Growing Corporate Market Share Key Tenet Of AA-US Air Merger - Business Travel News

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Growing Corporate Market Share Key Tenet Of AA-US Air Merger

February 14, 2013 - 02:50 PM ET

By Jay Boehmer

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.

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