United Airlines last week settled on a new marketing alliance with one-time takeover target US Airways. If not hindered by regulators, the pact will enable the carriers to share codes, integrate loyalty programs and develop other customer benefits. The codeshare partnership will present both opportunities and complications for corporate contracting.
Separately, United planned today to announce the elimination of corporate discounts on lower-fare buckets as it eyes cost-of-sale reductions, following similar actions taken by other majors.
The UA-US Airways alliance is a huge step forward for the revenue-starved airlines and represents a crucial cog in their respective recovery plans. US Airways—which will gain access to United's midwestern and western network, certain international markets and a potential seat at the Star Alliance table—plans to proceed even if it files for bankruptcy. For its part, United will tap into feed from US Airways' strong East Coast system. The carriers soon will announce specifics.
A US Airways rep said the alliance will be phased in, with frequent flyer and airport lounge reciprocity first on the agenda. The first wave of codesharing is expected to follow before year-end. "We are looking ultimately at codesharing in a majority of our domestic markets," the official said. "In the second year of the agreement, we will pursue the Star Alliance portion."
The codeshare pact will become the second of its kind between two of the top six U.S. carriers, following Continental/Northwest, the only partnership currently offering buyers joint contracts.
United's move to cut corporate discounts on certain fare types follows similar actions taken by other major carriers, most recently Delta Air Lines, and further signals United's need to improve weakened revenues. In an internal announcement, expected to be made public today, United said it "no longer will discount its sale, promotional and other deeply discounted fares when negotiating contracts with corporations." However, carrier officials would not identify specific fare categories excluded from such contracts.
Frank Kent, United vice president of North America sales, said, "This action on sales, combined with our guidelines on waiving fare rules and other policy changes, will align our sales costs with the lower revenue we experience on these promotional and other deeply discounted fares."
United parent UAL Corp. already lost $850 million during the first half of the year, prompting new policies aimed at reducing distribution costs and a new strategic plan. The carrier awaits word from the Air Transportation Stabilization Board regarding a request for $1.8 billion in federal loan guarantees and continues searching for interim CEO Jack Creighton's successor.
While United's statement on corporate discounting suggests little room for negotiation, some travel managers may expect exceptions based on the level of business they provide and negotiating clout.
Delta, on the other hand, left the door open in a letter to corporate clients, saying discounts on lower-fare buckets may only be reduced, not necessarily eliminated, and that sales reps would contact accounts to work through the specifics
(BTN, July 15).Northwest Airlines, which in November also eliminated corporate discounts on lower buckets, renegotiated some corporate agreements to increase discount levels on other fare types, according to sources.
"We have reexamined the pricing structure from every angle but we have been unable to find any alternatives that will produce as much revenue for United as the current highly segmented fare structure," noted president Rono Dutta, speaking this month with analysts.
Instead, United's only recent pricing move of note was a matching of lower fares brought into the Denver market by low-cost competitor Frontier Airlines. "Depending on the outcome of United's experiment, further proliferation of lower walk-up fares by the major carriers is a distinct possibility," said J.P. Morgan Securities analyst Jamie Baker, predicting a 1 percent hit to United's revenue, or $80 million.
Meanwhile, United on Oct. 15 will cease paying base commissions to non-U.S. travel agents on itineraries originating within the United States. The move will follow that of archrival American, which will impose the same policy Oct. 1.
According to Dutta, agency costs represent just one area of distribution from which United hopes to extract savings; global distribution system fees and credit card costs also are being scrutinized. However, Dutta stopped short of saying United will follow British Airways' decision to no longer absorb merchant fees on credit cards for corporate bookings
(BTN, June 24).United, as Dutta plainly described, is "a high-cost carrier" facing a renewed period of weakened revenue after seeing modest improvement between January and May. Those high costs generated a second-quarter cash burn of $1 million a day, which is expected to intensify due to seasonal trends. At the same time, second-quarter passenger revenues fell more than 20 percent. All told, the airline's second-quarter loss was $392 million and represented the eighth consecutive quarter in the red. Dutta expects "significant" third-quarter and full-year losses to follow.
"Airline revenue recently appears to be more closely related to corporate profit than overall GDP. For years we had been assuming the opposite was true," Dutta said. "So airline revenue is unlikely to recover until corporate profits also recover."
Furthermore, CFO Jake Brace, noting the carrier faces nearly $900 million in debt maturities in the fourth quarter, said, "Frankly, we are concerned about being able to refinance them."
Despite these woes, many industry observers do not believe United will win approval from the Air Transportation Stabilization Board, because it still has not obtained concessions from two of its largest unions. Also, as of June 30, United's cash balance still was $2.7 billion.
However, the US Airways agreement—a key element of a new business plan—may strengthen United's case for a federal loan guarantee, and at least partially addresses the particularly acute revenue crisis at these two carriers.
Considering the airlines just submitted information to the U.S. Department of Transportation on Thursday, it is unclear how the federal government will react. Last summer, the two carriers abandoned plans for a $4.3 billion merger after the U.S. Department of Justice raised anticompetitive concerns. This second attempt to cooperate, however, does not involve any equity stakes—unlike the original Continental/Northwest alliance—and keeps the two airlines as separate, competitive entities.