22 July 2009 - With approval to join an antitrust-immunized grouping of Star Alliance partners finally secured (with some caveats), Continental Airlines this week detailed the process it would follow in exiting the SkyTeam alliance. That process includes a winding down through the end of July of code shares with SkyTeam's Delta and Northwest airlines; a few days of alliance limbo after officially ending SkyTeam participation this fall; and longer-term plans related to common IT systems with Star anchor United Airlines and a joint venture with United, Lufthansa and Air Canada.
"With our final flight on 24 October, we will leave SkyTeam," said outgoing Continental CEO Larry Kellner. "We will be in Star just as fast as we can be after that. We just can't do anything until we get out of SkyTeam to jointly market with Star partners. It won't be seamless; it will be a couple days in transition."
Extracting itself from SkyTeam for Continental involves ending loyalty program and airport lounge reciprocity with Air France, Delta, KLM, Northwest and other soon-to-be former allies.
It also requires ending codeshare flights and joint corporate programs. On the former, some code shares with Delta and Northwest already have been discontinued, Kellner said, and "all drop off [by] the end of July." On the latter, he acknowledged that "we have some joint contracts, but we don't think that's a significant risk for us. It's a very small risk."
Meanwhile, Kellner said executives from Air Canada, Continental, Lufthansa and United last week "had our first discussions" regarding the planned four-way joint venture among the Star partners. "We have to be careful not to get ahead of ourselves," he said. "We aren't ready yet to project when we will be up and running."
Tech Integration To 'Solve' Customer Issues
There also is no specified timetable for a common information technology platform for Continental and United--including a common reservations hosting system--though Kellner said such alignment is a "primary focus."
"We are always worried about revenue hiccups as you have IT issues," he explained, "but we have been focused on this, we have had a significant amount of lead time, and I feel good about where we are in the transition from SkyTeam to Star. From a customer service side, one of the challenges we have always had in these alliances is IT, so clearly being on a common platform will solve a lot of customer issues."
DOT issued its Star Alliance-Continental approval on 10 July. As a result, for international services the airlines may jointly "develop, promote and sell" fares including "corporate fare products."
Beyond connections between U.S. and European partners, the airlines "over time" would seek to establish arrangements with carriers in Latin America and Asia-Pacific, according to incoming Continental CEO Jeff Smisek. "Perhaps joint ventures," he said, "to maximize connectivity and flow, and enhance service to customers."
Immunity Withheld For Several Routes
In issuing its final approval, DOT dismissed many
concerns raised by the U.S. Department of Justice but heeded others, and included several new carve-outs for city pairs where immunity from antitrust enforcement is not granted.
Described by United Airlines CEO Glenn Tilton as "only minor adjustments" from what had been requested, those carve-outs, according to DOT, are for markets where competition would "be reduced from two to one nonstop competitors, with respect to all fares in the cabin," and would be reviewed in the event of new entry into those markets. They include: "local U.S.-point-of-sale passengers flying nonstop on transatlantic routes between New York and Copenhagen, New York and Geneva, New York and Lisbon, and New York and Stockholm; local U.S.-point-of-sale passengers flying nonstop on transborder routes between Cleveland and Toronto, Houston and Calgary, Houston and Toronto, and New York and Ottawa; and U.S.-point-of-sale passengers flying on transpacific routes between the United States and Beijing." The carve-outs DOT previously established for Star Alliance immunity--Washington-Frankfurt, Washington-Chicago, Chicago-Toronto and San Francisco-Toronto--were maintained.
DOT also noted that "in the case of corporate fare products and group fare products, local U.S.-point-of-sale nonstop traffic shall constitute no more than 25 percent of a corporation's or group's anticipated travel (measured in flight segments) under its contract with any two or more of the parties."
Distribution Concerns Dismissed
DOT's approval also excluded restrictions advocated by the American Society of Travel Agents and Interactive Travel Services Association. The two groups in a late 2008 filing requested that DOT carve out the ability for participating airlines to coordinate on "the distribution of air travel through any independent travel distributor." They argued that an immunized Star Alliance including Continental would wield enough power to "tip the negotiating scales even further in favor of airlines" regarding corporate and travel agency relationships; "degrade and even destroy any online travel agency or traditional 'brick and mortar' agency that refused to succumb to lower compensation;" and generally raise fares and minimize competition in distribution channels.
DOT was largely unmoved. "The applicants will not be able, with 31.7 percent of the broadly defined transatlantic market, to exercise market power over competitors or suppliers," DOT wrote in its final approval. "There is no persuasive evidence in the record to support the claim that a reduction in travel agent commissions will result in lower output or higher fares."
DOT further noted that "public benefits of the alliance depend upon the applicants' ability to achieve efficiencies and cost savings in the core areas of distribution and sales. Cooperation will allow the airlines to offer travel agents or corporate travel departments one contract to maximize the networkwide discounts or incentives." [Delta Air Lines with its SkyTeam partners this month began offering agencies combined programs.]
DOT included the condition that Star partners "will be expected to give a complete status report in their annual filings" on "sales and distribution issues," including "cooperation in sales and distribution and joint negotiations with travel agents."
AA-BA Next?
Meanwhile, the Star Alliance-Continental antitrust immunity approval has given American Airlines and British Airways confidence as they await a ruling from DOT on their immunity request with other oneworld partners.
"The facts are on our side, and the fact that Continental just got approved is more evidence that the facts are on our side," said American Airlines CEO Gerard Arpey. "The weight of the evidence suggests there is absolutely no reason for us to not be put on a level playing field with our competitors."
Expecting a DOT decision "by the end of October," Arpey suggested "a linkage between how the European Union and certainly the United Kingdom would view the future of [the U.S.-E.U. Open Skies aviation agreement] if there were not a level playing field granted to American, British Airways and Iberia."
