American Airlines is reworking discounting agreements with its large corporate accounts by reducing certain complex contract terms to single, individualized discounts. The new strategy largely eliminates a variety of negotiated domestic discounts for big clients previously tied to fare classification and follows widespread published airfare reform in the domestic market. American's effort comes on the heels of recent moves by Delta and Continental airlines to make wholesale changes to corporate contract structures.
While the airlines' stated goal is to streamline negotiated deals, several variations on that theme and ongoing uncertainty about the published fare structure have presented buyers with a confusing scenario that poses as many questions as answers.
Individually, major network airlines either have made temporary changes or charted a more formalized course for preferred corporate agreements. After American's broad match of Delta's pricing changes in January
(BTN, Jan. 17), "we analyzed the impact on an account-by-account basis by looking at actual purchases during the previous 12 months and seeing what we can do to make this cost-neutral," said David Cush, American Airlines vice president and general sales manager. "We are not interested in reopening negotiations, but we want to make sure everything is recalibrated appropriately."
Meanwhile, most major carriers—American included—late last month implemented a broad fare increase, the first of such scale since Delta's systemwide fare changes
(see story). Initiated by Northwest, the modest price hike follows reductions in average published fares since the start of the new year and raises questions about how airline yield- management practices would impact new corporate discounting structures being discussed with clients. Furthermore, a recent Travel Analytics report commissioned by the National Business Travel Association suggested aggressive yield management has complicated the airfare environment for corporate travel buyers even as their preferred carriers tout simplified pricing.
On the surface, however, American's new discounting strategy—confirmed by travel managers for some of the carrier's largest clients—recalls the earliest days of negotiated airline agreements when single, customized discounts applied to the majority of all domestic fares. In this latest iteration, exclusions initially include the airline's three-class premium services on transcontinental routes and the lowest-bucket fares previously deemed ineligible for corporate discounts. Contract terms covering international routes also remain unchanged, but perhaps grow in importance for bigger clients.
"Unfortunately for buyers, it really is not simpler," said Scott Gillespie, CEO of Travel Analytics, pointing to dissimilar airline policies. "There are two different types of discount structures, which tip the scales toward complexity."
Each airline seems to have its own take on how best to alter the traditional corporate discounting model, accounting for their particular networks and published pricing structures, but most have come to similar conclusions.
"If you have just knocked hundreds of dollars off a fare, do you discount at all? The answer from the industry has been yes," said Doug Leo, US Airways vice president of sales and international, "but we'd still like not to discount the cheapest of the cheap."
Some travel managers generally supported newer contract models but net results are not certain for some, dependent as always on a company's fare mix, traffic patterns, volume and supplier portfolio.
"Companies need to do their own internal analysis to validate or disprove American's assumptions on how much the bottom line will be reduced with their new faring structure," said Doug Weeks, senior manager of global travel for McLean, Va.-based Booz Allen Hamilton. "Overall, for us, it will represent savings to the bottom line. The reduced discounts we will get on reduced fares still will yield savings."
"The change in discount structures is designed to offset changes in the fare structure, and in some cases that may be true for the average client," added Bob Brindley, vice president and general manager of Travel Procurement Solutions, a division of WorldTravel BTI. "But there are few average clients. Some may benefit and some may take a hit."
Cush said discussions with each account will proceed "on its own timeline," but that most changes should be accomplished by the end of the month. In analyzing each specific situation, Cush said American factors in "other ancillary benefits," including quality-of-life improvements and bottom-line savings realized from the elimination of Saturday night stay requirements and less leakage from managed travel channels to unauthorized distribution outlets.
"Bookings that go outside normal sales channels are an increasing headache," Cush said, adding that American continues to evaluate performance-tracking tools, including one furnished by the Prism Group and already in use at Continental, Delta, Northwest and United. "We are still focused on giving discounts to corporations that can deliver in excess of our natural share."
He also said American has not canceled any contracts but that one-quarter of all corporate clients agreed to participate in BusinessExtrAA. The more standardized program is designed for small businesses and offers them discounts on all fare classes and other soft-dollar incentives.
For some larger clients, international discounts will become an increasingly important element of airline relationships. In many cases, international deals would retain more traditional formats and present negotiating opportunities to both buyer and seller, especially as carriers divert growth to more lucrative overseas routes.
"Before, maybe 20 percent of total program savings came from international routes," Booz Allen Hamilton's Weeks explained. "Now they could represent more than 50 percent to 60 percent of total savings yielded from discounts."
Future corporate contracting in the domestic market remains unclear until published fare structures settle and network carriers implement new policies. Regardless of carrier, many buyers are seeing domestic discounts reduced from 20-plus percent to single digits.
"We are finalizing our corporate discount plan and making sure we adjust to the practical realities of the market," according to US Airways' Leo. He discussed a framework similar to Continental's
(BTN, Feb. 7) in which discounts offered on "traditionally priced routes" remain intact and new, lower discounts apply almost everywhere else, including many previously ineligible US Airways GoFares. "We are addressing this idea with open accounts and will come away with a structure we can use with our other customers."
Meant to weigh the impact of widespread airfare reform in the domestic market triggered in January by Delta Air Lines
(BTN, Jan. 17), the recent Travel Analytics study found only modest price compression, wildly varying average changes from one booking class to another and a sizable increase in the number of fare basis codes present in the market.
Travel Analytics analyzed more than 1 million fare basis codes filed with the Airline Tariff Publishing Co.—covering 2,775 city pairs served by the six major network carriers—and compared published pricing between Dec. 29, 2004, and Feb. 6.
Specifically, the number of fare basis codes in the average city pair jumped from 75 per carrier to 99. Northwest in early February had the most, 137 fare basis codes per city pair, or 12.2 per booking class, while Continental had the least at 84, or 6.8 per booking class.
"Carriers now have multiple tiers of discounts applicable to the 'old' and 'new' fares," according to the study. "Some are tied to booking classes, while others are tied to published ticket prices."
"Many corporate travel buyers will need to choose carefully between canceling their domestic airline contracts in favor of adopting a 'spot buy' strategy, and negotiating new discounts in this more complex fare environment," the study concluded.
"American is trying to standardize and simplify while still keeping the value for corporate accounts," Gillespie added. "The big question: Will single-digit discounts be worth enough to warrant the investment in resources necessary to maintain contract goals?"
One travel manager said that by dramatically reducing discounts, though potentially cost-neutral, airlines "send the wrong signal" and present fresh perception challenges for managed travel programs as both travelers and senior management question the benefits.
As lower discount levels and published fares appear in global distribution systems and corporate online booking tools, "there will be a much smaller gap between the preferred carriers' discounted fares and the non-preferred carriers' published fares," said WorldTravel BTI in a recent memo it sent to clients. "This may result in an increase in preferred carriers noncompliance."
The domestic fare hike last month adds another wrinkle to the outlook. Sources suggested carriers again may be compelled to start raising discount levels as published fares inch back up and also may consider reversing recent decisions on changing corporate structures.
For larger clients in particular, a single discount covering most domestic flying may be the intention but won't necessarily be the end result, according to TPS's Brindley. "Due to competition, they may have to offer more than one discount level, especially where they need to offer guaranteed fares in the market," he said.
On the agency side, American's Cush said changes to the fare structure should benefit travel management companies "since they are much more transaction-based, rather than dollar-based." Even so, American is "taking a real hard look" at its agency relationships but was not prepared to discuss specific changes.
Brindley, for one, suggested that some corporate travel buyers may receive more benefits by participating in their agencies' compensation programs than from lowered discounts tailored for them.
"If corporate discounts are really low, does a corporate client really want to sign a net-net deal and not get overrides?" he asked rhetorically. "Maybe some could earn more by trying to get a rebate from the agency incentive program."