<B> Top Cos. Recoup Cap</B>
<I>Travel Buyers Who Can Throw Their Weight Around Are Weighing In</I>
By Jay Campbell
As the last of the major airline holdouts threw their hats into the international commission cut ring, corporate travel managers headed back to the negotiating table to recover their lost revenues--and have met only mixed success.
Based on interviews with consultants, travel buyers and travel management company executives, it appears that only the most attractive accounts are being made whole, or even close to it. But anecdotal evidence also suggests that for accounts offering significant high-yield business and the ability to shift traffic in competitive markets, carriers are increasing their discounts and being more receptive to less common contractual possibilities.
The change in dialogue comes amid an uncertain economic outlook for the airlines in 1999 (<I>BTN,</I> Jan. 11) and a clear demonstration late last year that corporate travelers are adhering to travel policies and budget limitations.
"Talks are bearing fruit with those airlines to which we've moved share," said Beth Castleberry, director of travel services for Dun & Bradstreet in Atlanta. "The international cap cost us $200,000. When we went back, the airline didn't give us the whole thing back, but it did increase our discounts by targeting certain city pairs, particularly to the Asia-Pacific region."
Castleberry said the airlines have been surprised recently that travel managers and their policies are "getting more clout." As an example of that, one division of her company is considering mandating nonrefundable fares, as Oracle Corp. did last year (<I>BTN,</I> May 18, 1998). A large number of other companies also have set policies whereby travelers need approval from a vice president in order to buy anything other than the lowest available fare.
Gary Alexander, vice president of global supplier relations at Carlson Wagonlit Travel, said the airlines are "absolutely making our clients whole, either directly or on the back end," following the November international commission cap instigated by United Airlines (<I>BTN,</I> Nov. 16, 1998).
Rolfe Shellenberger, senior consultant for Runzheimer International in Palm Desert, Calif., said, "My contention all along has been that making their clients whole was United's scheme. With most of the market now capped at $50 and $100, they have a lot of money with which to take care of their good friends."
Insiders said that since the international cap, some net-net agreements have reached 40 to 50 percent off for non-hub, high- yield traffic driven by large corporations. More common are rate discounts in the high twenties and low thirties.
But all of these rates are being offered only selectively. In fact, it appears that for a majority of companies, average discounts are shrinking. Portland, Ore.-based airfare auditor Topaz International reported that while the 15.13 percent average discount in 1998 beat 1997's 13.89 percent average, the January 1999 figure of 15.99 percent was down from the previous three months, when Topaz recorded 16.16, 16.25 and 16.84 percent averages.
While larger companies get bigger discounts, those with air budgets of more than $30 million in January earned an average discount of 17.24 percent, down from 18.10 for fourth-quarter 1998.
As they meet with suppliers, managers of the most mature corporate air programs are looking for new opportunities to reduce costs--and some are asking what's next after net-net agreements.
Many are struggling with the concept of globalizing international air programs--and getting the attention of airline alliances--negotiators also are discussing new ideas for the domestic market. These range from flat fares based on cost per mile to bulk purchases and increased discounts in exchange for guaranteed business.
A recent meeting between Continental Airlines and its top corporate accounts provided an interesting view of the kind of supplier-buyer dialogue that is becoming increasingly appropriate.
The most talked-about negotiating concept was that of set pricing on a cost-per-mile basis. Hanna Murphy, manager of corporate travel and fleet arrangements for Siemens Corp., said that despite the fact that Siemens has "cost-per-mile deals all over Europe, I can't get that in the States. It's interesting to us because it brings our agency transaction costs down."
"That kind of program can work, and we're absolutely willing to discuss it," said Dave Bartels, Continental's senior manager of revenue programs. "But it generally has to be a higher price than corporations will agree to." Added Mark Sullivan, senior director of revenue programs, "If we could get Europe's yields, then fine."
Said another Continental customer not present at the meeting, "I think the next big tactic with airline deals is city-pair flat rates. In the past, we all got away from city- pair deals because they were difficult to manage. But now as the technology changes, we have better city-pair data and it makes it more attractive. What Chrysler did with Pro Air is pushing it along."
Continental's Bartels said a typical cost-per-mile negotiation would involve determining a number that fits somewhere between the company's highest and lowest averages. For example, a high could be 30 cents per mile, with a low of 10. It may then be logical to set the fare at 20 cents, with the corporation agreeing to put all travelers on that fare. But what often happens is that travelers buy the 20 cents per mile fare for less restricted tickets, but corporate lowest fare policies direct travelers to the published, lower-yielding 10 cent fares.
"A lot of these issues will go away when we perfect this thing called 'partnering,'" said Earl Foster, director of global travel management for Joseph E. Seagram & Sons Inc. "Five years ago, the answer from the airline on something like this would have been no. At least now there's interest. These are all tools. Some work, some don't."
Another option is up-front purchases of bulk airline inventory, such as the deal between American Express and Continental last year (<I>BTN,</I> June 15, 1998). But that idea, too, has drawbacks--namely, can the buyer come up with a load of cash?
"I can count on three fingers the number of bulk deals we've done," said Continental's Sullivan. Regarding the deal with American Express, Siemens' Murphy cited the potential for increased costs to the agency--and higher fees--as it creates additional fare types to search through.
Even if carriers are opening up a bit, it's not in their hubs and it's not with clients who have yet to demonstrate control of traveler choice. "In the eyes of suppliers, there are three types of clients: unwilling and unable, willing and unable, and willing and able. That last group is getting the big discounts," said Michael Boult, vice president of supplier relations at Rosenbluth International. "We did a study two years ago and found only three of 10 companies completely fulfilled their contractual goals in airline deals, usually because the goals were never truly attainable in the first place. Now it's up to 50 percent, but airlines are declining to bid on some corporate business because of historical nonperformance."
Such poor performance is prompting some airlines to discuss the idea of "make goods," or financial penalties for not fulfilling a contract's terms, in return for bigger discounts. Carlson's Alexander said the concept will become more common, and Boult has seen it in contracts offered by the more conservative international carriers. As with set fares, corporate travel managers would be wary of accepting the risk for changing travel patterns. "Because it isn't required across the board, we've told buyers they don't need to touch it," said Boult.
Stabs At The Tab
Following the most recent cap, airlines were reluctant to return revenues to any but their top clients. "I had a face-to-face with our airline, and they said they'll make up for the cap if we shift share," said Marge Gordon, travel manager for Orrville, Ohio- based Fischer-Rosemount. "I said, 'That's not making up for it.' A lot of people in the Midwest are trying to take stabs at it, but nobody's really broken through the cap."
Said one East Coast travel manager, "After the cap, I told all the airlines I'd suspend all my market share goals if they don't make us whole. They don't want to piss off their major corporate clients, and I think we're making most of it back. It's a price increase and I don't have a real sense of humor about it."
Still, "there are alternatives," he noted, referring to the dwindling number of airlines that have yet to cut international commissions, such as Virgin Atlantic.
That list got shorter over the past few weeks as Air France, America West, British Airways, Japan Airlines and Sabena, among others, joined the party. Air France and BA offered a few wrinkles on the United Airlines model set in November.
A week after Air France matched United, cut payments on Concorde flights to 5 percent and offered 7 percent on tickets validated but not flown on Air France, BA said it would continue with the tiered model it established in 1997. BA cut business class commissions to 5 percent and first class to 3 percent, but only for agencies that "market and promote" the airline. All agents continue to earn 10 percent for economy class.
To those who "choose only to distribute" tickets in BA's business, Concorde and first class, commissions are capped in two levels: one at $50 one-way and $100 roundtrip, another at $25 one-way and $50 roundtrip. BA determines the level for each agency by comparing its "market share performance against the BA capacity share in the marketplace, and other factors."
Over the three months since United's move, BA was disappointed to not see "the types of movement we would love to have seen" from travel agents shifting to BA for the higher commissions, said Woody Harford, vice president of business travel marketing. He encouraged BA's corporate clients to contact their sales reps to evaluate the impact of the restructuring on their relationship with the carrier.