Anticipating the next airline merger

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What buyers can do to prepare for a United-Continental marriage

The pending merger between United Airlines and Continental Airlines stands to significantly affect corporate travel buyers who rely on one or both carriers. While the completion of the merger is some months off, now is the time for travel managers to consider how their travel programs will be affected and begin crafting strategies for responding to market changes.

The pending United-Continental merger will affect some travel programs more than others, depending on how much an individual buyer relies upon the two carriers. Companies that previously had no preferred agreement with either Continental or United are unlikely to experience much impact. If neither route network provided the right mix for a company’s travel program before, then the new merged airline probably won’t meet its needs in the future. If a buyer spurned the two airlines based on cost, however, the new combined entity might make a more compelling offer than its current other preferred carriers.

The merger could add a level of complexity to negotiations for companies that previously entered into preferred supplier agreements with both United and Continental. The new merged airline will hold more leverage to push for higher market-share targets from buyers in exchange for discounts, which will most likely decline in markets dominated by the two airlines. In addition, the merged airline may offer buyers the lower of discounts when discrepancies exist between legacy United and Continental agreements.

“Companies will have to work to maintain the larger of the two discounts previously offered by one airline or the other and be prepared if the merged carrier significantly increases its requirements for share targets,” said Bob Brindley, senior vice president of BCD Travel’s consulting unit, Advito.

Companies with the largest potential for problems in a Continental-United merger are those that previously entered into preferred agreements with only one of the two airlines. These programs now will have to choose between entering into an agreement with both airlines or rejecting both.

Since no single airline, joint venture or alliance serves every destination to which a company sends travelers, buyers must use more than one route network to meet all needs. In working with multiple suppliers to fill the gaps, however, buyers inevitably end up with overlap: two or more carriers that serve the same routes to which the company’s travelers fly. The greater the overlap, the more difficult it becomes to guarantee a single airline or alliance a premium share of business. Larger overlap generally results in poorer share premiums for preferred carriers. This in turn leads to smaller discounts and, consequently, higher travel program costs.

“Companies presumably chose to not work with Continental or United for a reason,” says Brindley. For instance, the route network of the rejected airline may significantly overlap with a preferred carrier other than United or Continental. Dropping the other preferred carrier could result in a loss of net savings. Maintaining preferred agreements with both the merged United-Continental and other carriers may not be sustainable due to over commitments of market share. Moreover, doing so adds complexity to the program, making it more difficult to manage.

As a rule of thumb, companies generally come out ahead if they can secure agreements for discounted fares covering at least 85 percent of their total air spend, while keeping the total amount of spend in markets that overlap with its other suppliers below 30 percent. This formula generally ensures that a buyer will be able to provide enough market share to each carrier to secure discounts.

How to prepare
Before a company can determine the most prudent response to a merger, it must first determine how each carrier’s route network fits with its travel needs, and identify the markets where carriers overlap and compete with each other. Companies then may begin determining the impact of the new carrier combination. This includes deciding whether the merged airline creates additional opportunity through expanded market coverage, or whether it generates more risk by upsetting the current preferred carrier equilibrium and increasing carrier market share commitments to unrealistic levels.

Clients should avoid waiting too long to determine how significant the impact of a United-Continental merger will be in case they determine that the entire program must be reevaluated, including a full blown diagnostic, strategy review and sourcing engagement.

To help clients determine whether their programs are at risk from the pending merger, BCD Travel’s consulting unit, Advito, is offering targeted air assessments. The program is designed to:

• Assess the service fit of a client’s top carriers
• Determine whether any program changes are needed
• Identify potential alternative carrier options
• Determine whether a full-blown sourcing engagement is warranted

To inquire about the air assessment, contact Bob Brindley at bob.brindley@advito.com.

LEVELS OF AIRLINE COURTSHIP Interline/revenue-sharing agreements Airlines cooperate in providing individual segments in a multi-leg journey. The ticketing airline then pays the interline carrier a prorate based either on the industry standard Multilateral Proration Agreement (MPA) or on a special prorate agreement (SPA). Interline agreements may create savings for buyers without reducing carrier competition. Code-sharing alliances Airline alliances allow two or more partner carriers to adjust schedules to align flights so each may use one another’s services. Code sharing allows one airline to list and market segments provided by another airline. Individual airlines may provide partners with discounts on specific routes but continue overall to compete with one another. ATI alliance Antitrust immunity allows two or more airlines to coordinate with one another in setting prices – and to eliminate competition – in the markets served. Multiple carriers act as a single supplier; however, alliance airlines with antitrust immunity do not share revenue and expenses unless joined in a joint venture. Buyers may be able to negotiate with some carriers individually, but overall reduction in competition can remove downward pressure on prices. Joint venture Two or more airlines maintain their own assets, but market their services as a single entity for the specific network being served. JVs also share revenue and expenses from all of the operating routes that fall within the joint venture. The individual carriers continue to compete for routes not covered by the joint venture agreement, but competition is stifled in the JV market. A buyer can only negotiate discounts with the individual carriers in markets not covered by the joint venture. Mergers & Acquisitions Two major service providers come together as a single company, sometimes maintaining two brands (e.g. Air France-KLM), but eliminating all opportunities for competition. Mergers have little effect on travel programs that previously did business with neither legacy airline but can add challenges for companies that previously held preferred agreements with both carriers or only one.