The age-old balancing act of airline pricing has become even more precarious as revenue sags and carriers struggle to find financial footing. Though a bevy of recent leisure fare sales aims to stimulate demand in the back of their planes, airlines have held pricing relatively firm in the corporate travel sector, traditionally the most important yet least elastic.
Business fare hikes, meant to increase revenues, would dishearten corporations and business travelers, which were under pressure well before Sept. 11 to maintain or minimize travel spend. According to the airlines, however, business fare cuts called for by many throughout the industry as a long-term solution, are unlikely to generate enough demand to boost revenues when they need it most.
In a Rosenbluth white paper released late last week, calling on airlines to slash business travel prices by nearly a third, Michael Boult, chief operating officer of Rosenbluth International's Eclipse Advisors division, said, "Airlines won't publicly state that they are in a mess they can't get out of, yet, privately, they are quick to point out that the pricing equations are now broken. The solution, which we feel is the best, fairest and most sound approach, is one that promotes a greater degree of shared risk and is composed of variability in share and discount."
However, most carriers are expected to sit tight at least until January, when they can take a fresh look at demand patterns versus their adjusted capacities. Still, Northwest Airlines' pricing move last month (BTN, Nov. 12) signals a search for improving yields without enacting fundamental change. Many corporate travel managers, consultants and industry analysts, however, are not convinced there will be a recovery without structural shifts in complex pricing systems.
Northwest's move to make its full range of flexible business fares eligible for additional corporate discounts does not address the growing gap between business and leisure fares, a constant frustration for corporate buyers. Nor does it necessarily mean lower air travel costs for its corporate accounts. It does, however, emphasize alternate business fares—those that do not require a Saturday night stay, but are nonrefundable and require a 10-day or less advance purchase—as the only discernable tactic to stimulate corporate demand that has been employed since Sept. 11.
In fact, such fares, cheaper and more flexible for businesspeople, have been proliferating throughout the industry. New York-based Harrell Associates studied 20 top business routes and found 76 alternate business fares available. Only 13 were offered a year ago. "These fares allow the business traveler on the fence to make the trip if they plan ahead," said Bob Harrell. "Airlines have done this without monkeying around with price, but, instead, making fares more restricted, but not too restricted such as excursion fares."
The study found that alternate business fares on those 20 routes are, on average, 39 percent lower than the typical business fare—the lowest fully refundable coach fare available three or fewer days out.
That may not be enough to reverse the decline in corporate spending and pull carriers from revenue depression. "Unfortunately, it is too early to tell whether they are working. We will probably know as we head into next year," said Susan Donofrio, airline analyst at Deutsche Banc Alex. Brown.
No competitors have followed Northwest's across-the-board change, though United Airlines said it will no longer discount already discounted leisure fares and, anecdotally, other carriers have matched Northwest's moves in particular markets.
Sam Buttrick, analyst at UBS Warburg, also said the price structure is broken, while noting plenty of pent up demand. "That this unfilled demand is at price points well below the airlines current costs is their problem, not the customers'," he said. "A massive reduction in structured business fares, heretofore largely unchanged in the wake of unprecedented demand declines, may be necessary to get Corporate America flying again."
He added that such a strategy would severely diminish revenues in the short term, an ominous fact that thus far has dissuaded any carrier from trying it. "Business demand is fairly inelastic and that is still the case," said David Swierenga, chief economist at the Air Transport Association. "If you lower the prices, you further dilute revenue."
Consequently, unrestricted fare sales and cuts in published business fares always have been extremely rare. "My intuition is that lowering business fares would not be revenue positive," said an executive at a major airline. "And even if we did lower them, it is always harder to get them back up."
However, Buttrick said that a restored value proposition "would loosen travel policies so that the industry may produce more revenue in 18 months than under the current gouge and discount structure."
Indeed, airlines may face a prolonged, if not permanent, drop in corporate demand as companies reclassify discretionary versus nondiscretionary travel and seek alternatives to traditional air transportation. "Volumes are not likely to pick up to pre-Sept. 11 or even 2000 levels for another two or three years," said Andrew Winterton, vice president of the supplier relations group at American Express. "Into 2002, we will see how the system picks up. It either will be a slow rate, which will mean the need for further changes in the marketplace, or it will reachieve stability. In the longer term, if demand remains as flat as it is, the airlines would have to revisit how their revenue is derived."
Rosenbluth's white paper recommended a multipronged remedy centered around shared risk and technology-driven discount/share rates adjusted more frequently than in the past. It also advocated concurrent 30 percent cuts in published business fares, to induce more price-sensitive business travelers, and corporate discounts, to offset the walk-up fare reduction "while keeping corporations whole."
"The theory that a discount given was an incentive to eventually spend more through increased market share has flown out of the window," Boult wrote. "Belt tightening is the now prevailing theme, and carriers are stuck with deals created during the good old late nineties, and the ability to increase fares at a faster pace than the discounts has now run dry. We're talking elasticity here folks."
The agency, noting that "the days of evergreen discounting without sufficient post due diligence are coming to an end," asked airlines to cancel all corporate incentive deals that do not show a reasonable return on investment. The proposal also called upon corporations to avoid overcommitments, have responsible data, monitor deals to make periodic adjustments and employ point-of-sale and other analytical tools. It further implored travel management companies to "bury the hatchet" with airlines and not to push for raised discounts "out of revenge for lowering commission or other perceived bad deeds of the past."
Some travel managers went a few steps further, suggesting change should come by way of rationalization, if not simplification, of the incredibly complex airfare structure. "The result of the current structure has produced lower customer trust, huge investments in faring systems and the GDS, and large-scale agency investment in point-of-sale and post-sale tools," said Bill Patient, travel buyer at Atofina Chemicals in Philadelphia. All that, he said, generates "an amazing amount of waste, which, in the end, corporations pay for through higher fares."
Business Travel Coalition chairman Kevin Mitchell said the problem is that the airfare model stopped adding value for corporations. Noting that product substitutes impact inelasticity in any industry, he pointed to fractional jet ownership, aircraft charters and Web-based technologies as indicators. "The increased commitment to those alternatives is not far away, maybe the first quarter of next year. Match that up with business travel demand and it will tell a story," said BTC's Kevin Mitchell. "Right now, people want a structure they, their travelers and senior management can understand and embrace. Coming up with a new structure is not difficult. The hard part is determining the commitments buyers are willing to make."
The situation is very different at Southwest Airlines, a profitable carrier with a simplistic airfare structure, noted Kevin Iwamoto, president of the National Business Travel Association. "The current airline yield management systems have become far too complex and require too much infrastructure support," he said. "The algorithms and formulae used also never were meant to take into account a disastrous event like Sept. 11."
Indeed, Southwest, JetBlue and other low-fare carriers have fared well during the economic downturn, at the expense of the larger network carriers. United's West Coast shuttle and US Airways' MetroJet, both meant to fend off Southwest's steady advance, quickly folded in the weeks following Sept. 11. Some observers suggested the low-fare model would expand across the country, leaving the traditional industry leaders to reinvent themselves as niche players serving only the most business-oriented routes and catering to higher-paying travelers.
But airlines cannot justify a retrenchment of well-ingrained pricing and yield management strategies without any guarantees that a streamlined structure would, in the long run, improve their revenue situation. "If a simplified fare structure would be better accepted in the marketplace and help us to generate additional traffic and/or yield, we would try it," said Dave Hilfman, vice president of multinational sales and revenue programs at Continental Airlines, speaking during a recent Association of Corporate Travel Executives Webcast. "But how quickly will we get there?"
Meanwhile, corporate travel managers should not necessarily expect a more advantageous negotiating environment. Consultants and agents therefore suggested a renewed push for flat fares and consortia purchasing. The airlines also may consider isolated fare cuts in certain city pairs and in certain time slots to recapture discretionary business travel.
The prickly issue of Web fares has resurfaced in the challenged industry, as more corporations request their inclusion in negotiated deals.
"We are not asking for additional discounts on distressed inventory, but just access to that inventory within the programs we have in place today," said Pete Buchheit, director of travel and meeting services for Black & Decker in Towson, Md. "It is confounding to me that we have agreements with preferred carriers and then they work as hard as they can to incentivize our travelers to book outside of the program, whispering in their ears, and also holding our feet to the fire to fulfill program terms."
For that reason, pervasive among many of the airlines' corporate clients, Rosenbluth's proposal suggested carriers ask themselves if business travelers can purchase Web fares cheaper than discounted corporate rates. "If the answer is yes, then remove that inventory from the Web because either by design, or default, this only de-leverages corporations' ability to perform on the discount programs that have been negotiated," Rosenbluth's Boult wrote.
Airlines may not be eager to fulfill that request as they continue to realize distribution cost savings through new channels and unload distressed inventory otherwise going unsold. "The general public appreciates the fact that they have a wide range of alternatives," said Delta Air Lines CEO Leo Mullin, speaking last month at the Wings Club in New York. "Considering the value of yield management, I would not anticipate major changes."
Perhaps not to burgeoning Web fare sales, but carriers clearly are crafting new corporate models to turn the tide. How quickly they are adopted and how effective they will be remains to be seen. Also uncertain is whether they will be accompanied by or integral to business fare hikes or cuts.
"The airlines are throwing a lot of things at the wall to see what will stick. They are acting responsibly inasmuch as they are not panicking," said Bill Hubric, vice president of Management Alternatives in New Milford, Conn. "Carriers put so much effort into corporate travelers, who represent 80 percent of their revenue, that I don't see the pricing model becoming all that simple. But I suspect carriers will try to dress up in pretty colors some fare increases for corporates. My advice to travel managers, therefore, is to get to the bottom line quickly."