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Air France, Delta Join Up: Carriers To Share Transatlantic Sales Strategy, Route Expansion Plans And Bottom Line
POSTED: 9:44 a.m. EDT, October 24,2007
Air France and Delta Air Lines last week signed a transatlantic joint venture deal set to go into effect in two phases beginning next April and to be completed by 2010. Through the agreement, the carriers plan to share a common bottom line for transatlantic operations, align transatlantic corporate sales strategies and jointly expand routes.

Analysts and consultants called the agreement one of the largest and most meaningful transatlantic airline partnerships since Northwest and KLM enacted a similar deal in 1993. The Air France-Delta agreement sets the stage for a proposed four-way joint venture arrangement that would include Air France, Delta, KLM and Northwest.

Calyon Securities analyst Ray Neidl last week in a research note said the Air France-Delta match-up "will be a major benefit to both carriers, almost a merger in our opinion."

Through the agreement, Delta gains access to three Air France slots at London Heathrow and plans to launch daily Atlanta-Heathrow service and twice-daily New York JFK-Heathrow service in March. Air France plans to add a new daily flight between Heathrow and Los Angeles.

In addition to new Heathrow service, the first phase of the joint venture covers flights between Air France hubs in Paris, Orly and Lyon and Delta's hubs in Atlanta, Cincinnati, New York JFK and Salt Lake City, representing combined annual revenues of $1.5 billion, the companies said.

By 2010, the joint venture will govern all flights across the Atlantic operated by both carriers, as well as all flights between Los Angeles and Tahiti, representing combined annual revenue of $8 billion, the carriers estimate. Delta and Air France said by next summer "many transatlantic flights operated by Air France and Delta between Europe and the U.S. will be sold on a codeshare basis."

Citi Investment Research European airline analyst Andrew Light said the deal should yield increased margins on the Atlantic "as already experienced by KLM/Northwest's joint venture, due to more optimal capacity deployment, and could be boosted if antitrust immunity is gained for a four-way joint venture."

"Together, we will be able to offer passengers more flight options and frequencies, better schedules and new opportunities to earn more miles to take advantage of an enlarged network with seamless booking," Delta CEO Richard Anderson said.

Air France and Delta said the joint venture will not create a subsidiary. A steering committee with representatives from both carriers will manage the endeavor through nine working groups "responsible for coordinating day-to-day implementation of the joint venture agreement in the areas of network, revenue management, sales and distribution, products and services, frequent flyer program, operations, IT, finance and cargo."

Delta senior vice president for global sales and distribution Pam Elledge last week told BTN that the working group responsible for corporate sales will implement a "sales code of conduct: the guiding principles in terms of alignment of sales program and distribution programs. Though we'll be two separate companies and two separate brands, the sales code of conduct aligns those two sales forces together in terms of the focus and customer benefits."

However, Delta and Air France executives said the agreement, which needs no further regulatory approval, would not immediately impact corporate contracts or distribution.

"Today, as we sit here, there's really no change with any of the processes with customers," said Delta's Elledge. "The customers will continue to have a seamless experience with Air France and Delta. In the future, we'll look at more options for the travel agencies and corporate customers. With the joint venture there will be the potential for companies and agencies to have a more comprehensive program in place versus where we are today."

Air France vice president and general manager in the United States Jean-Claude Cros said the deal is an extension of the carriers' antitrust immunity, gained in 2002, and other codeshare agreements already in place. "We are used to working together," he said. "The main issue now is to give a better product to the customer and enforce a complementary presence with the customer in the next months and years. Of course, we're looking for synergies to increase our attractiveness to customers, mainly the trade and corporate."

Ron Kuhlmann, vice president of Unisys R2A transportation and management consulting practice, said the deal serves as both offensive and defensive salvos against the far-ranging repercussions of the U.S.-EU Open Skies treaty. Kuhlmann said strengthening of the Air France-Delta alliance is "another bellwether of things to come and changes that are out there, but you can be assured that whatever is happening between them is also going on behind the scenes. Things are going to really, really change."

Anthony Sabino, professor of law and business at St. John's University said, "This will be only the first of such major agreements as the new Open Skies treaty takes effect. American and European airlines have been champing at the bit for decades to coordinate their routes and services and provide travelers with nearly seamless opportunities to cross the Atlantic, especially as various economic factors!the strength of the euro against the dollar, the increase in transatlantic business, the opening up of Eastern Europe!propel traffic to new highs."

Air France and Delta said the joint venture's initial term will last through March 31, 2016, but the carriers expect to "renew for subsequent periods of three years with effect from this date."

Though Air France and Delta and Northwest and KLM already separately hold antitrust immunity on transatlantic routes, the four carriers, along with Alitalia and CSA Czech Airlines, are waiting for the U.S. Department of Transportation to approve an antitrust request filed this summer.

"SkyTeam has applied for ATI, and I suppose it may get it this time around because a lot of constraints that were on it are not there," Kuhlmann said.

However, the request!which includes the proposed joint venture among Air France, Delta, KLM and Northwest!has sparked further European Commission investigation as to whether such cooperation would prove anticompetitive on certain transatlantic and intra-European routes. The EC late last week said the carriers offered to make slots available to competitors at applicable European airports, among other concessions.

In a DOT filing last month, the carriers said the four-way plan "supersedes" the two separate joint ventures, and that the establishment of the Air France-Delta deal does not reduce "the parties' need, motivation, economic incentive or desire to complete their negotiation and implementation of a four-way joint venture agreement." Instead, "the parties anticipate that both joint ventures will form the building blocks for final negotiation and implementation of the proposed four-way joint venture discussed in the joint application."

The four carriers in regulatory filings said a four-way joint venture further would help to expand "service and pricing options," introduce new flights, increase flight routings and create joint fare initiatives.

In the filings, the carriers said the proposal is modeled after the Northwest-KLM structure. "With a common bottom line, Northwest and KLM have functioned as a single economic entity," one filing states. "With all revenues from transatlantic service going into the pool, they make pricing, scheduling and deployment decisions on a unified basis, focusing on the success of the joint venture in an environment devoid of gamesmanship."

Through the long-standing joint venture, Northwest and KLM were able to eliminate "duplicative sales and marketing costs. As a result, Northwest and KLM have decided that it does not make sense for each carrier to maintain sales and marketing personnel on both sides of the Atlantic."

Under that arrangement, "Northwest personnel handle pricing and sales of Northwest and KLM originating in the U.S, and KLM personnel handle pricing and sales of KLM and Northwest flights originating from Europe. KLM does not maintain a sales force or pricing personnel in the U.S. and Northwest does not maintain a sales force or pricing personnel in Europe."
From: BTNonline
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