join and become stronger against the dominant carrier. But that benefit could be achieved only in 199 markets with 15.2 million passengers a year by Northwest-Continental, 89 markets for 8.9 million passengers under Delta-United and 50 markets serving 6.4 million passengers by American-US Airways.

Anderson also pointed out that the harmful effect of barriers to entry at key airports--slot controls at four and long-term exclusive-use gate leases at several more (<I>BTN</I>, April 13)--would be exacerbated if the three alliances are approved.

Refering to AA-BA, DOJ said the two carriers should not be allowed to include routes from Heathrow to Chicago and Dallas, and added that if it were reviewing AA-BA under antitrust laws, the agency would try to block the partnership.

Karel Van Miert, the European Union's competition commissioner, questioned the effectiveness of such new flights and the removal of certain markets from the alliance, but he did say he is in closer communication with U.K. and U.S. officials these days. A U.K. official noted, however, that the universally agreed first step toward allowing the AA-BA deal, an Open Skies agreement between the U.K. and U.S., is a long way off.

<I>-- David Marcus and David Jonas contributed to this report.