By: Mike Heck, Director of Supplier Solutions
In today’s rapidly changing airline environment, there seems to be daily news on mergers, alliances, and joint ventures. As a corporate travel manager, it is important to understand how each of these is different and, more importantly, how they could impact a corporate agreement you may have with an airline.
A merger is a combination of two companies where one corporation is completely absorbed by another corporation. The most recently announced airline merger was between Alaska Airlines and Virgin America. Following full government approval and the issuance of a new operating certificate, Alaska Airlines will be the nation’s fifth largest airline. They will be a major player on the west coast and will be able to compete more effectively with the Big 3 (Delta, United and American), and Southwest. Upon receipt of the new operating certificate, the Virgin America brand will cease to exist. The most recent major merger was that of American and US Air. That merger closed with the US Air brand leaving the marketplace in October of 2015.
If you have a corporate agreement with Alaska Airlines, it would be reevaluated to determine fit with the new network and more than likely be amended to include the entire new network. Discounts and goals would most likely be modified.
Airline alliances are well known in the airline industry as a “marketing joint venture”. An alliance is cooperation between airlines whereby an airline markets seats on a partner’s flights generally in markets they don’t serve. An alliance requires multiple governmental agencies to grant immunity from antitrust laws.
Alliances allow an airline to compete in markets where they currently don’t fly their own aircraft. The three major global airline alliances are SkyTeam, One World, and Star (each with 20 or more airlines). Delta is the leading U.S carrier in SkyTeam, American the leading U.S. carrier in One World, and United the leading U.S. carrier in Star.
If an airline cannot transport a passenger from their preferred origination to their final destination, it would rather carry the passenger a portion of the trip, rather than hand the passenger off to a competitor. An example would be a traveler going from Mexico City, Mexico, to Saint Petersburg, Russia. If this traveler chose the SkyTeam alliance, they could be on flights operated by AeroMexico, KLM, Air France, or Aeroflot – all SkyTeam partners.
Alliance partners share route networks, frequent flyer programs, and airport lounges.
Many corporate agreements in the marketplace would not include all alliance partners. Corporations that do qualify for alliance agreements generally have over $10M in annual airline spend with employees and originating traffic in multiple countries and regions.
This brings us to joint venture partnerships. These allow airlines to align service offerings, share costs, revenue, and profit, as well as share risks – generally in a specific geographic region. For all practical purposes, a joint venture is a merger that applies only to certain defined routes and also requires government antitrust immunity.
Examples of joint venture partnerships include Delta’s Transatlantic partnership with KLM, Air France, and Alitalia as well as Virgin Atlantic’s and United’s Transpacific partnership with ANA. A more recent example is the just-announced trans-border partnership between Delta and Aero Mexico. During the application process, airlines are oftentimes required to divest of assets to ensure competitive balance. Delta and Aero Mexico divested 28 airport slots in New York City and Mexico City. American’s South Pacific partnership was Qantas was recently rejected — requiring both parties to pull back, modify their agreement (with additional competitive concessions), and reapply for approval.
The defining feature of a joint venture is “metal neutrality”, as all costs and profits are shared among the partners. For example, Delta does not care if a Transatlantic customer is on Delta “metal”, or partner “metal” of KLM, Air France, Alitalia, or Virgin Atlantic. Behind the scenes they divide the costs and profits.
Most corporate agreements would generally apply to newly added joint venture partners, but would most often require goal and discount modifications, as well as an amended legalese. An added value to a corporate customer would be having multiple airlines under one agreement. There would be one set of discounts, and one combined goal — all valid for the multiple joint venture partners.
Without question, the highly competitive airline marketplace is constantly changing and will remain very complex. My best advice to the corporate travel manager would be to have a reliable, proven, TMC partner to help guide you through this very interesting time in the airline industry.
Mike Heck is Director of Supplier Solutions for Fox World Travel. His primary role is to establish and manage key supplier relationships, including supplier evaluations, negotiations, and contracting. Mike is also tasked with making recommendations for supplier partnership strategies. Prior to Fox World Travel, Mike spent 30 years in the airline industry, managing a portfolio of corporate, global corporate and agency accounts.