Air Costs Climbing: U.S., U.K. Statistics Show More Traffic, Higher Prices

Fresh figures show corporate air spending rising on both sides of the Atlantic, as businesses step up the number of flights employees take and pay a higher price per ticket, especially on long-haul routes.

American corporations spent 7 percent more on domestic flights in the last quarter of 2005 compared with the same period in 2004, while their spend to Europe was up 14 percent and to Asia by 36 percent, according to analysis of more than $500 million of client spend by Solon, Ohio-based consultancy Travel Analytics. The increases resulted from both a higher number of segments and a higher average segment price (see chart, page 34).

The travel management company BTI UK found a similar story among the 100 largest British clients it traded with for at least 12 months. Between December 2004 and December 2005, the number of air transactions rose 8 percent and the average fare by 4.9 percent to create a total cost increase of 13.3 percent. As is the case with the figures from the United States, there is a marked divergence between short- and long-haul pricing trends. U.K. domestic fares are up 0.87 percent and to continental Europe they are down 9.6 percent, but on routes to both North America and the Far East, they are up 9.1 percent.

Travel Analytics president Scott Gillespie urged U.S. travel buyers to make international routes the priority. "A lot of corporate travel managers resigned themselves to thin domestic discounts and turned to the international side," he said. "It is going to be a key battleground in 2006 for buyers and airlines."

"As a proportion of transactions, international air is much smaller—usually 10 to 15 percent—but the spend can be 35 to 40 percent," said Travel Analytics head analyst Tim Nichols. "This is where the discounts are available, it is also where the savings are available."

The situation regarding average fares may not be as bad as it first looks, even though rising demand is creating inflationary pressures. Buyers at major corporations said their fares would have fallen last year if it had not been for fuel surcharges.

Even if the market does harden further, buyers with large multinational expenditure are confident they can fend off the worst of any fare rises. Neil Hammond, the Paris-based global travel manager for Schlumberger, said his global costs per mile rose 3.4 percent in 2005, but would have fallen had it not been for fuel surcharges.

A travel manager for another major multinational, who declined to be named, reported a similar situation after negotiating lower corporate fares for 2006. "We are moving a lot of people and we are meeting our market share commitments more than ever before." The travel manager added that she had tried to negotiate a reduction in the fuel surcharges but had been unsuccessful.

The main respect in which Hammond has seen airlines getting tougher is not on pricing but on holding clients to commitments, a strategy to which he has little objection. "It is not a bad thing that airlines are applying a lot more discipline to corporate contracts," he said. "It will allow clients which do perform to get better deals in the future." Hammond also predicts airlines to crack down on "waivers and favors," such as by charging for no-shows, even on fully flexible tickets.

One of Hammond's tactical priorities for 2006 is to get the best out of spot fare purchasing by encouraging travelers to book earlier. This is mostly associated with short-haul flying, but Continental's Schumacher said it can work on long-haul services too. "As soon as you know your schedule, book it," he said. "Fares are lower because we can plan our inventory better."

Travel Analytics data shows varying underlying factors by region. On U.S. domestic routes, the number of segments purchased has risen 5 percent and the average net segment price is up only 1 percent. Price per mile is up 4 percent, but miles per segment are down 3 percent, so journeys are shorter.

Ticket quality is down 4 percent. This measures changes in ticket type owing to yield management or corporate policy changes, such as upgrading from a coach ticket to business class, or from a restricted business-class ticket to a completely unrestricted one. Travel Analytics crunched the figures together for a measurement it describes as Airline Pricing Power—or ability to improve yield. Travel Analytics puts U.S. domestic pricing power at 8 percent.

The statistics for U.S.-Canada routes tell an even stranger story. Total spend is little changed at a 2 percent rise, but this masks the price per mile rocketing 41 percent and average segment price 24 percent, mitigated by a fall in miles per segment and the number of segments. Nevertheless, pricing power is up 36 percent. "You have to tip your hat to the airlines," said Gillespie. "They have clearly succeeded in driving prices up."

On long-haul travel to the two key regions, Europe and Asia, segment numbers have increased 5 percent and 13 percent, respectively. With price per mile well up too, average net segment prices for these two regions have risen 9 percent and 20 percent, respectively.

The Travel Analytics figures are corroborated by data from fare auditing company Topaz International. These show that the average fare for travel within the United States or to Canada rose from $450 to $473 between 2004 and 2005. The greater damage was on international routes, up 8.4 percent from $2,342 to $2,540.

Commentators attributed rising ticket prices to a range of factors. "Fuel surcharges explain a fair amount," said Gillespie. "In the domestic markets, they overcame the downward effect of SimpliFares [the revised domestic fares structure from Delta Air Lines launched in January 2005] and then some."

Continental Airlines senior director for the United Kingdom and Ireland Bob Schumacher said: "Yield is hardening for two reasons. One is the fuel surcharges and the other is that we are seeing more demand at both the front and the back. There is more corporate and merger activity going on. Flights to New York on peak days are selling out."

Virgin Atlantic general manager for sales Paul Wait said his airline filed a 3 percent fare increase to U.S. destinations in September 2005, on top of which the surcharge had risen, standing currently at £60 (US$105) per return trip. "Airlines are only recovering 20 to 25 percent of their costs through fuel surcharges," said Wait. Like Continental, he reports improved demand throughout the aircraft. Virgin is introducing a sixth daily London-New York service starting July 1.

Both Wait and Schumacher stress caution about pushing up fares, but BTI UK managing director Mike Platt said more is to come, even in the European short-haul market, where intense competition from low-cost carriers has pushed fares down. Platt said: "I can't see European fares going down much longer. We are moving from a buyer's to a seller's market. Airlines are feeling stronger and negotiating a lot harder."

Platt urged buyers to aim for fixed fares if they can but added: "This is getting harder because fares are only going one way." Schumacher confirmed a lack of enthusiasm for fixed fares. "We don't want to be held a hostage to fortune for three years," he said. "Who knows where prices are going?"

The next best hope for buyers is to hold the level of discount they negotiated on published fares when the market was softer. Wait said he is seeing a great deal of this at the moment. "Where contracts have six to nine months to run, clients are asking to extend the deal at the same percentage," he said.

Travel Analytics' Gillespie advocated U.S.-based buyers change airlines. "There is room to negotiate if you are willing to consider all carriers," he said. "Naturally, you are going to consider your hub airline, but if you want to leverage to your advantage, you will have to look at others too."