April 24, 1998
In a move to stay more competitive, some of the nation's largest airlines are planning marketing alliances with one other. But what do the alliances mean for the travelling public? Paul Solman and guests discuss the recent moves.
PAUL SOLMAN: For some key players in the airline industry the friendly skies may be getting even friendlier.
A RealAudio version of this segment is available.
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Airline marketing alliances.
Last night Dallas-based American Airlines, the nation's number 2 carrier, announced it plans to form a marketing alliance with number 6, U.S. Airways from Arlington, Virginia. Meanwhile, the nation's number 1 airline, United, whose home is Chicago, has been in talks with number 3, Delta, headquartered in Atlanta. Those talks for the moment, as you've heard, have hit a snag. These moves may have been prompted by yet another alliance announced earlier this year between Minnesota's Northwest Airlines and Houston-based Continental. If and when these alliances are finalized, partners could combine frequent flier programs and sell each other's tickets. Now, to help us explain what's going on we're joined by Julius Maldutis, who analyzes the airline business for Salomon Smith Barney; and David Field, who reports on it for USA Today's Money Section. And, gentlemen, welcome to you both. Now, Mr. Maldutis, what's the advantage of these alliances to these airlines?
JULIUS MALDUTIS, Salomon Smith Barney: Well, first of all, the reason for these alliances is that it's very difficult to get traffic growth domestically when airlines have built such concentrated hubs, so one way to get growth is through marketing alliances. What these alliances, in effect, do is provide very convenient travel for the passenger. In effect, they are diverting passengers off their competitors. So with the Continental/Northwest alliance being proposed earlier this year, this posed a significant threat to all of the members. And, consequently, that's why we have the other alliances being proposed.
PAUL SOLMAN: And, Mr. Field, how does this work? I mean, if I'm an airline traveler, as I frequently am, what do I get from this? I mean, what happens to me as passenger?
DAVID FIELD, USA Today: Well, first of all, we're talking about--if you're talking about Northwest and Continental, it works in a way that you probably already experienced. If you've taken a commuter flight on a small plane to a big airport, it says on the side Northwest and it says in real tiny print, operated by someone else. It has the same flight numbers of the Northwest flight, the same ticket, and you get all your miles. All you do is change planes at the big airport.
PAUL SOLMAN: You mean, that's United Express. That's lots of different feeder airlines, right?
DAVID FIELD: And if the Northwest-Continental proposal goes through, you'll have that on a much larger scale. You'll have a ticket that says Continental, Flight 2727, and you'll get on a plane and bingo, it's a Continental Airlines plane with a crew from the other airline, but you'll get your miles. And you'll be able to use your miles on another airline.
PAUL SOLMAN: So, what's the good for the airlines? Why is that good for them?
How alliances will affect the airline industry.
DAVID FIELD: They're good for the airline industry. You keep your customers, as Dr. Maldutis said. You keep the people that you don't want going to a competitor, who may fly somewhere where you don't fly. What's important to understand about the U.S. Airways and American proposal is it does not involve this sharing of flight listings. It's called code sharing. It's involves--
PAUL SOLMAN: Code sharing.
DAVID FIELD: Code sharing--where the computer code for each flight is shared between the two carriers.
PAUL SOLMAN: So you are just on one code for the whole flight.
DAVID FIELD: And if you're not a frequent flier, you can find it deceptive. You can go out to the airport thinking you're going to get on your favorite airline, it's somebody else's airline, and somebody else's crew. With American and USAir it's not going to be like that. It's still going to be two separate airlines competing as much as they do now, but you'll be able to use your frequent flier miles on either. In effect, you'll have a joint bank account for your frequent flier miles.
PAUL SOLMAN: But you agree with Dr. Maldutis, that we're not going to get any more, that they're taking business away from each other, or trying to, not that we'll have more flights now?
DAVID FIELD: Oh, no, he's absolutely right. You may see more flights on very popular business routes, but they'd simply be increased frequencies, and those are for the people who can afford to pay the astronomical fares that business travelers now have to pay.
PAUL SOLMAN: All right, Dr. Maldutis, I guess it is, what's the difference between an alliance and a merger?
The difference between merger and alliance.
JULIUS MALDUTIS: Well, a merger you combine not only your frequent flier programs, you do code sharing, you integrate your labor groups, your work rules, and you combine your systems, and we have seen that over the last decade there have been 22 mergers, and they have all been abysmal failures, and airlines have learned from this by doing a marketing or code sharing or a frequent flier program. You get 60 to 70 percent of the revenue benefits and none of the headaches, so that's why these alliances have proved so popular. Let me just give you one statistic. United Airlines, which is part of the Star alliance with Lufthansa, Verig, SAS, AirCanada, Thai, and others, received an incremental $180 million in pre-tax profits in 1997. And that's how powerful and beneficial these alliances are for the bottom line of these companies.
PAUL SOLMAN: So, Mr. Field, is that true, have they been failures, by and large, and, if so, will the alliance, do you think, or does the industry think will the alliance model work?
JULIUS MALDUTIS: If you're a passenger, you probably believe that mergers have been failures. If you were a passenger on USAir, after they bought Piedmont, in 1987, and were stranded when crews didn't show up and flights didn't get routed, you believe that they were a failure. Alliances are different. They are virtual mergers, if you allow the phrase. They have none of the problems of union integration, and all of the convenience of simply being at the same airport at the same time.
PAUL SOLMAN: So were they a failure from the point of view of the companies, as well? I mean, mergers just didn't work because they were too hard to affect, is that what you're saying, Mr. Field?
DAVID FIELD: USAir is still in debt because of the mergers it went through in the 1980's.
PAUL SOLMAN: Dr. Maldutis, pluses and minuses for consumers. I hate to be so self-referential--but I mean, that's what most of us care about.
The pluses and minuses for consumers.
JULIUS MALDUTIS: Well, what we have seen is the last two years full fares are up about 8 percent. Discount fares are down about 6 percent. So we continue to see price competition in the airline industry. I think it would be an erroneous conclusion to say that these alliances are going to result in across-the-board higher fares. For business travelers in business markets, yes, you're going to see continued higher fares. But at the same time, I think the carriers will compete and you will have special discount fares, special sales. The airlines are making enormous use of the Internet to dispose of their extra seats. So I think it's an extraordinary period and a very dynamic period.
PAUL SOLMAN: But haven't prices gone up on average 9 percent this past year and 17 percent, as I was reading today when I was preparing for this, in terms of business fares? And I mean, 40 percent I read in Fortune Magazine in business fares of the last two years.
JULIUS MALDUTIS: I think that's true because the airlines for the first time have learned how to price their product. They know that the business traveler has very little alternatives, whereas, the discretionary traveler does have different alternatives and a different price sensitivity. The airline managements have become extremely adroit and smart in pricing their product. And that's part of the deregulation process.
PAUL SOLMAN: Well, but I thought deregulation was going to drive prices down. Mr. Field, what do you think is going to happen to prices here? Are they going to continue to rise? What's--
DAVID FIELD: It depends on what kind of player you are. If you're a business player, your prices will continue to rise. If you're a leisure traveler, there's still going to be a lot of deals, and it's really important for us to remember that there's still a big chunk of the domestic market that's not going to be covered by any of these alliances. We're still going to have Southwest Airlines, the most popular airline and the most profitable airline in the nation, exercising the kind of price discipline and fair discipline that probably can keep the rest of the industry honest.
PAUL SOLMAN: Well, they're not competing in all these routes. I mean, Southwest is only in certain places.
DAVID FIELD: Southwest is a much bigger airline than one realizes. It's almost the size of the original USAir. It's about the size of TWA. And there are a lot of business fliers who are willing to put up with the lack of food, the peanuts, the frequent stops, to get Southwest fares.
PAUL SOLMAN: But the question is: Are they going to be able to get those fares now if these big airlines are combining and possibly pushing out smaller airlines, which has been an interesting--
DAVID FIELD: I don't think these big airlines will push smaller airlines out; they'll simply increase their lock on their home traffic, their home bread and butter, and, as Dr. Maldutis points out, airlines have become so sophisticated in pricing that we probably will see a fair number more sales from leisure travelers on fairly short notice, fairly focused sales, regional sales, buy-right-now sales. When they find out that the back of the plane is not full, they're going to let us know.
PAUL SOLMAN: Dr. Maldutis, does the government have to approve this? I'm not clear on the status of these three so-called alliances: one made, one just announced, and one about to be announced, apparently, the United.
JULIUS MALDUTIS: Very good question. There is no legislation on the books that requires government approval. As a practical matter, because these alliances are going to raise a lot of flags in Washington, already there have been tremors about the predatory practices and too much concentration in the industry.
PAUL SOLMAN: Predatory practices means what?
JULIUS MALDUTIS: Predatory practices means that the larger carriers have prevented the smaller carriers of getting access and in terms of gates or landing slots. I think that the Department of Transportation and the administration should be complimented, that they have become sensitive to the issue, they are providing these resources for the smaller carriers. So I think somewhat it's a red herring. They will be able to compete with the bigger carriers. Nevertheless, because this is a political issue I think there will be hearings in Congress. I believe someone already today announced they will hold hearings and perhaps the Justice Department and the Department of Transportation will look at the issue. It's not going to be decided immediately. I think it's going to take several months and perhaps by the end of the summer, early fall, we'll hear the verdict on these alliances.
PAUL SOLMAN: What about the verdict, Mr. Field, on deregulation? It's a last question, but there were 43 airlines, I read today, in 1978, when deregulation was affected. Fifteen of them remain, and certainly there's a sense in the Justice Department and the American public that we're getting more and more consolidation, concentration in the industry.
The verdict on deregulation.
DAVID FIELD: We're getting more and more consolidation in every industry. All that deregulation did was allow the inevitable consolidation of this industry to take place. No, I think deregulation has worked. More people fly now than have ever flown before. More people can afford to fly. There are more flights and there's more service.
PAUL SOLMAN: And your verdict, Dr. Maldutis, on deregulation, it's worked, it hasn't worked?
JULIUS MALDUTIS: Absolutely. It has been exciting. I compliment everybody who has been involved in it. One very final simple statistic: Airline fares today, adjusted for inflation, are 27 percent below than those fares in 1978, when President Carter signed the law.
PAUL SOLMAN: Okay, well, gentlemen, thank you both very much.