The AA/US merger – what it means for corporate clients

Posted in Blog
By Mike Eggleton
Senior Market Analyst

Nearly a year after the initial announcement, American Airlines (AA) and US Airways (US) officially merged in December 2013, concluding a lengthy period of consolidation and reducing the number of major “legacy” carriers in the United States to three. In the U.S. the three major network carriers plus Southwest now account for 80% of the domestic market.

It will still be some time before AA and US are truly integrated into a single airline – known as American Airlines – but travelers are already noticing changes. The two airlines have created linked frequent flier benefits, joint ticket counters, harmonized check-in, and code sharing.

So what does this consolidation mean for you?  How will it impact corporate air programs and pricing? Consolidation inevitably reduces competition and if you don’t do something, you could face less generous future contracts. On the other hand, it also provides an opportunity to uncover some new negotiating opportunities. Instead of waiting for the airline to set the agenda, here are some tips to help you analyze existing contracts and proactively negotiate the next.

What does the merger mean for corporate travelers?

Does your business currently have a negotiated contract with either or both of the merging carriers?

No contract with AA or US:

If you don’t have a contract with either AA or US, you’ll be largely unaffected, but this could present a negotiating opportunity for you. With expanded route coverage, American Airlines now offers a credible alternative to the other major network carriers.

Contracts with both carriers:

If you have contracts with both AA and US, American Airlines will want to consolidate these into a single new agreement with consistent terms and conditions and coordinated pricing. Before agreeing to anything, be sure to compare in detail the existing and proposed agreements to confirm that there is no disadvantage. Pay particular attention to:

• American Airlines offering the lower of the discount rates you previously received from the two separate carriers. They may be tempted to offer the less generous discount.

• Reduced discounts on monopoly routes created by the merger. U.S.-based airlines generally offer corporate clients a standard discount rate on domestic routes and a higher rate for flights to the hubs of competitors. For example, the US and AA hubs of Charlotte and Dallas Fort Worth were once competitors, but now that they hold a monopoly over the route, the competitor hub discount will disappear. On the bright side, the merger has created only a few new monopoly routes.

Contract with one of the airlines:

If you have a contract with just one of the airlines, you may be among the most affected by the merger. You probably have good reasons why you previously dealt with one airline and not the other. Now you’ll need to carefully analyze the situation to decide if the combined airline makes sense for your program.

While directly affecting contracted rates, the merger will also have a major impact on agreements with other carriers. For example, you may have previously needed agreements with US Airways as well as with Delta and United. The new American Airlines offers a much-expanded network, so you may be able to reduce your commitment to other carriers (although this will damage the rates you receive from them).

What proportion of the flights your company books are to/from/via hubs of the new airline?

The merger has also changed the competitive landscape at key U.S. airports/hubs. You should determine how important travel to/from/via the hubs of the new airline is to your program, and carry out a risk analysis based on these results. Put simply, the higher the percentage of your travel program that uses these hubs, the higher the risk to your program — airlines discount far less on routes from hubs they dominate. You’ll find the best opportunities for deeper discounts on the routes where American Airlines still faces significant competition.

Other points to watch out for

In addition to the contractual and hub issues, there are a number of other things we suggest you look out for:

• To secure approval for the merger, American Airlines must give up some of its existing slots at certain airports. In particular, it will face new or improved competition from low-cost carriers on a number of routes from Ronald Reagan Washington National and New York LaGuardia airports. But this also means cuts to its network, with 17 cities set to lose direct service from Washington National.

• Check the details of your existing contracts to understand what changes the new airline can and cannot make to them.

• In the short term, consider other, independent sources of travel data – the merger could disrupt the flow of accurate, timely data from the new airline.

• In the longer term, consolidation in the U.S. will give American, Delta and United more negotiating leverage in their contracts with global distribution systems, shifting the balance of power in travel distribution.

Though consolidation has reached an advanced stage in the U.S. with the merger of American Airlines and United Airways, we remain confident that with the right analysis and contract negotiation approach, this change won’t damage your corporate travel agenda. Though it will still be some time before AA and US are truly integrated, we’ll continue to keep you informed as changes progress and stay proactive about what this merger means for your airline agreements.

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