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Five Europe-based travel buyers in October discussed with BTN their strong misgivings about
airline consolidation, as well as their views on hotel and rail supplier
relations. Syngenta head of global travel management Peter Brodbeck, UBS executive director of travel management Mark Cuschieri, Omnicom Group director
of corporate travel services Nicola
Lomas, Huntsman manager of corporate purchasing for goods and services in
Europe, Africa, Middle East and Asia/Pacific Corrado Simontacchi and Ingersoll Rand global travel, fleet and
meeting services director Pascal Struyve
met with editors at the Association of Corporate Travel Executives global
conference in Berlin.
Business Travel News:
Are you worried that business travel is shifting from a buyer's market to a
PeterBrodbeck: We are all seeing prices
increasing. However, some airlines are still suffering, leading to them being
quite aggressive in their pricing. Having said that, others are increasing
their fares significantly, so we have been talking about trying a system with
them: If we don't reach our target, we pay back the difference from the normal
corporate price they would have given us. We are doing that as a test on four
routes as a starter.
BTN: That sounds
like what Lufthansa is trying to impose on its clients in Germany. Are you
suggesting this voluntarily?
but only if the rates are at a specific level. They need to be below what the
normal competition offers. We are not sure if it will be successful.
BTN: How have the
Brodbeck: It has
taken a very long time. They had to go to their boards and revenue management
departments. However, the rates are not yet where we would consider them to be
successful. In the meantime, we have had other offers that were almost at the
same level, and that surprised us. It has made it difficult to justify that
small difference and take the risk of having to pay it back.
Airways recently told us that it is trying to increase its yield in the
corporate market to help it return to profitability, which will mean less
availability of lower fares, as well as lower negotiated discounts. What is
CorradoSimontacchi: As a principle, I have no
issue with that if the market allows you to do it, but I don't think the market
is fair. If you bring in distortions, then I am not happy about that kind of
BTN: In what way
is the market unfair?
Consolidation. As a buyer, I have no interest in and gain no benefit from
dealing with an industry that keeps saying it does not make the money it
expects. Of course, I want them to make money, but I don't like them restoring
their profitability by going through consolidation while telling me this is for
my benefit. Every time these consolidations and joint ventures take place, my
average ticket price goes up, because where there were two or three carriers
competing on a route there is now only one.
BTN: If you don't
think this is the right way for airlines to restore profitability, what is the
didn't mean to say this isn't the right way. Definitely, this is the right and
fastest way for them to do it. What I don't like to hear is that this is for my
benefit. The only benefit I see is an enhancement in terms of network
capability, but the service is not seamless. We sometimes still see differences
in terms of baggage policy. I would at least expect them to be consistent in
terms of this, but it's not the case.
BTN: Are they
giving you any flexibility as to whether you can negotiate with them jointly or
as separate airlines?
PascalStruyve: When the alliances offered
corporate deals, they did not share their profit and loss among each other,
which meant they were more marketing vehicles than pure commercial vehicles.
The joint ventures and mergers have one P&L, and that becomes a totally
different discussion—and there you obviously don't have that much choice
anymore. In an alliance, you can say: "I want to work with you, but I
don't want to work with you." In a joint venture or a true merger
environment, it is "you use us or you don't use us," and "you
work with us or you don't work with us," so we will have less choice.
BTN: The consolidated
entities say their customers will be OK because now there is going to be robust
competition between three of them in the marketplace.
do you define a market? Is it just a route or citypair? About 70 percent of our
citypairs these days are in a kind of monopoly situation as a result of
consolidation. We have a lot of spend routed out of Switzerland and Belgium,
which is where we have our two major offices in Europe. We used to have
Lufthansa. We used to have SN Brussels Airlines and Swiss, all of which are now
Star Alliance. Guess what is left of the competition?
said they are all in Star Alliance, and there is an alliance within the
alliance with United and Lufthansa, etc., and Lufthansa owns Swiss, but Swiss
is not part of the alliance within the alliance. That is confusing too. What is
more, Swiss is charging a fortune. I think the alliances have become too big.
There is no coordination. There are airlines in there that are not really
participating in anything except the mileage program.
you ask me what my wish would be for next year, it is that life would be much
easier, so I am going to be looking for simplicity. My wish is to deal with an
industry that is going to give me simplicity, not complexity. I am getting to
the point where I am not 100 percent sure anymore what the value of a managed
travel program is, considering all the complexity to be managed, versus a
completely unmanaged program.
NicolaLomas: That goes back to trust, because
the airlines are suggesting that this consolidation is for our benefit by
pulling it together and making it simple for us instead of having to negotiate
with multiple points. We want simplicity, but we need to have trust in order to
accept it, but it remains absent. There are examples over and over again, such
as London to Barcelona or Madrid. If you look at those two markets, they are
some of the most expensive in all of Europe, and yet Spain has one of the most
depressed economies, so how can it have some of the highest-priced tickets? To
me, the answer is monopolistic routes.
BTN: But there
are lots of low-cost carriers flying between London and Spain.
Lomas: If you
look at the two airlines that started sharing revenues and merged over those
two routes, it immediately increased the prices.
BTN: It's clear
that as buyers you have a problem with airline consolidation. Do you have any
glimpse of what solutions there might be?
airlines need to demonstrate a willingness to understand their corporate
customers. When our businesses go out and get new customers, we try to understand
who the customer is, what their business is and how we can fit together.
Sometimes that seems absent within the travel industry.
BTN: Maybe the
airlines are getting so strong that they don't need to try to understand you
Lomas: Well, they
probably don't until we dip back into the recession.
Brodbeck: What we
also see with airlines more and more is that they do have a sales organization,
but the salespeople are just there to talk to you and have no decision powers.
The decisions are being [made] solely by revenue management, and the revenue
management department is just looking after its own logic. They don't know
exactly what the customer wants. I am struggling with that because I can talk
to my sales guy, but I know he has to go back to his revenue management
department to ask if he could please give me a better price.
there is not enough transparency about what a joint venture is going to bring
to us. The airlines have to do their homework, but it is all changing so
rapidly that they don't have time. It's like they are trying to set a new world
record for the speed at which they close these deals and move on to closing the
next deal, but they never stop to find what it is they are going to offer. What
is the value proposition in the marketplace? It is crucial that this is defined
so we can understand what it is bringing to us. That is something that is
missing today. We have discussions about fares and contracts, but there is a
lot of uncertainty about what it is going to do for the corporate customer and
what it is going to do for the traveler.
MarkCuschieri: A number of these alliances
are running at such a pace that that they themselves don't know which way to
turn or how their organization is going to work. The bottom line for these
alliances—I won't knock them for it—is that it is about saving their cost base.
I would like to know how those significant savings are going to benefit me on
my average ticket price because I don't see it going there.
Lomas: In most
other industries, if two other companies merge, they are able to make a better
contribution to their own bottom line because they take out the duplication of
costs, and then they will often offer lower prices to their customers as a way
of gaining marketshare. When there is a merger in our industry, they take out
some of the duplication of costs and then the price goes up.
agree that is what is going on in the market. What I see here is not in line
with what should happen in theory. If airlines are saying, "we are
becoming stronger, so either you take it or leave it," then don't spend
time trying to negotiate with me when I can only have a very minor impact on
large buyers we have spoken to in the past few months have said that, despite
all these alliances and joint ventures, they are still able to pick and choose
their own combinations of carriers for contracting. Does that make sense to you?
answer is probably different for each of us because it really depends on the
travel partners you have. Sometimes, as a result of the consolidation you have
passively been through, you may find you are working with just one and, by default,
you don't have too many choices. If you are lucky enough to still have a
choice, I am pretty sure you will be able to get into efficient and valuable
BTN: The message
that seems to be coming out of the United States is that one transatlantic
joint venture is not enough coverage for a corporate client's needs, but two
joint ventures are too much coverage.
Lomas: The scope
of our traveler base would not allow me to pick even as few as two. I have a
significant U.K. traveler base, a significant German traveler base and a
significant French/Dutch traveler base. There are others, but those are the
main ones. Spain can plug into the U.K., and Switzerland and maybe Italy can
plug into Germany, but I couldn't encourage a French traveler to travel via the
U.K. to get to somewhere else in Europe. Maybe if you are doing lots of long-haul
you can say, "OK, this is our primary airline for long-haul," but 46
countries in Europe?
frustration is when you are in smaller markets or markets where you have no
choice. The Swiss market is a key area, but our choices are limited.
depends on where you are based—if you are based in Zurich, yes. If you are
based in Basel, where we are, we can choose Lufthansa via Frankfurt or British
Airways via London. We have to change aircraft.
BTN: While we are
discussing the balance of power between corporates and airlines, what is your
verdict on this year's Lufthansa contracts with the penalty clauses? Do you
think they are going to be influential?
Struyve: You can
only have such contracts if there are key performance indicators that the other
party has to meet. Otherwise, if there is no on-time performance, no last-seat
availability or the airline is not competitive in the marketplace, I cannot
commit or perform to a contract. So you cannot have one-direction discussions.
It has to be in both directions.
I can understand where Lufthansa is coming from because it
has cleared up a lot of contracts that were underachieving. Over the years,
clients just signed anything, and the airlines' attitude was, "If you
don't achieve, it's not so bad, we'll just have another try at it." OK, this
has to stop, we have to be honest about that, but if that's the way airlines
want to go, there has to be responsibility on their side too. They have to have
certain standards in order for us to achieve our volume goals, and that's the
piece that is missing today.
is another example of airlines not listening. As a result of the economic
crisis, we have seen a big shift in our organization in terms of how we book
our travel. For example, three years ago, 80 percent of our short-haul tickets
were fully flexible and 20 percent had restrictions. Today, it is completely
the opposite. When I show the airlines this is the way we fly today, they say,
"This is not a business product, so it is not the product for you, and I
am not prepared to get into a commercial discussion." So I say,
"Sorry, are you telling me how I have to travel? I am the customer and I
am telling you what I need."
BTN: Let's move
on to the subject of hotels. Corrado, we understand you have looked at working
with some suppliers on a discounted best-available-rate basis. Why?
wanted to understand if there is a more efficient way to do business. However,
the question for which I am still lacking an answer is: Where is the value? I
don't have an issue with a discounted best-available rate disrupting my ability
to forecast my budget. The problem for me is, what is going to be the added
value compared with the traditional RFP cycle? If there is no value, why bother
with it? If there is, please help me understand where this value is and how I
can pass it back as a key message in my organization.
BTN: Has anyone
else considered moving to a discounted BAR?
biggest issue we face on the hotel side is the RFP process. For all of us with
decent-size hotel programs, it is a painful process that takes a lot of time
and costs a lot of money. I would say it's not going to be a black-and-white
story moving forward. It's more like a hybrid format, where you continue to
negotiate in a certain number of locations but all the others you will leave up
to the market to play its game. However, it must be under the condition that we
are reassured it is competitive for our program and doesn't drive noncompliance
somewhere in the mix. I think we can all agree that continuing with the same
process as we have today is simply not a solution.
BTN: It appears
negotiations are more finely balanced going into 2011 than they have been for
several years. How is the situation looking for you?
Lomas: One of the
things I have noticed in this recession compared with the period just after
2001 is that sellers have been a lot smarter about how they price. In the past
couple of years, negotiations have been very much based on our history together
and what I could realistically forecast, based not on a crystal ball but some
good indicators. As a result, right now the swing isn't as much as it was
There is definitely some noise from key suppliers wanting to
right-size their programs, but I would say their position is fairly weak at
this stage because I don't know that we are guaranteed to be out of the
recession. That makes it a bit of an arrogant position for a supplier in any
category to say: "OK, we're done now, the rates are going up."
BTN: Do you feel
that suppliers are as wary as you are about the year ahead?
Lomas: Those who
have been in the industry long enough or have good business sense are. Perhaps
those who are a little less seasoned in how these swings and roundabouts work
might be a bit more bullish in their approach.
are a lot of messages in the press about what level the [hotel rate] increases
will be, but once it comes down to reality I am not sure we are going to see
those kinds of increases. It is probably still 12 months too early for hotels
to really push on price, so I would guess it is all going to be down again to
partnership that you can demonstrate. If you say you are going to deliver 500
rooms, are you really delivering them at the end? I can foresee some cleaning
up in the number of contracts hotels are going to have. They are going to go
for the customers who are committed and stick to the promises they made, but I
am not sure there is going to be such a big change from a price-setting point
of view next year.
Cuschieri: I have
attended some presentations lately where hoteliers have said rates are not
sustainable at a lower level because occupancy rates are increasing. I have
heard calls that the buyer needs to wake up now and sustain some big increases.
I think that's quite concerning. Our programs are about longevity—but sometimes
there is no recognition of that long-term relationship.
Sometimes at the end of the year they tell you, "well, you didn't really
produce," but in the course of the year there has been no follow-up,
support or communication, and if they don't tell me until the fourth quarter,
that is too late. I can't change the situation anymore. In the key markets of
your program, you need to build up a partnership, but dialogue in a program is
something you build up over years.
some extent, compared with what we said before about the airline industry, I
feel a little more relaxed about the hotel offerings. There is a much higher
level of fragmentation that helps to keep fair and healthy competition. This
time around, some hotels have seemed more prepared to listen to us than before
and some of them completely understand I am not in control of the budget of my
company. What I do control is the marketshare of room nights that go to a given
property in a given location.
BTN: Are they
willing to do marketshare-based negotiations with you?
the time being, I don't have anything sitting formally in any contract which is
marketshare-related, but they do see it as a KPI to measure whether the
commitment is there or not. They want to get into that kind of conversation,
which for me is very positive.
BTN: Mark, you
stated you want to see strategic partnerships, but presumably hotels will say
that in 2009 you renegotiated your contracts down by 20 percent or so, so now
it's time for them to claw some of that money back.
Cuschieri: No, we
didn't. We committed to an annual program and when it came up for
renegotiation, we didn't go for 20 percent or 30 percent discounts. A lot of
the hoteliers came to us. We even took some increases because we were thinking
longevity. We knew that if we took deep discounts or significantly pushed some
of these suppliers, then we would pay for it the following year. We saved a
significant amount on our hotel costs, but it was more the hoteliers coming
back to us because occupancy wasn't there and they were trying to win marketshare.
Brodbeck: If you
are looking for savings, you have to focus on your high-volume cities, and for
us that is mainly Basel. We are in an uncomfortable situation there because our
volume there has gone down during the recession, so we were facing rate
increases. What we did was take higher-cost hotels out of the program,
especially the ones that increased their rates.
the first time last year, I didn't have an RFP, because every time I felt it
was ready to go, there were plenty of hotels calling to offer me a better rate,
so I thought why do I even need to bother? That's why I am thinking about
whether this way to do business is still valid in today's market environment.
think there will be some hedging, with some buyers looking at more than a
year's program. They may consider two-year programs.
BTN: Do you think
the suppliers would contemplate that?
think they would be open to it.
Lomas: We've had
a two-year program for the last four years.
BTN: Are you
seeing any signs of progress in negotiating with rail suppliers?
Lomas: My current
position with rail is weaker than it was 12 months ago. The cost of
distribution for a rail ticket through a TMC anywhere in Europe is so much
greater than a direct source, like Thetrainline in the U.K. or Deutsche Bahn in
Germany, so I am seeing more bookings bypassing the TMC, and the value of the
rail bookings is not high enough to justify my resource to try and pull it back
in and therefore negotiate on the spend. It's too fragmented for me to get my
arms around it.
story for me, except that recently I have been in touch with sales
representatives from Eurostar and Thalys [the high-speed rail operator from
Brussels to Paris, Amsterdam and Cologne]. They are becoming conscious that
their market situation is going to change soon, so they are no longer
communicating they are the only ones in the market and we have to take it or
talking here about the planned entry of Deutsche Bahn into the international
are trying to get prepared for working in a much more open market than before,
which to me is a big thumbs-up.
Struyve: If you
see the prognosis of the number of travelers and footprint of international
rail over the coming years, it is clear there are going to be new entrants at
some point. It is also clear Thalys and Eurostar have understood competition is
coming, so they are getting ready for it.
Lomas: In that
case, the message in the Belgian market is a bit more open than the U.K., where
Eurostar is still acting in a very dominant manner. I look forward to
competition in that market.
This report appears in
the Dec. 20, 2010, issue of Business Travel News.