American Airlines, which has offered individuals the prepaid AAirPass card program for 20 years, recently has been negotiating many more similar mileage-based agreements with corporate clients. Corporate AAirPass programs provide cardholders with elite traveler status, but at price points that can be negotiated below the set 51 cents per mile available to individuals.
American quietly has been forging such deals with select corporate accounts for years. Investment banks have been particularly active AAirPass users. Now interest in more controllable contracting is growing throughout Corporate America.
"The corporate market is poised and positioned to buy from airlines in a different way," said Frank Morogiello, AA vice president of global accounts. "The marketplace has shifted and buyers are asking questions that move us to the AAirPass part of our toolbox. We need to be prepared to do more of those programs." AA already has expanded the AAirPass client base, but would not divulge how many accounts it has contracted.
According to various buyers, this type of program has many advantages, including booking flexibility and cost-savings on routes where the cost per mile is particularly high, notably transatlantic flights in business class and last-minute, short-haul bookings.
Yet, there are several stumbling blocks. Travel managers said the program, among other things, can be difficult to manage, must be auditable and can jeopardize volume-based corporate card incentives. Furthermore, fluctuations in published fare levels mean prepaid programs represent a level of risk for buyer and seller alike. At this point, fares are very low and buyers may be more inclined to lock in pricing ahead of the next round of fare hikes. However, with budgetary constraints as they are, many companies may be unwilling or unable to prepay.
Morogiello acknowledged that the model does not appeal to all companies and that interested clients must consider accounting and payment procedures. "But if you know that American is your premier carrier and have determined it is a better way to buy, this has proven very successful," he said.
The corporate model mirrors the individual AAirPass program in many respects. The primary differences are that corporate clients are issued multiple cards for their travelers based on need, mileage is debited from a central corporate account and pricing is flexible. Because miles only are debited when an AAirPass cardholder actually flies, the system avoids refunds, exchanges and ticket voids, which AA said can account for 10 percent to 15 percent of a company's tickets.
Individual AAirPass pricing is available in two- and five-year plans, representing upfront outlays of $25,500 and $63,750, respectively. Premium class and international booking are debited at higher or lower rates, depending on specific routes. However, the airline customizes corporate AAirPass pricing for each account. "It depends on the customer and the share commitments. Everything is negotiable," Morogiello said. "We figured out a way to help corporations buy like this, and maybe there are three specific O&Ds to be discussed. Maybe they want to move more from column A to column B."
According to sources, AA would have to come down considerably from the 51 cents-a-mile price for the model to be accepted widely. "Last month, we talked to American about a corporate AAirPass program," said a travel manager at a large West Coast company, "but of our top 100 city pairs, not one had an average cost per mile higher than what that program offers. In fact, our average cost per mile on those 100 city pairs was 19 cents." He cited a 5,000-mile transcontinental roundtrip, which at 51 cents a mile equates to $2,550: "No one is paying that for a coach class ticket."
Other buyers, representing companies with varying levels of international travel, said overall CPM figures ranged between the lower 20s and lower 30s. However, certain city pairs are much more costly and lend themselves to AAirPass usage. "Short-haul flights, where there is no Southwest influence, can run between 75 cents and a buck a mile," said John Smith, president of Chicago-area Tower Travel Management, citing Chicago-Minneapolis as an example.
"AAirPass is one of the cheapest ways specifically to fly internationally and that is how American can sell lots of these things," added Rolfe Shellenberger, an independent consultant. "Overall, 40 cents a mile would be a good starting point in those negotiations." Runzheimer International, a firm to which Shellenberger remains associated, in its forecast of 2003 business travel costs released last month, predicted "business air travel yields will drop from about 32 cents per mile to more like 27 cents per mile."
However, Morogiello said certain companies may be willing to enroll in AAirPass at or above the 51 cents-a-mile level. "Maybe you just want this from a service standpoint," he said. Indeed, AAirPass offers cardholders—viewed by the airline as premium full-fare passengers—a bevy of privileges, including complimentary Admirals Club membership, use of first class checkin regardless of class traveled, priority boarding and waitlist for upgrades. Because AAirPass cardholders have full inventory available to them at the time of booking—even the last open seat on an aircraft—Smith compared AAirPass with fractional private jet ownership programs. "You are making an investment in an airline, it just happens to fly scheduled service," he said. "You pay a substantial amount and you fly when you want and where you want."
A current disadvantage to the AAirPass program is that it excludes all codeshare flights, though AA is evaluating that policy. Kevin Iwamoto, global air and car supplier manager for Hewlett-Packard, who said this type of model is "eventually where I'd like to go," raised another potential problem: "It would have to be arranged so that it is auditable, otherwise how do you know all trips by cardholders are business-related?"
Some companies also may be unwilling to minimize corporate card volumes and potentially sacrifice related incentives, said Chris Staal, director of global corporate travel for Thomson Corp. "We talked to American about it and some of our travelers would be great candidates," he said. "But it would be very difficult to manage and we are not yet convinced. Plus, it is another set of information you would need to cut and paste."
John Heilner, vice president of Management Alternatives in Princeton, N.J., downplayed the effectiveness of cost per mile models in general, due to pricing variability. "As an overall benchmark, cost per mile makes sense but there is almost no day-to-day usefulness," he said. "You have to look at individual markets and percent-off deals."
Other AAirPass issues include a lack of familiarity among gate agents and inconsistent functionality at airport kiosks, according to UBS Warburg analyst Sam Buttrick, himself an active user of the UBS AAirPass account. "But to the extent that corporations measure efficiency of travel programs in terms of cost per mile, it makes sense to pay for travel in this way," he added. "Airlines historically have been reluctant to engage in mileage-based programs for fear of diluting yields, but yields already have been diluted."
Still, other majors either do not offer prepaid mileage-based programs, or, in the case of United Airlines, have not yet adapted it for the corporate market. However, Steve Ross, United manager of sales products and process, said the carrier may do just that with the PassPlus program. "We are aware of the trend and are studying it," he said. "Corporations are more interested and want to begin dialogue on a CPM basis."
Certainly, rival AA has seen the interest. "Ultimately, when you sit across from a procurement team that oftentimes reports to the CFO, the question is, 'How smart is it to do a percent-off deal?' " Morogiello asked. "It is not as sexy as it used to be to go into a boardroom with a 20 percent discount."