Pundits Knock NW-CO Code Sharing

<B> Pundits Knock NW-CO Code Sharing</B>

By Jay Campbell

Many in the travel industry are opposed to the recently proposed alliance between Continental and Northwest Airlines, but such sentiments won't in any way slow the forces of consolidation that fomented the code sharing arrangement.

An informal e-mail survey of travel agencies, corporate travel managers, airport executives, consultants and airline and government officials, taken by the Business Travel Coalition, found that 66 percent of the 69 respondents did not favor the proposed link-up. Twenty-nine percent approved; 5 percent were undecided.

Those not in favor cited concerns about increased consolidation in the airline industry, which they said makes for higher fares. "Ultimately, there will be fewer competitors, and less competition," said one respondent. "Show me a consolidated industry in which this is not the case!"

Said another, "near term, little change. Long-term, reduction of discounts available and possible reduction in cities served, at least with frequency. Just as code sharing reduces competition, so eventually will this."

Indeed, Continental chairman and CEO Gordon Bethune acknowledged that the airline will no longer have to discount its product as aggressively as in the past (see story, page 1). Although Northwest's and Continental's route systems overlap on only eight routes--between their hubs of Detroit, Minneapolis and Memphis and Cleveland, Houston and Newark, respectively--buyers are concerned that, as Bethune suggested, the carriers' stronger positions will give them more negotiating leverage by making them more attractive.

Continental executives speaking in January to the carrier's annual corporate advisory board argued that the new alliance will be beneficial to corporate customers from a service standpoint. "We're still talking to our lawyers about what we can do together, whether we can do joint contracts," said Mark Bergsrud, Continental's vice president of marketing, planning and revenue programs. "But we expect to offer better deals with more utility, more scope. We'll find a way to give you the benefits of our large network. Our premise is that we discount based on share shift, and now there's more opportunity to shift share."

"There's nothing that says, from a pricing perspective, what's going to change," said Jim Compton, vice president of pricing. "We'll still be very competitive."

Some respondents to the BTC survey were hopeful that the new alliance could lead to improved competition with the nation's big three--American, Delta and United--and their international alliances. "If Continental had the courage to expand into Denver again, and to challenge United's West Coast dominance and American's New York City power center, I'd see this as a long-term consumer benefit," said one.

The alliance, which is pending an approximately four-month review by the Depts. of Justice and Transportation, involves a 14 percent investment by Northwest in Continental and aims to include code-sharing and frequent flyer reciprocity on all routes. The carriers said no hubs will be eliminated. Northwest will pass up its voting rights--except in the case of a merger proposal--for six years. If approved, it would become the largest-ever domestic code-sharing deal, surpassing 1994's America West-Continental pact.

Continental and Northwest espoused such benefits as "seamless, online connections between Tokyo and Rio." But Northwest balked at references to a merger: "We will remain two independent airlines," said president and CEO John Dasburg.

In the long term, both carriers see their international partners becoming involved in what would be an airline network that rivals the United-led Star Alliance. Continental partners with Air France, Alitalia, America West and Virgin, among others; Northwest has an alliance with Alaska Airlines and KLM, among others.

Continental and Northwest combined (in 1997 figures) would make the second-largest carrier in the world in revenue passenger miles, with 119.9 billion, just shy of United's 121.4 billion. American would be third, with 107 billion. Based on a NatWest report that counted 1996 revenues in each of the world's regions, NW-CO would be the largest domestic airline. Internationally, it would significantly improve its ability to challenge American's dominance in Latin America, and American's and Delta's lead on the Atlantic. The addition of Continental Micronesia also would shore up Northwest's rivalry with United across the Pacific.

The code-sharing deal is expected to generate more than $500 million annually for the carriers within three years. Continental will earn about 45 percent of that.

While claiming they are interested in the new revenues--and not opposed to the alliance in principle--Continental's pilots are protesting what they called a failure by management to offer job protection provisions in their current contract negotiations. The pilots last week were conducting "virtual strikes" in Cleveland, Houston and Newark, and promised to make things difficult for the two carriers to implement the alliance without such provisions.

Meanwhile, the CO-NW deal--which all but hinged on the U.S.-Japan bilateral awarding U.S. carriers the right to code-share within this country on routes to Japan (called same-country code sharing)--has spurred Delta and US Airways to apply for code sharing with TWA and with American and United, respectively, on U.S.-Japan services.