<B>AA, TWA Align Sales</B>
By David Jonas
American Airlines and Trans World Airlines by mid-July will have integrated all corporate contracts under American umbrella deals covering all flights on both carriers. The rapid harmonization of all sales, revenue management, scheduling and finance functions represents phase one of the largest and most complex airline integration project in commercial aviation history.
Other elements of the integration will occur in stages during the next two to three years, including initial codesharing and service alignment starting this summer, and TWA's migration to Sabre sometime early next year.
Affected buyers, particularly those aggregating existing volume on both carriers, have had a generally positive outlook on the integration. Others have underlying fears that fares and schedules, specifically in St. Louis, eventually will be adjusted to the detriment of corporate travel programs.
Just a few months after receiving all necessary approvals to cement the TWA acquisition and operate the carrier as TWA Airlines LLC (BTN, April 9), American aggressively went to corporate accounts to begin integrating contracts--even though res systems, ticketing rules and accounting systems remain separate.
In fact, TWA managing director of corporate sales Fernand Fernandez said the bulk of TWA's major accounts already have been merged. "TWA never was able to offer corporate clients a global contract, which is something they have been increasingly asking for," Fernandez said. "Now, they can travel anywhere in the United States and abroad with a single discount level." He added that clients with more modest travel programs may see "smaller tier deals" and that American's small business products--Business ExtrAA and AAirPass--will be heavily marketed throughout TWA's core corporate client base in the Midwest.
In most cases, companies that had deals with both carriers now are using a single discount for domestic flights on both carriers. "Anyone flying on TWA automatically gets the American discount," confirmed John Smith, president of Tower Travel in Oakbrook Terrace, Ill., adding that the American discount now applies even in many cases where a pre-existing TWA discount was higher.
One St. Louis-based company, for example, already has seen contract integration: A combined deal with a flat, across-the-board discount for all domestic AA and TWA flights kicked in June 1. "I have a sense that we might have received the better deal on the revised contract because we already had a relationship with American and, therefore, had more volume overall," said the company's travel manager. "But we were surprised American provided that discount in a city where they have more than 50 percent of the lift."
The travel manager said he was further surprised by American's willingness to offer a two-year contract term. "We expect over time that AA potentially will make various changes to their operations, frequencies, schedules and fares. I would have thought they would prefer a shorter contract."
Another buyer--also from a company with pre-existing deals on both carriers but from a different region--was not at all surprised by American's approach. "By expanding the network, American had less reason to extend the discounts. But they wanted to keep the good will of their top corporate accounts and not get into too much trouble early on," the buyer said. "They are very smart, from a sales perspective, and maybe next time around they'll be tougher."
The newest TWA contract for State Farm Insurance in Bloomington, Ill.--currently still separate from a "stronger" AA contract--was configured with a single discount across the board, "which was something new for TWA," said Melinda Samp, supervisor of the air travel and lodging unit. "That contract made for a cleaner process, which will make it simpler to merge the two discounts. Hopefully, that will happen in the next few months."
From the TWA perspective, single contracting with American immediately was beneficial. "Incrementally, we grew our corporate client base 44 percent, as American's top global accounts now have access to TWA," Fernandez said.
As expected, AA gained far fewer of the accounts it did not already have--only 15 in the entire Central region, for example. However, some new corporations may come onboard now that American has an even larger market presence.
Fernandez, meanwhile, hinted at new corporate and agency arrangements that "make it easy for them to book on TWA" without any back-end payment problems. "Anything they do on TWA essentially is gravy." When asked if those arrangements include new override deals, he said without elaboration, "Yes and no."
Meanwhile, travel managers will start seeing fewer sales reps as American repositions an integrated salesforce.
AMR chief Don Carty, in a speech late last month to the St. Louis Civic Progress Board, said in the next several weeks travel agency and account management will be combined. "So, instead of two sales reps calling on your company, there will be one," he said. "And that one will be able to offer the comprehensive services of the combined American/TWA network."
Indeed, some travel managers whose companies have had American, but not TWA, contracts said they recently have been paid visits by their AA reps, showing off just how expansive the carrier's network has become.
Samp said State Farm now has new sales reps, including a pair representing American Eagle, but thus far the company still is unsure what will become of its TWA rep. Tower Travel's Smith also confirmed that American very recently "restructured and downsized Chicago sales significantly."
Complete integration of the salesforces is expected by July 16, but in the interim some travel managers are reporting surreal meetings with reps from both carriers, an arrangement strictly forbidden, of course, when TWA was independent.
Despite encouraging signals from American, some travel managers are cautious. "TWA was not strong on contract adherence and enforcement of goals, and I'd guess that American will be tougher," one buyer said.
Also, American's 22 percent domestic market share is not necessarily the end-all solution for many buyers. A company's travel patterns still must mesh with American's network for the world's largest carrier to be a relevant preferred supplier.
Though buyers reported a generally proactive approach by American in keeping them, their agents and their travelers informed, there still is plenty of confusion, both at the airport and the negotiating table. "From a corporate perspective, the hardest thing to get across is that TWA is not going away any day now, even though we no longer have our own contracts," Fernandez said. "We probably would have been better off naming ourselves American Airlines LLC after the bankruptcy."
As merged corporate contracting takes hold, American will use a slower strategy in integrating operations, with complete TWA assimilation not expected for at least three or four years. Aircraft conversions, followed by integration of flight crews and maintenance workers, likely will begin next year.
"Fortunately, we can move at a much faster pace on other things that the customer sees," said Tom Horton, AMR senior vice president of finance and CFO, last month. This summer, American will start reconfiguring TWA aircraft to match its expanded leg room in coach. TWA's domestic fleet is set to be refurbished by September, followed by the international fleet a few months later.
American this summer also will begin coordinating other inflight products and services and concentrating gates and other facilities at mutual airports. Flights from those particular airports could be the first ones covered in an initial round of codesharing as early as late June. American, however, said it has yet to pinpoint specific codeshare routes.
A major milestone in the integration will occur when TWA switches to Sabre from the Worldspan global distribution system, which it had part-owned. "We're working hard to achieve complete system integration by the end of next year's first quarter," Carty said last week. "At that point, we'll be ready to start presenting ourselves to the traveling public as a single airline."
Following the migration to Sabre, TWA flights will be presented as American codeshares, similar to the way American Eagle flights are marketed and presented within the GDS.
Already squared away are frequent flyer and airport lounge reciprocity.
American also has begun adjusting the combined network by aligning some Caribbean services, but much more evaluation will be done. "There is a considerable overlap in transcon and hub-to-hub flying and we'll have to take a look at that," Horton said.
The carrier also will seek to reallocate resources to improve passenger flows. The Chicago O'Hare hub, for example, could be used as more of an origin and destination point, while transcon and other connecting traffic may be funneled through St. Louis. Carty, noting physical constraints at both Chicago and Dallas/Ft. Worth, said, "If we are going to participate in the growth we expect in East-West traffic in the United States, we're going to have to flow an awful lot of people through St. Louis."
Carty added that service from New York will be adjusted, including a gradual restoration of international routes previously pared down by TWA. Indeed, American expects its large base of corporate accounts and the power of its AAdvantage program to transform many of TWA's unprofitable international routes into profitable ones.
American expects to generate $500 million a year from the integration. Much of that will be achieved through scheduling efficiencies, the elimination of the restrictive Karibu ticket agreement with Carl Icahn and share shifts and yield improvement resulting from a greater share of premium traffic in areas on both coasts where TWA's financial situation had kept away corporate clients. "In those communities, American's reputation, contacts in the corporate community and stronger foothold will help the profitability of the TWA operation tremendously," Carty said.
American was able to leverage its financial strength in slashing more than $200 million a year from TWA's previous aircraft lease rates. Horton, who acknowledged labor cost increases as TWA employees are transitioned to American contracts, said TWA overall could begin contributing positively to annual profits as early as next year.
Once fully combined with TWA, American will offer a global network of 300 cities served by 900 aircraft, handling at least 21 percent of all domestic traffic. In the interim, American vice chairman Bob Baker is TWA Airlines LLC's CEO, while Bill Compton, TWA's CEO up to the closing of the transaction, serves as the subsidiary's president.
United Airlines and US Airways only can hope to follow American and TWA on the path to integration. Their proposed merger, announced more than a year ago (BTN, June 12, 2000), remains mired in the regulatory process. Industry observers said the deal is in jeopardy of either being significantly altered or rejected outright. Carty, in addressing shareholders last month, said the prospect of the United-US Airways merger "is looking less certain every day." U.S. Department of Transportation secretary Norman Mineta expressed his doubts last week in several printed reports.
United Airlines officials told hundreds of employees involved in integration planning to return to their previous posts. The carrier, however, said the move reflects its state of preparedness rather than doubt.
United would pay a $50 million break-up fee to US Airways, should it by Aug. 1 call off the deal, which still calls for a $60 per share purchase price.