Darn the Torpedoes, and All That!

Continental Airlines, Delta Air Lines, and Northwest Airlines issued the following response to the U.S. Department of Transportation's (DoT) notice last Friday (separate article, below) proposing to impose certain conditions on the implementation of the carriers' marketing agreement:

"We have decided to move forward with implementation of our marketing agreement at the earliest possible date. As planned, the three airlines will soon offer reciprocal frequent flyer and airport lounge benefits to consumers, and will begin codesharing as soon as practicable.

"In recent days, we reached agreement with the U.S. Department of Justice on conditions related to our marketing agreement, and we were prepared to accept most of the additional conditions that DoT sought to impose on us. However, some of DOT's conditions are unacceptable, and we will not agree to them.

"A similar marketing agreement between Continental and Northwest has lowered prices, increased service levels and brought as much as $1.5 billion of annual benefits to consumers since it started in 1998. The marketing agreement among Continental, Delta and Northwest will bring similar consumer benefits, including:

• Seamless service to thousands of new markets
• Frequent flyer reciprocity, so customers can earn their favorite frequent flyer miles whether they fly Continental, Delta or Northwest
• Access to each carrier's private airport lounges
• Increased frequency of flights, and better time of day coverage for travelers
• Broader availability of low-priced seat inventory

"Our marketing agreement preserves competition among Continental, Delta and Northwest, since each carrier will continue to independently price, schedule and make all other competitive determinations. The U.S. Department of Justice, the government agency with the principal responsibility and expertise in enforcement of U.S. competition laws, last Friday approved our marketing agreement, subject to conditions agreed to by the carriers with the Justice Department, stating, 'This alliance agreement, as conditioned, has the potential to lower fares and improve service for passengers in many markets throughout the country.' The Justice Department concluded that no other conditions were necessary to protect competition or to realize the consumer benefits of the carriers' marketing agreement. According to the Justice Department's statement: 'The alliance can benefit consumers by offering codeshare service to new cities, increasing frequencies or improving connections to cities already served by the carriers, and by permitting frequent flyers to earn and redeem their miles on any participating carrier. Corporations can also benefit from joint bids for contracts from alliance airlines where the airline partners offer complementary rather than competing service.'

"Moreover, the DoT recently permitted a virtually identical marketing arrangement between United Air Lines, the world's second largest airline, and US Airways to proceed without any conditions imposed by the DoT.

"While the three airlines were prepared to accept most of DOT's proposed conditions, there are several conditions that are not acceptable. In particular:

• Confiscation of 'underutilized' gates -- the DoT's proposed requirement that the airlines surrender gates at their hub airports that do not satisfy an arbitrary 'utilization' test created by DoT is unacceptable because it is completely unrelated to the marketing agreement, labels normal gate utilization as 'under-utilized,' will put at risk the core assets on which the airlines depend to operate their hub-and-spoke networks, raises complex questions about airport financing arrangements, and jeopardizes the ability of the airlines to continue to serve the full scope of communities they now serve.
• Limitations on the scope of codesharing -- while the airlines are willing to adhere to numeric limitations on the scope of codesharing during the first year phase-in of service, the potentially permanent limitation contemplated by the DoT is unacceptable as it would severely restrict the availability of codeshare benefits to millions of passengers and arbitrarily deprive the airlines of the much-needed economic benefit of the marketing agreement.
• Limitations on joint contracts -- the proposed restrictions on joint contracts with corporate customers is unacceptable, as it will arbitrarily and severely deprive corporate customers and travel agents of the advantages of the airlines' expanded codeshare services. It would also arbitrarily and unfairly leave the airlines unable to compete effectively for corporate customer and travel agency business.

"These proposed DoT conditions would undermine the value of the marketing agreement to consumers, and, therefore, to the participating airlines.

"Although the carriers will not agree to certain of the conditions that DoT seeks to impose, Continental, Delta and Northwest have committed nonetheless to:

• Release to local airport authorities a total of 13 gates at four of the carriers' hub airports that become surplus as a result of the carriers relocating their gates in order to make connections between the carriers more convenient for travelers, and offer to release in the future any gates at their hub airports or at Boston that become surplus as a result of similar airport gate relocations related to the marketing agreement
• Restrict for a one-year period the total number of new domestic, Canadian and Caribbean codeshare flights between Northwest and Delta and between Continental and Delta to 650 flights per two carrier codeshare (for a total of 2,600 flights), and specify that at least 391 of each marketing carrier's new codeshare flights (a total of 1,564 flights) must be to or from underserved or small airports, with a provision to notify the DOT if the carriers desire in the future to increase the number of those new codeshare flights
• Restrict three-carrier joint bids for corporate or travel agency contracts to those companies that request them; prohibit joint bids to companies headquartered or with a principal place of business in a carrier's hub city or other cities for domestic service originating from that city if the combined market share of the three carriers exceeds 50 percent at that city, and restrict the content of joint bids unless otherwise requested by the company or in a good faith response to a competitive bid.

"None of these additional commitments was required by the Department of Justice when it approved the carriers' marketing agreement last Friday, nor were similar conditions imposed by DoT when it approved a virtually identical agreement between United Air Lines and US Airways. None of these additional commitments is necessary to preserve competition as part of the carriers' marketing agreement, which is designed to maintain the competitive independence of each of Continental, Delta and Northwest. Nonetheless, each carrier has made these commitments during the pendency of any enforcement proceeding brought by DoT.

"Now that DoT's regulatory review period has terminated, Continental, Delta and Northwest intend to move forward with implementation of their alliance (subject to the commitments outlined above).

"Our marketing agreement fully complies with applicable law. Should DoT bring an enforcement action regarding the marketing agreement, the carriers intend to defend their marketing agreement vigorously while continuing to implement it, in order to protect the pro-competitive, pro-consumer benefits identified by the Justice Department, and to prevent the DoT from placing Continental, Delta and Northwest at a competitive disadvantage during a time of unprecedented crisis in the airline industry."

FMI: www.continental.com, www.nwa.com, www.delta.com