Many industry analysts say it's emperors-no-clothes obvious that executives at American Airlines' parent company, AMR Corp., will successfully come up with a counterproposal and rescue its merger with US Airways Group.
The proposed merger must go on, despite a lawsuit filed today in federal court in Washington, DC, by the US Justice Department and a half-dozen US state attorneys general. The suit says the tie-up will reduce consumer choice and hike costs.
American and US Airways probably could have made a proposal less likely to force Attorney General Eric Holder to talk tough. As one industry wag noted:
"Someone should have seen a problem owning 67% of daily departures from DCA. Directly touches both Houses of Congress."
There's a grain of truth in that comment. Bureau of Transportation Statistics data show US Airways as the dominant carrier at Reagan National, where it and American now account for nearly a third of the airport's passenger traffic -- or more than double the market share of Delta, the airport's second largest carrier.
The hold up might have been avoided had the airline relinquished more of its prime landing spots. That may be the key to a deal.
The mistake was likely made because the gargantuan size of these airlines, the echo chamber of stock analysts saying that the airline industry has become profitable again, and the unhurried pace of regulatory approval created a certain executive hubris.
Expect a deal
There will probably be a certain amount of gallows humor as executives ask in conference calls, "What's the number?"
From the government's likely point of view, a settlement won't require much budging from the airlines -- just some divesting of routes and assets.
After all, the Department of Justice doesn't want to make too many concessions, and thus risk spawning lawsuits for previously approved airline megamergers or anti-trust immunity cases. It also doesn't want to step on the toes of the Department of Transportation.
But how can American Airlines recoup some of the concessions it is going to have to give up? By pushing harder on its drive to exploit third-party distribution of its fares, schedules, and availability data.
American Airlines as a media company
Surprisingly, just as every media company in the world is trying to run away from content business models, American Airlines (AA) acts more and more as if it were a media company that publishes and distributes its fare and schedule information .
By “media company,” I don’t mean in the traditional sense of, say, publishing an in-flight magazine or curating in-flight entertainment options.
I mean instead that AA is acting like a publishing company in that the commercial agreements it pursues with third-parties are similar to those used by some media companies. The carrier is as protective of how its airfares, schedules, and seat availability are distributed by third-parties as Apple and News International are with their content.
Similarly at conferences and in law courts, American Airlines product managers have been fulminating robots on the subject of content distribution, not unlike publishers.
Direct connect as publishing model
One of AA’s main publishing methods is Direct Connect, a distribution channel long intended by American Airlines to route around the global distribution systems. It’s not unlike Associated Press licensing its content to Huffington Post, a straightforward way to digitally re-purpose existing content with a potentially profitable business model.
Look at a content publishing announcement trumpeted by AA last week: Cheapoair became the first online travel agency to display Choice Essential, Choice Plus, Preferred Seats and Main Cabin Extra. Cheapoair’s parent company Fareportal is receiving the Preferred Seats and Main Cabin Extra content via Direct Connect.
A few months before that, Priceline became the first online travel agency to display AA’s dynamic content (i.e., seats plus ancillary products), namely Preferred Seats and Main Cabin Extra, but it does not yet display Choice Essential and Choice Plus.
Fareportal is receiving Choice Essential/Plus content via ATPCO, the fare distribution clearinghouse, according to an American Airlines spokesperson.
Other agencies using AA’s Direct Connect also have access to these products. However, it is up to them to decide to expose these additional options to their customers.
Also in this vein, last December CheapAir became the first OTA to offer American Airlines’ new fare choice bundles.
Loyalty content
Another example of AA acting like a publishing mogul is how last week the airline reversed course and signed a commercial agreement with AwardWallet, operates the largest loyalty rewards-tracking tools for frequent fliers. AA now allows the company to access its frequent flier account data on a contracted basis.
By requiring a fee (of about $5,000 a year, according to sources), AA can vet who uses its API, to protect the way its content is distributed. This protects it from the potential problem of having its information misused by a third-party, with consumers blaming AA directly as a brand for any problems that might result (be it a security breach or invalid information).
[For related thoughts in this vein, read “A distribution view — If airlines were TV channels” by Timothy O’Neil-Dunne.]
One strategy among many
Similar to what Apple is doing, AA is trying to build up a constellation of third parties that interact with its data and brand in a vetted way. Airlines are prohibited by law from offering online bookers--or anyone else--a price advantage, but they can privilege some third-parties with the completeness and appeal of the content it provides.
Case in point: In May, American Airlines and Amadeus signed a distribution deal that enables agents to access the full range of American’s airfares through the Amadeus GDS alongside the carrier’s ancillary products supplied directly by the carrier itself.
There are many signs that the immediate result of the AA/Amadeus breakthrough in aggregating both GDS and direct connect distribution will be to enable AA to sell its ancillary products on Expedia.
AA has long been a farsighted trendsetter when it comes to distributing and re-purposing its content. The carrier founded (and later spun off) Sabre, the reservation system, and invented the first major frequent flier program—both of which platforms have content distribution implications.
Other airlines will be sure to be watching AA’s model closely. Because unlike proposing an $11 billion merger, pushing around relatively small third parties via distribution deals is unlikely to attract Department of Justice scrutiny.