American and Delta have announced that they’ll be ending their interline agreement on September 14. I immediately assumed this was Delta’s doing, and sure enough, it is… sort of. Delta has decided to raise rates significantly, and American won’t pay it. For that reason, the relationship is ending. Why do I place the blame on Delta? The rationale being used to jack up rates makes no sense.
Delta and American have had an interline agreement for decades. A basic interline agreement means a few things…
- American can sell tickets with Delta flight segments on them (and vice versa)
- American can check bags through to Delta flights (and vice versa)
- American can reaccommodate disrupted passengers by sending them to Delta on an agreed upon rate (and vice versa)
The first part really isn’t all that important these days. American and Delta both have pretty expansive networks, especially considering their joint venture and alliance partners. So the chance you’d need to combine the two on one ticket just to reach a far flung destination is pretty slim.
Yes it means you can’t do a single ticket with American one way and Delta the other, but you shouldn’t be doing that today. Delta already doesn’t allow cheap fares to be put on tickets issued by non-partner airlines. So you’ll be paying a lot more to put them on one ticket than two in most cases.
What does matter is the reaccommodation agreement and the ability to transfer bags when people are reacommodated. I recently learned that an interline agreement isn’t required to have a reacommodation agreement. (Did you know that Virgin America and Southwest have one? Update @ 817p on 9/14: Despite Virgin America’s CEO saying so at the recent Boyd conference, Southwest says it does not have a reaccomm agreement with the airline.) But for most airlines, it’s a basic requirement and American confirmed that it can’t do reaccomm without interline on a systemwide basis. That’s because a reacommodation agreement means that tickets and funds can be reconciled by the giant Airlines Clearing House. It’s a simple process that works.
Delta, as you know is running a great operation these days, and it’s proud of that fact. It should be. But it has this delusional belief that because its operation is so great, it should be able to charge non-partners a ton more money to take passengers. In particular, I understand Delta recently went to American and at least one other large US carrier and demanded hefty rate hikes above the standard industry settlement rates. It offered to pay the same rates in return, but it knew that it wasn’t reaccommodating nearly as many passengers because its operation is running well. This was a money grab.
How do I know? Well take a look at this quote from Delta’s release on the ending of the interline agreement.
“Thanks to employees’ stellar operational performance, Delta customers enjoy an industry-leading experience. Unfortunately, we couldn’t reach an agreement with American that adequately addressed the number of IROPs customers that American transferred to us,” said Eric Phillips, Senior Vice President – Revenue Management. “In July, for example, American sent passengers to Delta for reaccommodation at a five-to-one ratio. At that rate the industry agreement was no longer mutually beneficial.”
Delta clearly thinks it’s worth a lot more money, and American balked. The problem here is that the Delta quote makes no sense. Yes, American is putting 5 times more people on Delta than the reverse, but Delta is the one that benefits more in that case, not American.
This means American is readily handing over 5 times as many customers to Delta at the last minute. At that point, these are people who are filling seats that will otherwise go empty, and Delta gets paid for it. Even better, this doesn’t cannibalize any of Delta’s existing business. It’s pure profit with a little opportunity to win over American passengers thrown in.
Delta sees it differently. It thinks its operation is so good that other airlines should be willing to pay more. But by ending this agreement, does American really suffer? Sure, it might not be able to put people on Delta anymore (at least not without writing a check), but I would be amazed if this meant more people stopped flying American and started flying Delta. This just means that each airline will have fewer options when it’s trying to get people back on track, and that sucks.
As mentioned, I understand American wasn’t the only one told its rates would be going up. But since nobody else has announced the ending of an interline agreement, that means the new rates must have been agreed upon. That seems crazy, but good for Delta. It fought one battle and won. Had American caved on this, then I’d say Delta was smart. But American didn’t, and Delta needs to rethink this.
For American, the cost was just too much. Should American have just sucked it up? Without knowing the full details I can’t say for sure, but at some point you do have to draw the line. Should Delta have come down? Now, yeah. Since at this point it’s just not getting any of that incremental business. This didn’t have to be a public negotiation. Delta could have quietly backtracked and gleefully made some money at American’s expense.
Now, that’s not happening. Everyone loses, and that’s a real shame, to say the least.
