January 31, 2008 - The U.S. airline industry appears poised for large-scale consolidation that would turn the domestic and international competitive skyscapes upside down. Some of the likely participants and many observers say that mergers and acquisitions--should they occur this year--may start materializing within weeks. Based on input from travel management sources, a rational approach for those running managed travel programs is to pay attention and consider the wider impact for their organizations but not get bogged down in intensely scrutinizing every possible scenario.
Because there are too many potential combinations, too many variables and, despite strong expectations, no certainty of any major carrier tie-ups, it is currently impossible to determine just how the industry would be reshaped or the specific ramifications for individual client programs.
"It is prudent to take a look at contingency planning, but I wouldn't get too worked up about it," said Bob Brindley, vice president of the Americas for BCD Travel's Advito consultancy.
Nevertheless, many are eyeing the potentially negative ramifications that could be in the offing, including reduced competition--which may lead to capacity cuts and fare hikes--reworked domestic and international alliances, and awful customer service.
In a Business Travel Coalition poll of 70 travel managers working for companies with airline contracts, three-quarters of respondents said M&A would lead to higher business fares. More than 50 percent of respondents to the poll--developed with the U.S. Government Accountability Office to help assess the potential consequences of airline consolidation--were concerned about customer service quality.
In the name of "rationalizing" the "fragmented" industry, airline executives said consolidation would allow for domestic capacity cuts (which some airlines this year already are undertaking on their own). That could lead to fewer nonstop flights in many secondary markets and fewer connections through hubs to small cities, impacting thousands of organizations. It also could lead to capacity reductions on certain primary routes, which also would drive fares higher.
"A lot of clients are concerned that if, all of a sudden, two airlines link up where there was fierce competition before, now it's going to be a monopoly and chances are they'll cut capacity," said Mitch Cwanger, practice leader for air at American Express Advisory Services.
"Each client has a different mix of preferred airlines in their portfolio," added Brett Zabel, CWT Solutions Group global project manager. "We are in wait-and-see mode to see who acquires who, which hubs and route structures stay in place and what the management style will be, which will determine what the corporate discounting strategy may be. You have in the industry today vast differences in the way people believe corporate discounting should be done."
Advito's Brindley said travel and purchasing managers are concerned that the time and resources allocated to global airline requests for proposals could be wasted. "If, all of a sudden, one of the carriers they selected to be a cornerstone of their program pulls down operations in one of their major markets in their program, that is a big worry."
"People who talk about how great these mergers will be are the ones that are going to make most of the money," said HRG North America CEO Tom Gleason. "So much happens afterwards. What you buy is not always what you get."
Gleason, a longtime American Airlines sales executive who witnessed firsthand the assimilation of Reno Air, Air Cal and Trans World Airlines, described how operations in many acquired markets were not maintained. "We gave them up," he said. "The only thing left of TWA after it was bought by American was a downsized St. Louis hub. Otherwise, everything they bought was gone."
On the other hand, consolidation could provide an organization's existing preferred carriers with larger networks, potentially allowing buyer and supplier to expand the scope of the preferred program. Carriers that do not participate in full-blown merger transactions also could take advantage of expansion opportunities.
"If you start putting some of these very large carriers together, there may be small carveouts," said AirTran Airways president and CEO Robert Fornaro. "Certainly if you look at New York, there has to be some carveouts, and even at Washington National. We'd like to participate."
In terms of customer service, a seemingly endless set of challenges likely would lead to inconveniences. As airlines work to integrate their systems, technology and worker groups, for example, travelers should expect deteriorating on-time performance, baggage handling and staff responsiveness.
US Airways president Scott Kirby said the carrier's on-time performance "was 17 points worse than the industry average in March of last year, in the middle of our res migration issues." US Airways lost functionality in its Web site and most of its airport kiosks when transferring 7 million passenger records. By the end of 2007, Kirby claimed, US Airways was running at 10 points above the industry average.
"Will there be a merger? Without a doubt," said HRG's Gleason. "But will it benefit travelers? It will be a problem in the short- to mid-term. It is much more difficult than anyone will admit to. Very seldom is there a very successful merger in the United States."
BTC chairman Kevin Mitchell noted the economic impact of customer service challenges. "With the top six [airlines] collapsing into three in the same time period, there is a strong likelihood of a very unstable aviation system," he said. That instability [as well as fewer flight options in some markets] could prompt business travelers to head for their destinations a day earlier than they normally would, Mitchell suggested, simply to minimize the risk of missing important meetings. That, in turn, leads to higher hotel and meal costs.
Even US Airways CEO Doug Parker--who led the US Airways-America West merger, made an unsuccessful bid for
Delta Air Lines and remains one of the more vocal proponents of wide scale M&A--acknowledged the inherent difficulties. "There's more behind these transactions than simply looking at route maps and putting two pieces together," he said. "It is much more complicated than that. The more popular ideas probably aren't where we end up."
While Delta-Northwest and United-Continental represent the most widely anticipated of all the possible combinations, other scenarios certainly could play out, or none at all.
And if specific transactions are announced, travel managers have no say in how the airlines begin execution. For that reason, one travel procurement professional, located in a hub city heavily impacted by the integration of US Airways and America West, said, "You can worry about it all you want, but that won't change anything. You just have to go with the flow."
