United Airlines and Expedia: A severing of ties or a prolonged tiff?

United Airlines appears to be ratcheting up rhetoric against Expedia in the latest US airline salvo against extracting better terms with third party sellers. But what will be the final outcome of the latest tussle between a US airline and an online travel agency (OTA)?

During early 2019 Expedia filed a lawsuit against United, arguing the airline breached its agreement with the OTA and sought an injunction prohibiting United from interfering with Expedia’s ability to work with United customers after 1-Oct-2019. In late 2018, United told Expedia it would cut its access to flights after Sep-2019. United’s moves appear to stem from its efforts to gain better contract terms from Expedia, a recurring theme between airlines and third party distributors over the last decade.

American Airlines’ yanking of its inventory from Orbitz in 2010 and 2014 was a result of the airline concluding the terms of its contract were unfavourable. In 2014 American’s then president Scott Kirby stated the airline had worked tirelessly with Orbitz to reach a deal with economics that would allow the airline to keep its costs low and compete with low cost carriers. Eventually the two companies resolved their dispute.

Now Mr Kirby is president of United, and the airline plans to stop offering its inventory to Expedia and its partners Orbtiz, Travelocity, Hotwire and Cheaptickets on 1-Oct-2019 after the company determined it could not negotiate a contract with more favourable terms with Expedia.

United’s chief commercial officer Andrew Nocella recently told analysts and investors the airline has invested in its own website and app to be more cost effective, and while Expedia has historically been good at selling its lowest fares, “quite honestly we think we can sell our lowest fares just as well and that’s where we are”.

Fare segmentation has swept across the US airline industry, and now the lowest fares are the basic economy offerings from the most of the largest US airlines (with the exception of Southwest). Perhaps part of United’s conclusions of selling those fares just as well rests on its ability to nudge customers to buy up to higher priced tiers. The three large global US airlines have cited upsell rates from basic economy fares of 50% to 60%.

Many unanswered questions remain in the latest dispute between United and Expedia. Is United just playing hardball to obtain better contract terms, or does the airline fully believe it can sell its lowest fare tickets just as well as Expedia? In 2016 Expedia and United were on the verge of ending their agreement but extended their contract two days before it was set to expire.

If United ultimately does end its relationship with Expedia, will other airlines follow suit? All airlines want better terms with third parties that distribute their products, but American and now United have been the most aggressive in the US in taking dramatic steps to obtain improved contract conditions.

Meanwhile, United’s corporate revenue grew by double digits in 1Q2019, buoyed by efforts from its corporate sales force and the benefits the airline continues to reap from its new revenue management system Gemini.

The airline’s corporate revenues grew 13% year-on-year in 1Q2019, which was driven by Gemini projecting that more seats should be held to be billed later in the booking curve, and efforts by United’s corporate sales force.  “Saving seats to sell closer later to departure date is possible due to efforts of our sales force,” said Mr Nocella.

United’s double digit top line corporate revenue growth is nearly double its top-line revenue passenger revenue growth of 7.1% for the first three months of 2019.

During a recent earnings discussion with analysts and investors, Mr Nocella offered more insight into the ways United is utilising its Gemini revenue management system.

“I think we’ve made a lot of progress with Gemini and we’ve been very careful on to change our booking curve reflect the fact that we have more close-in demand,” Mr Nocella concluded.  “So, we learn from it every day obviously and we get better and better at it.”

He explained as United progresses through the rest of the year, it will tweak how it works with Gemini. However, he added, “..we’ve been very conscious to make sure that we start changing our booking curve to reflect the revenue potential of the airline and we successfully did that in Q1 [2019] and we think we’re well on our way to doing that in Q2 [2019].”