Benchmarking Europe's Biggest 2010: Consolidation Consternation

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 seller's market?

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?

Brodbeck: Yes, 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 airlines responded?

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.

BTN: British 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 your view?

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 statement.

BTN: In what way is the market unfair?

Simontacchi: 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 right way?

Simontacchi: I 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.

Simontacchi: How 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?

Brodbeck: You 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.

Simontacchi: If 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?

Lomas: The 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 anymore?

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.

Struyve: Today 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.

Simontacchi: I 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 that negotiation.

BTN: Several 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?

Simontacchi: The 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 commercial discussions.

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?

Cuschieri: The 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.

Brodbeck: It 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.

Simontacchi: Here 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?

Simontacchi: I 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?

Struyve: The 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 previously.

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.

Struyve: There 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.

Struyve: 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.

Simontacchi: To 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?

Simontacchi: For 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.

Simontacchi: For 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.

Cuschieri: I 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?

Cuschieri: I 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.

Simontacchi: Same 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 leave it.

BTN: You're talking here about the planned entry of Deutsche Bahn into the international rail market?

Simontacchi: They 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.