Windy City: AA, UA Storm Rages
<B>Windy City: AA, UA Storm Rages</B>
<I>Third In A Three-Part Series on Negotiating At Hub Airports</I>
By David Jonas
Driven by a fierce battle between its two hub airlines, American and United, the Chicago negotiating environment offers unparalled opportunity for corporate buyers. While United slowly has gained market share in the Windy City, it is clear that American has taken the gloves off in an attempt to mount a comeback.
Chicago's Midway Airport--and the variety of carriers that use it--is a viable alternative in many cases, but most corporations must use O'Hare for a good portion of their domestic travel and all of their international travel needs. Therefore, Chicago-area buyers, for the most part, have little choice but to work with either American or United in some capacity.
By the very nature of such heightened competition between two majors, each is pressing hard to either win new corporate accounts, retain existing ones or steal some from the other. Said one travel manager, "Unlike other markets where there is guerilla warfare, Chicago is all about trench warfare. You're either in one camp or the other."
And that warfare has been stepped up even further in the past year or so as both American and United have reached deep into their sales arsenals.
"Both have been aggressive in going after each other's clients. American had won an awful lot of business over a three-year period and since United viewed it as their home town and saw a significant share shift away, it has been more aggressive as of late in defending its turf," said Bob Brindley, vice president of marketing at Chicago-area McCord Travel Management. "We have heard in the marketplace that United won back a few large accounts that American had converted from United three or four years earlier. The natural reaction is to find opportunities to take an account back if a competitor has taken one from you."
Brindley added that the carriers have been "pulling out all the stops" and offering everything from front- and back-end discounts, which have been on the rise in the past 12 months for high-performing accounts, to upgrade programs and access to top accounts desks. The result for buyers is leverage and the possibility to draw the two airlines into a bidding war for their business.
Aside from playing one off the other in an attempt to score the biggest discount, buyers should consider several characteristics that differentiate the two main Chicago carriers.
Of course, network coverage for a corporation's needs is critical and in many cases, United's has the edge with its larger market share. In fact, the 2000 Factbook from Salomon Smith Barney shows United's lead widening with nearly 49 percent of scheduled seats out of O'Hare, compared with American's 34.5 percent (see chart, page 1).
"United really does have more market control typical of a hub situation as they have more traffic to redistribute," said Rolfe Shellenberger, senior consultant at Runzheimer International. "And unless AA can convince United to give up slots, that imbalance will not change significantly."
In fact, John Smith, president of Tower Travel Management in Oakbrook Terrace, Ill., expects United to continue to widen the gap. "There is new leadership in the Midwest region for United, specifically in Chicago, who appear to be aggressive in retaining and growing market share," Smith noted.
Even so, American and United have their own distinct strengths from Chicago and/or routes they would like to beef up. For United, transpacific flights are a prime target while American is more interested in transatlantic share and boosting traffic to New York LaGuardia, Los Angeles and San Francisco.
One clear network advantage for American, however, is the deployment of regional jets. Through its American Eagle subsidiary, the carrier quickly has expanded usage of the business traveler-friendly RJs and created a strong short- and medium-haul sphere of influence in the region.
Meanwhile, one widely discussed factor that will play into Chicago wheeling and dealing, in varying degrees, is the recent enhancements to the coach class cabin (see story, page 18).
"We have already seen the additional room in coach class factor in to some negotiations that we have been party to," Brindley confirmed.
"United's Economy Plus was at first well received. But now if the financials are close and the extra space throughout American's coach class can help drive compliance and consequently improve financial returns, it could definitely be seen as something to tip the scales."
He added that more leg room won't go far in offsetting a 5 percent or more differential in discount levels, but will impact analyses for more competitive proposals.
Terry Trippler, airline expert at Onetravel.com, took it a step further. "No matter what United has gained in Chicago, American will gain it back, and more," he said. "Airlines have never competed on service like this and you will clearly see a big swing."
However, Smith said that while travelers at large may be attracted to American's product, the smaller subset of frequent business travelers still will opt for United's offering, which will give an additional inch or two--up to 36 inches--depending on aircraft type. "If United is able to attach a value to Economy Plus, they can get more yield out of higher paying passengers and still offer a lower-cost product for the folks in back," he said.
Physical attributes aside, each carrier has its own philosophy toward Chicago. "American tolerates competition with more alacrity than United and recognizes it cannot be everything to everyone," Shellenberger said. "United, however, is a steamroller." He further observed that American is not as strict in enforcing share requirements and is less likely than United to revoke Chicago contracts.
Meanwhile, at the bargaining table, American as the secondary carrier can be aggressive and still make money.
"There is more negotiating space in Chicago than other cities where the yields are much lower," Shellenberger said. "So the key is that American can offer what amounts to a 40 percent discount and still be profitable."
Also, with a higher percentage of seats in first class and therefore more opportunities to upgrade, American at times is more focused on the individual business traveler. United, on the other hand, focuses on commitments from corporations and the source of the business in a single-carrier strategy.
Still, Smith said neither American nor United aggressively cancels contracts, particularly in Chicago. "Both carriers are working hard to ensure win-win agreements because so much is at stake here," he said. However, he added that the difference in philosophies becomes apparent when looking at contract goals. "American is more driven by market share in Chicago, probably because of their positioning, while United is after dollar volume," he added.
Though O'Hare is not the most controlled airport for either carrier because of the presence of the other--nor is it likely to be the most profitable--it is one of the most important. Traffic, market share, revenue and all the other indicators are analyzed and dissected on a daily basis. And while O'Hare is a key cog in the domestic networks, it also serves as a major international gateway in which both American and United have invested heavily.
As mentioned earlier, Midway Airport, which is closer to downtown than O'Hare, can offer options for corporate travelers in the Chicago area. Several low-fare carriers serve the airport, including Air Tran, American Trans Air, Frontier and Southwest. Along with a handful of larger carriers operating from Midway, including American, which has a few daily flights to its Dallas/Ft. Worth hub, these alternatives can fulfill the needs of many smaller companies and fill in the gaps for larger ones while helping buyers of all sizes avoid traditionally high fares from O'Hare.
In fact, those traditionally high fares at the airport are now the focus of an investigation by the House Judiciary Committee. According to printed reports in the Chicago Sun-Times, committee chair and Illinois congressman Henry Hyde is trying to determine if the two carriers are engaged in anticompetitive activity at O'Hare.
Meanwhile, Midwest Express and its hub at Milwaukee's General Mitchell International Airport, located just to the north, also can be used as an option for certain short- and medium-haul flights, depending on a traveler's office location.
While Chicago does not tell the whole story of the rivalry between the two airlines, it certainly is the most visible battlefield. In fact, some industry insiders speculated that such heated competition between the two often spills over into markets where neither is dominant. "They really are fierce competitors nationwide," Brindley noted. If you ask either who their number one competitor is, they'll be quick to say it's the other one. Even in a market like Boston, where no carrier dominates, the city pairs where American flies has a fair level of overlap with where United flies." As a result, they focus more on beating out one another and lose sight of the other players in those markets.
The bottom line is that Chicago-based buyers, more so than their counterparts in most every other city, can let the airlines fight over them. Said one industry insider, "All you need to do is mention the other carrier's name and you'll get a good program.