Air Carriers Competing Aggressively For European Biz

<B>Air Carriers Competing Aggressively For European Biz</B>

By Amon Cohen

Published fares on transatlantic routes once more are increasing by a double-digit percentage, just as they did in the boom years of 1996 through 1999. Travel managers, therefore, might be forgiven for thinking that 2001 will be an expensive one for flying between Europe and the United States. They would be wrong. In fact, fierce competition, especially on the U.S.-U.K. services, which account for 40 percent of the U.S.-European Union market, mean it unanimously is agreed to be a buyer's market when it comes to corporate deals.

"It is a buyer's market without question," said Tom Stone, the director of global travel management for The Seagram Co. Ltd. "As far as the North Atlantic is concerne, the discounts have increased dramatically . When I sat down with carriers three years ago, many would not have gone as far as double figures and certainly not as high as 20 percent. Now there are some very deep discounts indeed."

Reliable sources have told BTN that British Airways, which has changed radically from refusal to negotiate corporate deals, is offering discounts as heavy as 50 percent. U.S. carriers are going even deeper, with reports of up to 60 percent reductions on standard fares. The picture emerging in Europe, therefore, is that companies without transatlantic deals face tough times ahead, whereas those with deals are receiving exceptional value and also flexibility. Net fares are now said to be nearly standard in transatlantic corporate deals. In return, however, airlines are demanding better adherence to deals by clients and are more ready to pull the plug if commitments are not honored.

Matthew Davis, head of the purchasing consultancy for American Express Europe, confirmed that published fares will show a double-digit increase between July 2000 and June 2001. The rate of increase is highest for transatlantic flights, a market that already costs significantly more per mile than any other long-haul region from Europe. "Fares are going up," said Davis, "but airlines have been much more generous in their deals over the past 15 months. Competition also is producing an increasing number of fares, such as special offers."

Whether the deepening discounts are sufficient to offset the fare increases is hotly debated. Davis said companies still can expect a net price rise in excess of inflation. He warned that "the full impact of fuel increases has not been passed on yet because of hedging. Airlines are taking the longer-term view but if fuel prices stay high, they will have to put fares up again."

Davis' view received support from Alice Buss, corporate travel manager for ING Bank in the Netherlands. "It is sort of a buyer's market because competition is intense, but we don't have much to negotiate about because of the oil price increases," she said. Better news comes from Ray Wooldridge, travel procurement manager for U.K. aerospace and defense manufacturer BAE Systems, who has been able to keep 50 percent of his deals at the same price as last year: "My deals have improved rather than deteriorated."

As ever, the best offers come from foreign carriers. Third-party European carriers regularly propose 40 percent reductions and more to corporates prepared to send their travelers via an indirect point. This can work even for companies in countries with an Atlantic seaboard, such as the United Kingdom. BAE travelers based near Manchester use hubs in continental Europe to fly to the United States in cases where they would have to fly indirectly via London anyway.

U.S. airlines are also, of course, foreign carriers in Europe. In the United Kingdom, their product generally is perceived as inferior to BA and Virgin Atlantic, both of which, for instance, now have beds in business class. U.S. airlines are being extremely aggressive on price, but persuading Europeans to use them is another matter, as Nora Buysschaert, Brussels-based European global procurement manager for Merck Sharp & Dohme, has discovered. Buysschaert has deals with U.S. carriers that cover both U.S. domestic and transatlantic routes, but she and her travel managers do not have the power to mandate. Finance directors in each national market frequently choose to do business with their flag carrier instead.

Willingness to use foreign airlines is one of the quickest ways to save money, though the potency of this tactic is diminishing slightly, according to Amex's Davis. Non-national carriers are offering 50 percent to 100 percent greater discounts than home carriers, although that is decreasing because the home airlines are giving more than in the past.

Davis, Wooldridge and Stone all single out BA for making considerably greater efforts than in the past to negotiate constructively with corporate clients. This has been in spite of the EC forbidding BA to make deals based on market share or on incremental growth. That resulted from a complaint successfully brought to the Commission last year by rival Virgin about BA abusing its dominant U.K. market position. As a result, all dominant EU carriers face similar restrictions on their ability to negotiate in their home markets.

"BA cannot talk about market share, which is a big problem for them and a big problem for me," said Stone. "I can control market share but I cannot control the number of sectors we do."

BA also is due to announce cuts to its published fares ahead of its move to zero commission in the United Kingdom in April. The airline said the fare reductions are intended to offset any effective price increases caused by the removal of commissions in favor of booking and money collection fees that are considerably less generous, especially on long-haul flights. However, it has not yet given any indication of the extent of the reductions. To do so significantly in advance of April 1, BA claimed, would leave it liable to prosecution for "signaling." Until the fare reductions are known, it is difficult to predict whether zero commission will put up the cost of flying BA, but similar challenges lie ahead in the Netherlands and Ireland, where KLM and Aer Lingus, respectively, are set to announce lower commissions in the next few weeks.

For many companies, fortunately, the impact on their transatlantic deals will be negligible because they already effectively operate in a zero commission environment, thanks to the adoption of net-net fares. There are no reliable figures available on how widespread net-net fares are, but all the agents and airlines BTN spoke to confirmed they have mushroomed in popularity over the past few months. Travel managers said all airlines are prepared to offer them, in the U.K. market at least, including a previously skeptical BA. One reliable source said BA now derives 20 percent of its income from net fares.

In return, airlines are being more vigilant about ensuring that clients deliver on their side of the deal. "Carriers are becoming much more strict. If clients don't behave, then in some cases we are seeing deals being pulled," Davis said.

This is particularly true in the case of net-net deals, where the airlines have more to lose because they give the discount before getting the bookings, said Karen Kelly, head of U.K. sales for Virgin. "The airline is taking the majority of the exposure now, which is why we are putting on quarterly targets," she said. "If clients are not making them, we are having to change or pull the deal."

Airlines also are being more careful about who gets a deal. "There is more flexibility from airlines on how to structure deals, but we are reluctant to go net-net where the track record suggests policy cannot be mandated," said Kelly. "Penalty clauses do not work because travel managers cannot go to their cost centers and say, 'give me another &pound;200 to pay Virgin.' Trust is increasingly important. Purchasers are getting more aggressive and sophisticated but airlines are getting much more commitment back--it is more of a partnership."

Just in case the trust is not there, the carriers have another weapon at their disposal--data. As the session on corporate client ID codes at ACTE Global made clear (BTN, Nov. 6), airlines already know a great deal about clients and are using it today to ensure agreements are honored. "If a client says it is dealing with two airlines and it is really dealing with three, we can see that," said Kelly. The figures Kelly used in her example are not arbitrary: two is emerging as the acknowledged optimum number of preferred transatlantic carriers for corporate clients to have.

"Travel managers recognize that they can't have four preferred carriers across the Atlantic and probably not three either," said Seagram's Stone. "However, I hope that carriers recognize in return that we need more than one to ensure we maintain traveler convenience.