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Taking Stock Of Airline Bonds

By John Briley and Craig Stoltz
Special to The Washington Post
Sunday, January 17, 1999; Page E01

   


If you haven't taken the time to ponder the consequences of the recent cluster of airline alli-ances--the profusion of quasi-mergers, strategic partnerships and marketing relationships among major air carriers--you're probably a shrewd steward of your time.

Despite periodic headlines and apocalyptic sound bites, not much of what's transpired has hit the wallet of a typical air traveler yet. Some deals are little more than handshakes and strategic flag-plantings; some evolve (or, as in the vaunted American-British Airways mating, disappear) as maneuverings between bedfellows and regulators continue; most await a flurry of federal reports and legal challenges.

Still, no matter how subtle, uncertain and carefully measured the moves appear, they are looking very much like a consolidation, at least functionally, of the industry's Big Six carriers into a Big Three (see box below). This is certain to have consequences big and small on the folks who ultimately fill the seats and foot the bills. Here, we attempt to explain what's going on in this slow-moving mating dance of giants, and then explore each of the expected effects on air travelers.

So return that tray table to the locked and upright position, make sure your seat belt is pulled snugly across your hips and stash those peanuts in your pocket. There's going to be some turbulence ahead.

Why Alliances?

Alliances are partnerships between two or more airlines that, in the most simple deals (like the one between American and US Airways), agree to honor each other's frequent-flier miles and (usually) offer elite customers reciprocal access to airport lounges. In a more intricate alliance (so far, only the Northwest/Continental link and some international matings), the partners combine a mileage and lounge pact with an agreement, known as code sharing, to put passengers on each others' flights under a single flight number or "code." In the larger international coalitions (Star and Oneworld are the two biggest), airlines have established (often maddeningly) different arrangements with different partners. (See box on Page E11.) Each international group has at least one U.S. member.

The domestic groupings involve the country's top six airlines and represent nearly 70 percent of U.S. air travel. Among the majors, TWA remains the most conspicuously nonaligned U.S. airline (though it has some minor international deals).

While airlines admit the alliances are designed to increase profits, they contend the deals will help them do this the old-fashioned way--by creating happier customers.

"Customers want to go from one place to the other, and the alliance gives the airline reach it didn't have before without the costs associated with entering new markets," said Fernando Vallecillo, Delta Air Lines' manager of airline partnerships. In other words, allied carriers using code sharing can sell more destinations to their customers without having to bargain for airport slots or build new regional operations. They say this will make them more competitive and able to pass along savings in the form of lower fares.

Not everybody views the alliances so rosily. The coziness between competitors has drawn interest from the U.S. departments of Justice and Transportation, which are studying alliances as possible violations of antitrust laws and as threats to fare and route competition. Justice is suing Continental and Northwest to reverse certain aspects of the agreement. Consumer advocates such as Consumer Reports and passenger groups are crying foul, arguing the alliances will lead to fewer choices and, inevitably, higher fares and degraded service. The most conspiratorial critics view the alliances in the context of other recent airline actions (cutting travel agent commissions, penalizing electronic agents, buying or starting up low-fare competitors) as a move to consolidate control over the historically unprofitable passenger air traffic business.

Paul Ruden, acting executive vice president and chief operating officer of the American Society of Travel Agents, said the wave of alliances is a "variation of the slippery slope theory." Each airline "sees his competition lining up in bigger pockets of power," then follows suit. The result, he says, is even greater consolidation of power, at the expense of consumers and agents.

But let's step outside the intramural squabbling. What do these alliances mean to you? Let's take them point by point.

Frequent-Flier Programs

Pro: Airline alliances will expand options for frequent fliers by opening new routes for award travel.

Con: Frequent-flier programs already encourage members to choose flights for reasons aside from price and service; sweeter frequent-flier deals will only exacerbate this.

Assessment: The melded programs, particularly the American/US Airways deal and, to a lesser extent, the Continental/Northwest deal, offer substantial advantages.

Discussion: Under domestic deals, airlines permit members to shift miles from their alliance partner's accounts--but only when the member is ready to redeem miles for a award. That is, a Northwest frequent flier may transfer 20,000 Continental miles to her Northwest account and redeem them for a Northwest flight. But she may not transfer 10,000 miles from her Continental account to combine with with Northwest miles for an award. (The exception here is the American/US Airways deal, of which more later.)

This will help fliers by opening the partner's air routes for award travel. But because members can't combine miles, customers seeking maximum rewards, including the coveted elite status (which offers "free" class upgrades and other perks), will still need to concentrate their flying with their primary airline. There may be a minor benefit to travelers who fly frequently enough to enjoy points with a secondary airline--giving Delta frequent fliers, for example, the motivation to book with United rather than another carrier when a Delta flight isn't available or convenient. The loyalty deals will benefit members of smaller carriers' programs the most. Delta members will enjoy access to United's greater reach, and US Airways members will benefit from American's extensive route map. Current members of American's and United's first-rate plans will gain few advantages from the alliances.

Among alliances, American and US Airways offer the most complete and juicy integration. The two let participants combine miles from both accounts for an award on either airline (say, moving 5,000 US Airways miles into an American account to get an American ticket).

Under the Northwest/Continental mating, Northwest eliminated the expiration dates on WorldPerks miles, so, like Continental OnePass miles, they don't expire. This makes the alliance attractive to less frequent fliers who need several years to amass awards. Each line lowered the miles needed for a domestic round trip from 25,000 to 20,000.

By contrast, United/Delta offers little beyond basic mile-shifting.

Skeptics respond that securing a mileage award seat was hard enough--and that giving participants of other programs access to a partner's routes will make it tougher. According to Consumer Reports Travel Letter, airlines allocate between 6 and 8 percent of seats for frequent-flier awards (airlines won't verify these figures). No alliance partner we interviewed said it has plans to increase the allotment as a result of alliances.

According to publishers Tom Parsons of Best Fares magazine and Randy Petersen of InsideFlyer magazine, this is particularly worrisome in cases where one partner flies to a desirable destination that the other doesn't. Both cited American's service to Hawaii as the chief example, since US Airways doesn't fly to Hawaii and the islands are a perennial favorite of awardees. Petersen advised American AAdvantage awardees planning to score Hawaii soon (a round trip costs 35,000 miles) to reserve seats now.

American spokesman Mark Slitt says this is an exaggeration. Mileage award seats are "available on every flight," he says. "But if you wait until the last minute to [redeem an award], you may have to use more miles to get that seat." A last-minute ticket to Hawaii would cost an AAdvantage member 70,000 miles if all 35,000-mile-award seats are gone, and a last-minute round trip in the continental U.S. would cost 40,000 miles, compared with the plan-ahead cost of 25,000 miles.

Travel columnist and former Consumer Reports Travel Letter editor Ed Perkins yawns at mileage exchanges for a different reason, at least in the United/Delta grouping. "It's a huge smoke screen," he says. "The fact that I can now use my United miles on Delta is practically meaningless to me because United goes just about everywhere that Delta goes." (See more on this alliance below under Ticket Prices.)

Action to take: If you are a frequent flier with any domestic alliance member, open a frequent flier account with your new "partner" airline. If you're an American or US Airways frequent flier hoping to score a Hawaii award seat on American, book soon.

Ticket Prices

Pro: Alliances will permit airlines to expand route networks at lower costs, letting them pass on savings via lower ticket prices.

Con: Alliances will consolidate power in the hands of essentially three mega-carriers, reducing competition, consolidating hub dominance, discouraging low-fare competitors and ultimately producing higher fares.

Assessment: Alliances haven't been in place long enough for price patterns to emerge, and only the Continental/Northwest deal involves code sharing so far.

Discussion: Both the departments of Transportation and Justice say the potential for anti-competitive pricing is most pronounced on routes already flown by each partner. The fear is that partners would function as a single line where routes overlap, refusing to compete on price and permitting prices to drift upward. Of the alliances, United and Delta offer the most overlapping routes, and thus the greatest threat.

The concern is even greater if such routes run between hub airports dominated by partners. Regulators would scrutinize any future plans by United and Delta, for example, to code share between Denver, a United hub, and Atlanta, a Delta hub. Northwest and Continental have eight overlapping routes (none directly affecting the Washington area) but will not code share on those.

Washington area competition would face little threat in the near term, since the area is served by three major airports and most carriers (all alliance participants, plus TWA, have a presence here, as do low-fare leader Southwest and other low-fare carriers). United dominates Dulles and recently declared it its East Coast hub, but Delta and American offer competitive service there, too. US Airways (including its low-fare spinoff, MetroJet) and Southwest are evenly matched at BWI; US Airways is the biggest player at Reagan National, followed by Delta and American. BWI and Dulles offer many international flights, and competition to Europe is especially robust.

The broader future of code sharing may lie with the Justice Department, which has filed suit against the Northwest/Continental alliance. Though it is suing over the issue of Northwest's voting stake in Continental, it is known to be looking closely at code sharing's effect on competition. The alliance proceeded with the understanding that the government may break it up. Separately, the department testified to Congress that code-sharing agreements can hurt consumers by resulting in fewer discount seats on a given flight, higher overall fares and the squashing of low-cost rivals. It's widely believed that if the Northwest/Continental alliance's code sharing passes muster with the Justice Department, the other two alliances will code share, too.

Opposition to the alliances has come from, of all quarters, a brother airline. In a Dec. 8 report, unaligned TWA charged that United's alliance with Lufthansa (under the Star family) sets the stage for higher prices between the United States and Frankfurt.

"There are no fare wars in the Washington-to-Frankfurt nonstop market, due to the United-Lufthansa deal," TWA spokesman Mark Abels said. "If you want to fly from the capital of the United States to the industrial capital of Germany, there is no price competition. None."

It's true that United and Lufthansa are the only carriers who run the Washington-Frankfurt route nonstop, both from Dulles. That flight costs $355 for a Jan. 29-Feb. 1 round trip, the same as British Airways charges to Frankfurt, but with a stop in London. Others offer Frankfurt fares between $360 and $410 from the D.C. area, although some involve unappealing connections (Northwest from Reagan National through Detroit, $371). Time will show whether United and Lufthansa can exercise monopoly pricing on the nonstop route--or whether price competition for connecting flights keep direct flight prices down. Meantime, it's all talk and theory.

Problem is, monitoring the effects of alliances is difficult thanks to airlines' "yield management" techniques, which permit airlines to add or pull discounted seats--or seats at any fare level--from a flight minute to minute. That makes it "awfully easy to disguise a price hike until well after the hike," warns Perkins.

In a report to Congress, the General Accounting Office found that if the three domestic alliances all went forward as planned and used code sharing, 1,836 of the 5,000 most frequently traveled domestic routes would be served by fewer independent airlines than they were prior to any domestic alliances. This could reduce airline competition for about 100 million of the 396 million people who fly domestically each year, the GAO concluded.

Action to take: With airlines forming partnerships, it's more important than ever to shop for lowest fares by using the Internet, calling a number of airlines, or calling a travel agent and using the Internet, rather than calling a single airline. If using the Net, make sure you shop low-priced carriers independently, as many are not listed on Web-based systems. Use Preview Travel's Low Fare Finder (www.previewtravel.com) to target low fares, and shop the results against Southwest's offerings out of BWI (www.southwest.com).

Reservations and

Customer Service

Pro: Alliances that code share will be able to offer customers "seamless" travel--travel on two airlines that, in terms of booking and customer service, appear as one.

Con: "Seamless" travel is (for the most part) already available on any airline, provided customers use a travel agent or an Internet-based system to make the booking. Code sharing won't add destinations; it will let airlines sell more destinations directly to their customers.

Assessment: The advantages of "seamless travel"--the ability of an airline reservationist to ticket a passenger on a partner's line to a destination not served by the first partner--accrue mostly to the airlines, not customers. And code-sharing arrangements harbor a pricing bombshell: If you book a trip involving partner carriers, you (or your travel agent) must shop both carriers for the best price.

Discussion: Currently, the only domestic alliance that offers such seamless travel is the Continental/Northwest deal (though many international partners code share, and major carriers have been code sharing with regional airlines to offer small-city connections for over 20 years). Under the system, a Continental OnePass member can get from Reagan National to Duluth, Minn., and book all legs of the trip through Continental, even though Continental does not serve Duluth. The passenger flies Continental to Detroit or Minneapolis before transferring to Northwest for the final leg.

The advantages? The passenger can travel on a single ticket issued by either airline. All frequent-flier miles earned for the trip could be credited to either a OnePass account or a Northwest WorldPerks account. Customer service issues on either leg can (allegedly) be dealt with by the "home" airline.

But little of this is new. If you are flying airlines that don't code share, you can already get an "interline" ticket through any travel agent (or even, sometimes, airlines ticketing personnel). It happens all the time. Yes, under the Northwest/Continental deal you'll be able to travel "on a single code," as the airlines put it, from Spokane, Wash., to Corpus Christi, Tex. But you could have taken this trip before on the same two airlines by having a travel agent make the arrangements. It's hard to see how traveling under a single code benefits the passenger--unless you believe airlines will be able to handle baggage, billing and other customer service issues on their partner's airline as well, or better, than they handle such problems on their own. Airlines also say that, over time, code-sharing will lead to smoother connections, as partners will locate gates and arrange schedules for easier plane-changings. Opponents add that code share partners often fail to offer the same level of service and safety as their major carrier counterparts.

As for that fare bombshell: When dealing with code-share routes, you can't be sure you have the lowest fare unless you check both partner airlines. Airlines split up the seats on each code-shared flight and each partner prices its own seat inventory, offering seats in economy, coach, business, first class and so on. One partner often has economy seats available after the other carrier has sold out.

This is no idle what-if scenario. Shopping for a fare (June 1 to Brussels, with return June 15), we checked in with code-share partners Delta and Sabena. Sabena quoted $958 for Delta 6315 (to Boston) and Sabena 534 (Boston-Brussels). Delta reps offered precisely the same seats, same flights, same day, for $1,030. In addition, the Sabena rep offered that, by departing on the same flights the day before, we could fly for $797. When we asked Delta about that option, Delta said all its coach seats for May 31 were sold out; all they had were business-class perches for $4,006.

"It pays to call both partners or have your travel agent check for the lowest fare," admits Northwest spokesman Jon Austin. Despite the extra work required by consumers, Austin says, alliances are "still good because we're providing a bigger [travel] network than either airline could have provided on its own."

Action to take: Whenever you're booking a flight on either Continental or Northwest--or any international flight--ask the reservationist or travel agent whether the itinerary involves a code share (according to the DOT, 30 percent fail to disclose this, though required to by law). If it does, call the partner airline to see if it's offering a better fare. If you're using a travel agent, ask your agent to do the same thing.

So What?

The realignment of the airline industry is ripe territory for conspiratorial agitprop and corporate smoothery. The airlines insist they are doing nothing more than transforming into efficient, public-spirited corporate citizens, poised to make their vital service available to all at a fair price. The opposition sees the airlines buying consumers off with frequent-flier trinkets while behind the scenes they consolidate power, smother low-fare competitors and send ticket prices to the ionosphere.

It's fun to listen to both sides, sort of like listening to a college bull session, but without the Doritos. But the fact remains that nobody knows where any of this is headed. As the trip unfolds, there's not much for travelers to do but keep flying, shop more assertively than ever, consider all options and keep your wallet tucked deep in your front pocket.

And yes, keep that seat belt buckled across your hips. We may not know where this flight is headed, but we know it's only the first leg.

   
© Copyright 1999 The Washington Post Company

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