Baked into the revenue synergies that American Airlines and
US Airways envision in their $11 billion merger, announced Thursday, are the
typically espoused benefits of linking networks and mixing fleets. Yet, the
third major precept of the combined carrier's revenue goals strikes closer to
home for corporate travel buyers: "It is winning back and winning
corporate share," said US Airways president Scott Kirby during a
conference call with analysts.
"Delta and United, with global comprehensive networks,
have been able to win share from both American and US Airways on a standalone
basis, simply because the networks are more comprehensive," he continued.
"Being able to win back our fair share is the third large bucket of
revenue synergies."
By the end of the third quarter of 2013, the two carriers
expect regulatory approvals to be secured, AMR to have emerged from bankruptcy
court protection, the merger transaction to have closed and a joint sales force
to be ready to hit the streets in an effort to achieve those revenue synergies.
Speaking Thursday with BTN,
AA vice president of global sales Derek DeCross and US Airways senior vice
president of planning and marketing Andrew Nocella said that while they will
remain competitors during the six or so months needed to close the deal,
winning corporate business will be a day-one initiative.
"As soon as we're one carrier, you'll see us jointly be
able to negotiate those RFPs, and that just brings much more in terms of
compelling choices to those corporate travel managers," said DeCross.
"As soon as we have the capability from a legal perspective to go out and
operate as one team, we will do so. That will be a great thing for our corporate
customer and corporate TMCs."
It's All About The
Network
The airline business is a network business—and perhaps
nothing is more important to attract corporate clients. If an airline doesn't
fly to where you're going, why deal with them?
Combined, the carrier would operate more than 6,700 daily
flights to 336 destinations in 56 countries, according to the carriers. The
merger would tie together American's strength in Dallas, Chicago, Miami, New
York and Los Angeles with US Airways' hubs in Phoenix, Charlotte, Philadelphia
and its growing operation in Washington, D.C.
Of the combined 900 nonstop routes now flown by the
carriers, only 12 are served by both. "Most of those are hub-to-hub type
flying," said US Airways CEO Doug Parker, who will maintain that title at
the "new" American.
While AA and US Airways suggested they are greater together
than the sum of their parts, others are suspicious of what a more deeply
concentrated airline business means to consumers and corporate clients.
Concentration Of
Power
AA and US Airways are the fourth and fifth largest U.S.
carriers, respectively, and their merger would create the largest domestic
airline with more than 20 percent market share, according to data from the U.S.
Bureau of Transportation Statistics.
Business Travel Coalition chairman Kevin Mitchell indicated
that for corporate clients "there are few benefits to offset the negative
impacts of this proposed merger." He claimed it would result in
"reduced competition, higher fares and fees and diminished service to small
and midsize communities."
Airline industry power indeed has become more concentrated
in recent years, not only through mega-mergers that include Delta-Northwest,
United-Continental and Southwest-AirTran, but also increased alignment within
airline alliances and joint ventures.
JP Morgan analyst Jamie Baker noted that should AA and US
Airways complete their deal, the four largest U.S. carriers would control 88
percent of the domestic market—up from 60 percent in 2005, before the wave of
mega mergers.
Dahlman Rose & Co. analyst Helane Becker in a research
note today said the merger removes "one decision-maker in terms of
capacity and pricing," which eventually could keep industry capacity in
check and, in an unwelcome development for corporate buyers, enhance pricing
power for airlines.
Parker, however, said competition would be preserved.
"I've been a long proponent of industry consolidation," he said.
"This is the last major piece needed to fully rationalize the industry,
enabling airlines to be intensely competitive but also sustainably
profitable."
BTC's Mitchell countered that sentiment, suggesting that the
impact of anticompetitive effects would be felt beyond corporate travel buyers
and consumers, as carriers gain "leverage to drive supplier prices below
competitive levels for travel agencies, travel management companies, airports,
global distribution systems, parts suppliers, caterers and all manner of supply
chain participants."
Carlson Wagonlit Travel CEO Doug Anderson sounded less
concerned. "The fact that there will be another strong, financially viable
carrier in the U.S. is not a bad thing. I’m encouraged by all this," he told
BTN. "We’ve got good
relationships with both airlines. We know what their strategies have been and
we know their management teams very well. I would expect to have a good,
healthy, ongoing relationship with the merged airline."
Becoming The New
American
If all goes according to plan, the carriers expect to
receive sometime this summer the necessary regulatory and shareholder
approvals.
AA and US Airways on Jan. 31 got the regulatory ball rolling
by filing for a Hart–Scott–Rodino antitrust review. They expect minimal
regulatory pushback, citing what Parker called an "extremely
complementary" network.
"The Justice Department could order asset sales if it
finds the deal creates a monopoly in any area," according to Sterne Agee
analyst Jeff Kauffman. "We see this as unlikely given there is little
overlap of the respective networks." Similarly, JP Morgan's Baker
anticipated only "modest" divestitures, if any, at Washington Reagan National
Airport to appease regulators.
As they await approvals, the carriers will embark on the
first stages of integration preparation. American CEO Tom Horton, who would for
a limited period of time become non-executive chairman of the combined airline,
said the companies are forming "transition teams" across various
"functional areas."
US Airways' Nocella said it's "too early to tell"
who will lead the integration team overseeing sales and marketing.
There is much to hash out. There are notable differences in how
the carriers approach the corporate market: AA uses Prism to structure and
manage corporate agreements, while US Airways uses an internal system; AA is
active in antitrust-immune joint ventures with British Airways and Iberia on
the Atlantic and Japan Airlines on the Pacific, while US Airways has taken a
loner approach to international sales; AA has a long history of deep
entrenchment in the corporate and travel management marketplace, while US
Airways backed away from the sector immediately following its 2005 merger with
America West—though it has since taken steps, with some success, to re-engage
corporate America.
"Any time you take different companies, there's going
to be some different approaches," said DeCross. "Quite frankly we
look at taking the best of both carriers and bringing that into one. High-value
customers make up a disproportionate share of our revenue bases, and this is a
network business and that's what this is going to do: bring a very compelling
network alternative to other carriers out there."
For corporate programs, the carriers are "going to
learn from our differences and ultimately come out with a much better product
at the end by combining the best of both," said Nocella.
Should the carriers receive the required approvals, Parker
estimated that it would take about 18 months to transition to a single carrier,
which includes getting a single operating certificate from the Federal Aviation
Administration as well as the transition onto a single passenger services
system.
Until that process begins, executives said it will be
business as usual for their frequent flyers, corporate clients, employees and
partners.