Buyers Facing Majors' Mergers Must Be Discerning

<B>Buyers Facing Majors' Mergers Must Be Discerning</B>

As recently as October, Business Travel News ran a cover story entitled "Air Consolidation Throttles Down," (BTN, Oct. 2, 2000). With growing opposition to domestic mergers and one failed attempt in Europe, some observers believed the "urge to merge" was over, at least for a while. Small chance.

Clamor aside, the major carriers in the United States are looking to reshuffle the deck for larger networks and more concentration in markets. Although there may be better flight schedules in some markets, the result would be fewer end-to-end connections and fewer carriers with which travel managers can negotiate. This translates to reduced leverage and the potential for pricing increases. Barriers to entry and limited airport capacity would continue to restrict competitive options from smaller carriers.

Carriers, especially in the United States, always have preferred mergers over alliances; the latter proving relatively ineffective at cost control and market concentration.

Will there be adequate competition with only three majors and a second tier of low-cost carriers working around hub limitations? In some quarters, there is almost hysterical opposition to the concept of a dominant three-company system. Much debate is expected and there is a lot of political uncertainty as the new Administration settles in and takes over the review process for mega mergers.

Early approval in Europe of one U.S.-based merger is no guarantee that the U.S. Department of Justice or, more importantly, Congress will bless massive industry consolidation.

Travel managers need to think strategically, assess merger developments aggressively and look closely at "what ifs" concerning discount deals now in place or about to be contracted. There can be benefits for companies from mergers, at least initially.

For instance, contracts often allow renegotiation for "material" changes or have unilateral out-clauses inserted by mutual consent. Few, if any, discount contracts bind the carrier regardless of change, or limit the carrier to termination for cause. "Material" change clauses may be used to scrap old deals, increase share hurdles or make other requirements different or stricter.

To reduce resistance, some merger applicants propose to agree not to raise fares for a period of time. Does changing or eliminating corporate discounts due to the elimination of the discounting carrier violate that commitment? There seems to be at least a public interest argument there.

Based on the following assumptions, there appear to be at least four possible results a company might expect:

<li> That there is no change in fare levels in the short term by the acquiring carrier, possibly based on a pre-merger pro-consumer commitment to DOJ.

<li> That all the acquired carrier's routes are maintained by the acquiring carrier (also for approval rationale).

<li> That the company has volume on the acquired carrier.

<li> That the acquiring carrier does not try to renegotiate discount and/or market share.

Merger Results: If Company A has the same discounts on both acquired and acquiring carriers, it should be at least initially in the status quo. Four other results are more likely:

<li> Company A, with 20 percent discount on the acquiring carrier and 15 percent on the acquired carrier, is better off by 5 percent on the former routes of the acquired carrier.

<li> Company A, with 15 percent on the acquiring carrier and 20 percent on the acquired carrier, loses 5 percent on the "new" routes now operated by the acquiring carrier.

<li> Company A, with 20 percent on the acquiring carrier and no deal on the acquired carrier, now has 20 percent on the expanded network.

<li> Company A, with 20 percent on the acquired carrier and no deal on the acquiring carrier, is back to full fare unless the acquiring carrier was to honor the old deal, which is not too likely. Company A has to look for a competitive option to resurrect some leverage.

Depending on traffic mix, incremental savings from a compromise discount on the acquiring carrier could yield better discounts than the combination of the two programs.

For example, assume Company A has $5 million in pre-discount spend on acquiring Carrier X, with a 20 percent discount, and $2 million in pre-discount spend on acquired Carrier Y, with a 10 percent discount. If Company A could convince X to offer 18 percent on a combined program, total savings would be $1.26 million instead of $1.2 million with separate discount programs.

Unless there is government intervention against "free" market forces, air consolidations appear to be about to "throttle up." But, how quickly will it happen? One target date is April, but there is growing concern in nearly all quarters over losing airlines no matter how marginal their performance.

Carriers themselves are jockeying for position with almost daily changes in offers and counteroffers. There also is some traditional lethargy on transportation issues during the changing of the guard between administrations. To rush to cancel or renegotiate your corporate discounts now would be premature and very dangerous.

For now, business as usual with a watchful eye on the brewing storm is the best practice. Focus on delivery under current deals, resolicit prior to contract expirations and consider some contract protection if you can, depending on current leverage.

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John Caldwell is a Washington, D.C.-based attorney who heads the travel management consulting firm Caldwell Associates.