The risks and opportunities of airline consolidation for business travel programs

AVOIDING TURBULENCE

Introduction

Whatever role you play in your corporate travel organization, offering the best experience for your travelers and obtaining the best value for your company are top of mind. This includes extracting value from your airline contracts and maximizing applicable discounts. This would be challenging enough in a static environment, but in corporate travel your only constant is change. Traveler routes and requirements evolve as your company experiences growth, changes strategy, signs new business, or opens additional locations.

The airline industry has also been in flux, adding to the challenges you face. Large airlines have merged with major competitors and purchased smaller ones. New entrants have shaken up the market and forced legacy carriers to innovate. Meanwhile, the airlines have improved their data analytics, further upping their advantage. With limited time and resources to manage your travel program, the challenge of keeping up with these changes is real.

As the airline landscape evolves, it is vital to optimize your air program and revisit your contracts to ensure they deliver the greatest value to your company and your travelers. It’s tempting to think a more consolidated airline market would make this easier.

After all, mergers mean fewer carrier options to deliberate between. The problem is that consolidation reduces competition, decreasing motivation for airlines to offer deep discounts unless it’s tied to performance above and beyond expected share.

As the airline industry shrinks, complications grow. Ideally, your corporate travel contracts mirror your company’s travel patterns to maximize discounts, boost compliance, and ensure your contract targets are always fulfilled. The remaining carriers expect more share, making contracts that much harder to satisfy. Contract enforcement also increases as carriers capitalize on a less competitive environment to reduce or remove a discounted rate. The many side effects of airline consolidation require constant agility and a strong understanding of your business and traveler needs.

This whitepaper assesses the risks of airline consolidation and takes a regional view of the market in North America, Europe and Asia-Pacific and examines opportunities for companies to maintain an edge.

From a customer’s perspective, it’s no surprise that healthy competition is more advantageous than a monopoly, and this is particularly true in air travel. Although airline groups, alliances and joint ventures can positively impact the traveler experience (i.e. broader route network, joined ticketing, mileage programs), they can create challenges for procurement.

Reduced competition in air travel usually results in lower negotiating power and higher fares for companies. It is also easier for airline conglomerates to consolidate data, offering detailed visibility into a company’s travel spend and making it even harder for you to find points of leverage.

Many travel managers feel powerless in this situation, which may lead them to refrain from actively negotiating discounts, thus wasting opportunities to capture additional savings. However, most airlines are willing to negotiate and travel managers still have negotiating power, provided they know their travel data right down to the booking class level.

What are the risks?

Following the Airline Deregulation Act of 1978, which opened up competition on routes and fares, US airlines operated independently. While state-run airlines in Europe could always rely on their home markets, US airlines have always battled for every point of market share, leading to highly structured corporate agreements with generous discounts. Competition intensified in the 1990s when low-cost airlines (e.g. Southwest Airlines, AirTran Airways) seized the opportunity to shake up the traditional airline business model.

Following the terrorist attacks of September 11, 2001 and the sudden aviation downturn, legacy airlines had to adjust their business models and structures quickly in order to survive against the more efficient low-cost competitors pushing into their key markets. As a result, we witnessed a decade of mergers and acquisitions, in which big airlines got bigger to regain market power and profitability.

The View from North America

Since 2016, the three largest legacy carriers (American, Delta, and United) have introduced basic economy fares with limited amenities to compete with the low-cost carriers. At the moment, most companies and travel management companies (TMCs) do not allow these fares due to the inherent drawbacks for business travelers. As they become more prominent in the marketplace, companies will need to review their stance and assess the impact of these fares on their travel spend.

With the North American airline landscape better managed today than it was ten years ago, competition has decreased drastically. For corporate clients, this has resulted in reduced bargaining power, especially if most of their key routes are dominated by a single carrier. While airlines in this region still like to talk about market share-related targets, many companies see diminishing returns in actively shifting share, especially with best-buy policies in place. Unless there is a backend payment linked to a certain agreement, it usually pays for companies to negotiate the best possible upfront discounts with all relevant airlines.

North American Consolidation

‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 ‘15

‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 ‘15

TWA

America West

U.S. Airways

Delta

Northwest

United

Continental

Southwest

AirTran

‘16

‘16

Alaska Airlines

Virgin America

American Airlines

Until the 1990s, government-owned airlines in Europe had made themselves comfortable in their respective markets when European legislatures began to liberalize the airline market, as seen in the United States in 1978. Major national airlines were privatized and competition emerged, leading to a much more varied airline landscape within a few years. This rapid change, coupled with the rise of low-cost airlines (e.g. EasyJet and Ryanair) and Gulf carriers (e.g. Emirates), made it clear that many European airlines would not survive for long if they continued to operate independently. This led to a wave of consolidation, leaving us with the three big players (i.e. IAG, Air France-KLM, Lufthansa Group) and several “challenger” airlines. From a consumer perspective, it has been advantageous that the legacy airlines suddenly had to improve their business models to compete. This is especially the case for long-haul travel in competitive markets, where travelers benefit from expanded route networks and improved services.

The View from Europe

On a national and regional basis within Europe, airline consolidation has had several downsides. Traditional airlines have themselves stepped into the low-cost market (e.g. Germanwings, HOP), limiting complimentary services and cutting the short-haul networks of their main brands. The biggest risk for clients now lies in the potential bankruptcies of the remaining challenger airlines (e.g. airberlin, SAS), leading to monopoly routes with higher fares.

With the three large conglomerates in Europe persisting, continuing airline consolidation is not likely to have a significant impact on long-haul travel. Airlines from the Middle East continue to push into Europe, despite recent challenges, including passenger and revenue loss. Even with continuous or expanded commercial partnerships (e.g. Lufthansa and Etihad) and investor relationships (e.g. Qatar Airways holds 20% of IAG), competition between Europe and points east remains high.

On transatlantic routes, the level of competitiveness is rather opaque and strongly impacted by the three alliances (i.e. Star Alliance, SkyTeam and Oneworld) and joint ventures. These have acted as a stand-in for consolidation in this market, as airlines agree to share slots and revenue (i.e. British Airways and American Airlines since 2010, Lufthansa Group, United Airlines, and Air Canada since 2013 and Air France-KLM with Delta since 2015). Further consolidation is unlikely and competition would only be impacted on certain routes if specific airlines suddenly decided to terminate transatlantic routes (e.g. Virgin Atlantic, Singapore Airlines).

European Consolidation

Air France

KLM

British Airways

Iberia

Lufthansa

Swiss

Austrian

Germanwings

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‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 ‘15

IAG

‘16

‘16

Before the 2000s, passenger air traffic in the APAC region was historically dominated by Japan. To, from, and within Japan, airlines carried 91.8 million passengers in 1995, followed by China with 47.5 million, South Korea with 29.3 million, and Australia with 28.8 million. Twenty years later, 436 million passengers would be carried to, from, and within China, more than any other country in the region and nearly four times as many passengers as Japan.

As was the case two decades earlier, the focus in this region lies on domestic routes in the region (i.e. China and India) as well as intercontinental travel to Europe and the United States. Continuously strong growth in APAC, especially in China and India, combined with low fuel prices in recent years, has led to a very industry-friendly environment. Strong governmental control, high market diversity, and the rise of low-cost airlines may prove beneficial to customers in the short-run, since fares still remain to be very inexpensive in many markets.

From a travel management perspective, Asia bears a lot of uncertainty, which is risky for long-term strategies and contracts. Airline consolidation, as in Europe or the US, is not expected due to high hurdles for foreign investments in most of APAC (except for Australia and Singapore). The biggest consumer risk lies in the high volatility of the low-cost market (i.e. in India and South East Asia) and in sudden strategic changes at governmentally-owned airlines (i.e. in China). Although this may affect route schedules and frequencies, sudden increases of fare levels as seen in Europe are unlikely.

The View from Asia-Pacific

Most companies will find it advantageous to let final resulting fares, schedules, and availability determine usage over market share targets. Cost-efficient travel, although more difficult to measure, is more beneficial than high contract savings at lower efficiency. Airlines may overstate contract value and persuade with complimentary amenities (e.g. status matches), especially since differentiation in the actual product has become more difficult (i.e. general luggage and seat reservation fees). Due to changing fare structures and fare opacity, it can be a challenge for companies to address these important details in negotiations. However, this is where additional value can be achieved with appropriate insights.

How Egencia Can Help

Egencia Consulting Services can help you manage all the moving parts of your air program by helping you find the best discounts and realistic market share targets. This way, you can devote your time to bettering your core business and ensuring your travelers receive the best rates as your contracts are actualized. Egencia Consulting Services offers end-to-end air sourcing services, from program review to RFP to implementation. Every travel program is different culturally, financially, and operationally. Egencia works with your unique needs to develop and implement a solution end-to-end so all you can continue working on your other priorities and achieve substantial immediate and long-term results.

Articulate goals for where you want your air program to go.

Evaluate current traveler needs in relation to your air contracts.

Analyze your travel data for leverage in future carrier negotiations.

Measure traveler satisfaction levels with your preferred carriers.

Helpful Hints for Every Air Program

If you would like to engage with the Egencia Consulting Team or need more information, please contact: consult@egencia.com or visit www.egencia.com(C) Egencia, LLC. All rights reserved.