BTN's annual answer book for business travel managers everywhere. Added this year: travel risk management
The suggestion made in the August 2013 Travel Procurement Perspective, "The Myth And Reality Of Airline Mergers And Higher Fares," that a merger between US Airways and
American Airlines might have no upward impact on airfares does a disservice to readers.
If these two airlines merge, the airfares in their overlapping markets will rise, everything else being equal—not just in their handful of nonstop markets, but in the hundreds of overlapping one-stop markets
as well. Whether this outcome is in the public's best interest is grist for a different debate.
What's not debatable is the basic law of supply and demand. If US Airways and American merge, there will be one less supplier in each of their overlapping markets. The relevant question is by how much the average corporate airfare will go up.
The short answer? Negotiated Y-class fares (generally considered "walk-up" or last-minute fares) likely will rise by at least $37 each way, on average, in these merger-affected markets.
That's how much our regression analysis found to be associated with one fewer airline serving a domestic U.S. market. A bit more about this study:
We at tClara analyzed Y-class airfares in 4,645 domestic U.S. markets. These fares recently were negotiated by the U.S. General Services Administration's City Pair Program office. Buyers with less purchasing leverage
than the U.S government should expect their fares to go up more than this study indicates.
Our model tested four potential factors that may explain each market's negotiated airfare:
Other market-specific factors that would enhance the predictive quality of this model, such as the concentration of airlines and the buyer's spend or passenger volume, were not tested.
Here's the formula that we found that predicts the government's negotiated Y-class fare in any of the analyzed markets:
For the stats-oriented reader, all four factors were found to be statistically significant at the 1 percent level. The model resulted in an adjusted R-squared of 14 percent. The range of fare impact per carrier is $37, plus or minus $3 at the 95 percent confidence interval.
Competition clearly impacts the price of airfares. For every additional airline that serves a market, the Y fare goes down by an average of $37. And vice-versa—Y fares are $37 higher on average in markets with one fewer supplier.
What should travel buyers do about this?
Gauge your exposure. Determine how much of your spend is in merger-affected markets. Be sure to include those one-stop markets where AA and US Airways have overlapping service.
Estimate the increase. Our analysis suggests an 11 percent to 15 percent increase in government-negotiated Y-class fares. Corporate buyers probably will see larger increases in premium fares and smaller increases in more restricted fares. Note that fares likely will rise on all airlines in the merger-affected markets, not just on AA and US Airways.
Finalize negotiations now. Most buyers should try to secure the most favorable discounts before the merger is approved and before published fares rise.
Industry consolidation seems inevitable. Fares will go up. Let's hope that the airlines will use those profits to build better networks and customer experiences.
A longtime industry consultant, Scott Gillespie is managing partner at tClara, a corporate travel data analysis firm.
This report originally appeared in the November 2013 edition of Travel Procurement.
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