<B>Refiguring Alliances</B>
<I>Delta-Air France And Other Pacts Add Corp. Negotiating Options</I>
By David Jonas
A flurry of alliance activity dominated the international airline scene as 1999 came to a close. In 2000, corporate buyers must reevaluate their needs and make sense of the newest alliance configurations to determine which groupings will work best, at least for now.
The newest global alliance, Delta and Air France, already has begun implementing "bridge agreements" with some top corporate accounts in Europe, and is looking for similar opportunities in the United States.
Although these agreements cannot offer integrated pricing schemes due to antitrust regulations, and at this point do not include joint discounting like the new agreements coming out of the Continental-Northwest partnership, they do enable corporations to shift air volume to the two carriers to achieve incentives.
Delta and Air France both offer clients incentives for hitting their independently defined targets. If the client reaches both carriers' targets, it earns a bonus "bridge" incentive as well. Incentives can include commission payments and soft dollar arrangements.
Keith Rogers, Delta's director of sales development, said, "We are identifying common corporate clients to determine where the potential lies in integrating traffic that would otherwise be with another alliance. As long as they fly with one of us, they will be contributing to their corporate agreement."
Bridge agreements at about 55 European corporations kicked in on Jan. 1, with at least 50 more ready for implementation. In the United States, the process has been slowed as the two carriers work to develop systems to track and provide flown performance numbers with one another. The more complex U.S. deals will operate on a segment model, whereby the client has to provide an agreed number of passengers per sector.
However, at this point, the simpler European deals--based on increasing revenue by an agreed amount--only are on a country-by-country basis in 14 national markets. "Our clients are looking for multinational deals and these negotiations are going on at the moment but it becomes very difficult to get the right information for them without antitrust immunity," said Robert Keysselitz, Delta regional manager for sales development and performance in Europe.
The 14 national markets up for grabs do not include France among their number. The partnership is not offering bridge deals there to avoid falling foul of European Commission objections to incremental incentives by dominant carriers in their home markets. British Airways was fined 6.8 million euros last year for offering such incentives in the United Kingdom and was forced to change its override structure. SAS made similar changes at the beginning of this month and more major European Union carriers are expected to follow suit this year.
Keysselitz said it is impossible to give figures for the revenue that clients must provide to generate a bridge deal, or the bonuses they could expect to earn, since each agreement will be settled on a case-by-case basis. "With big corporations, the target could be $2 million; with small corporations, it could be $50,000," he said. Performance will normally be monitored over a 90-day period.
Despite running a bit slower to market, bridge agreements on this side of the pond are being discussed with several corporate clients. "Those discussions are leading from the question of what happens now that the Atlantic Excellence is gone," Rogers said. "They are asking, 'How can I structure an agreement with you that will be as competitive as other alliance agreements?' " Indeed, Delta is working quickly to fill the gaps left when it abandoned Austrian, Swissair and Sabena this summer, and to provide value to global corporations seeking connections from Paris to other European destinations, Africa and the Middle East.
The development of joint agreements also gives the two carriers leverage in attracting clients on the West Coast, a traditionally weak region for Delta and therefore a new focus area for corporate sales. "Air France could not secure those customers because they needed a domestic U.S. agreement. Now we can offer transcon service to the Southeast and through service to Paris and then onward to just about everywhere else," Rogers said.
Agencies also will begin seeing bridge agreements. Some recently have been introduced to European agencies while those in the United States will beta test until planned rollouts in June.
At the same time, the two carriers are developing service quality standards and technology integration. Rogers said one development is the sharing of information on top corporate clients via the reservations process. Also, an integrated Internet strategy is in the works, an area where Air France can learn much from its more advanced U.S. partner.
The carriers said they hope to receive antitrust immunity by year-end and move forward with a deeper sales integration strategy. Also, ties with Aeromexico, the third alliance partner, are expected throughout 2000, as are announcements of new members.
Meanwhile, other alliances have been adding new partners, which translates into new opportunities for buyers. Indeed, the United-led Star Alliance recently welcomed British Midland as its newest member. The British carrier brings coveted Heathrow slots to the table and executive chairman Sir Michael Bishop told BTN that the airline already is moving forward with integration. "We have been competing with one hand tied behind our back. Now, with a much larger network and customer benefits such as frequent flyer mileage through Star, we have much more to offer our corporate clients." Bishop added that discussions with clients already are underway and the carrier simply is awaiting final regulatory approvals. The airline also seeks authority for transatlantic service to Heathrow and other destinations in the United Kingdom.
However, BTN has learned that United and British Midland struck an individual deal before the latter announced it had joined Star. The agreement enabled the two carriers to work together with corporations on traffic beyond London.
The antitrust-immunized trio in the Star Alliance--Air Canada, Lufthansa and United--in 1999 accelerated the pace of joint deals to corporations. A senior manager at one of the carriers, speaking on the condition of anonymity, told BTN that more than 100 such deals, which include joint pricing and discounting for U.S. corporate clients, now are in place. "We've worked through easy-to-use agreements because of demand and ability to facilitate them," the source said. "Many are existing agreements which had been expanded and show the evolution of us sharing value between ourselves and our customers."
In other Star news, United and Air New Zealand filed for antitrust immunity.
Northwest-KLM and Alitalia, which recently received the green light for an immunized tripartite alliance, also will begin developing synergies. KLM president and CEO Leo Van Wijk told BTN, "With antitrust immunity, we now can offer an integrated network and seamless shopping for the corporate market."
While Continental--the fourth member of the still unnamed alliance--has yet to agree on such deep integration, some progress has been made. The carrier and KLM recently announced a new marketing agreement that includes reciprocal frequent flyer programs, through checkin, joint lounge access and, pending government approval, codeshares on certain routes. Continental already shares code with Alitalia, and of course cooperates with Northwest extensively in the domestic market, including several new jointly discounted deals (BTN, Dec. 6, 1999). The two carriers also recently began code sharing to Mexico, a development that could frighten American Airlines as corporations now have a viable alternative south of the border.
Despite Continental's hesitancy to take the full plunge with its overseas partners, the carrier doesn't have much choice in aligning itself. Said Gary Wilson, chairman of Northwest, "We acquired shares of Continental to ensure it would not be acquired by an entity hostile to our alliance."
Meanwhile, Air Canada's takeover of Canadian Airlines has shifted the balance of power north of the border away from Oneworld and toward the Star Alliance (see story, page 1). As a result, corporations with existing multi-airline deals involving either carrier--or looking to ink a new one--must sort through the new configuration.
"We are hoping to meet with the airlines soon to address joint deals now that AMR is out of this," said Samir Andraos, president of Quebec-based AIM International. "We don't know how the relationship between AMR and Air Canada will develop, if at all."
Andraos said that since alliance deals appeared in Canada about 18 months ago, those corporations that chose Canadian Airlines because Oneworld was better suited to meet all their network needs might be better off sticking with Oneworld or negotiating multiple deals. However, he added that the situation likely will change when Air Canada begins taking over Asian and South American routes previously served by Canadian.
The Canadian Broadcasting Corp., meanwhile, proactively signed a five-year global agreement with Air Canada that includes other Star Alliance carriers. Doug Stuewe, director of corporate acquisitions and negotiations, said the new deal is an umbrella agreement that allows for the addition of other airlines, and not exclusively a Star Alliance deal. Nevertheless, he noted, "Where joint pricing was possible, it exists within the agreement and where joint discounting is possible, it exists within the agreement." Air Canada, United and Lufthansa are an antitrust immunized trio and therefore can work cooperatively on pricing.
On the Oneworld front, apart from losing Canadian, AA chief Don Carty said the alliance members would be "more than content" to have Swissair and Sabena enlist. In the meantime, Carty said there should be no obstacles blocking antitrust immunity and a new Atlantic alliance between AA, Swissair and Sabena. In addition, Carty still hopes for deeper coordination with British Airways. "One thing that represents a competitive imbalance on alliances around the world is the limitations on how intimate the partnership between American and British Airways can be," he said. "We have to untangle that."
Meanwhile, Singapore Airlines late last month acquired a 49 percent stake in Virgin Atlantic for about $970 million. The carriers said their networks have no overlap and therefore are "uniquely complementary." They plan to cooperate on codesharing and other customer service benefits. Virgin will retain its identity and management team, though Singapore will have representation on Virgin's board.
It is not immediately clear how the deal will impact the Star Alliance, which Singapore is set to join next year, though Singapore-Virgin codesharing potentially could give Star a stronger position at London Heathrow.