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After Delta Air Lines jolted the industry two years ago by unveiling its 'SimpliFares' pricing initiative, many components of negotiated preferred agreements between carriers and corporate customers changed as a result. However, much changed back. To cope with the complexities of airline pricing and the perception of a commoditized market, buyers and sellers are approaching their relationships with new tools, new methodologies and a renewed focus on customer service.
Upheaval in the airline industry notwithstanding, the basic principles of airline contracting have not changed. Companies that buy higher-yielding tickets (namely those for premium class, purchased at the last minute or for overseas travel) and effectively direct traveling employees to preferred suppliers can extract higher discounts and, in some cases, secure fixed fare arrangements.
[PULL_1]But some components were short-lived. By that summer, for example, Delta raised fares beyond a self-imposed one-way cap of $499. Since then, domestic published fares generally have kept rising and financial performance at major U.S. carriers has improved. Still lower than they were earlier in the decade, corporate discounts again are heading higher.
"It has come almost full circle," said Bob Brindley, vice president of the Americas for BCD Travel's Advito. Prior to SimpliFares, he said, discounts off published (constantly changing) fares for the domestic system ranged between 10 percent and 50 percent. Immediately following SimpliFares, the largest airlines adjusted contracts to reflect discounts of "a maximum of about 10 percent."
Airlines also reintroduced discounts on the lowest-priced tickets, following an effort to exclude certain types of fares from negotiated agreements.
"Airlines pay discounts out of their profit margins," said TRX Travel Analytics vice president and general manager Scott Gillespie. "As long as their profit margins are increasing, they can afford to offer higher discounts, whether they chose to or not."
Though some of the traditional concepts of airline contracting remain intact, the tactics have changed. On the supplier side, airlines are using data consolidators and decision-support tools to ensure they are getting proper returns on investment and construct customized programs based on specific markets, points of sale, classes of service and other factors.
"Airlines have become much more sophisticated in the way they structure their contracts," said Dale Eastlund, air solutions project leader for the Carlson Wagonlit Travel Solutions Group. "It is more difficult from the procurement side to analyze and dig in to what all the elements are."
Corporate pricing models diverged in 2005, though most of the largest airlines settled on tiered discount structures. American Airlines and United Airlines, for example, use a tiered structure based on class of service while Continental's discounts are based on actual price points. "It works because it is simple," said Monisa Cline, Continental staff vice president of North America sales. "The procurement folks don't have to understand faring, bucket levels, different letters, etc. It is simply based on price."
In absolute terms, domestic discounts are generally still lower than earlier in the decade--and in some cases significantly lower. "Discounts are so minimal that the maintenance alone will eat up the savings," said a purchasing manager from a midsize construction firm. "Domestic discounts for us are around 1 percent to 8 percent, so we look at small business programs," which generally are standardized, online programs that provide free tickets and other traveler perks.
At the same time, airlines now are more carefully measuring performance, and either cutting discounts or pulling deals when accounts do not achieve contractual targets. That has prompted corporate buyers to use enhanced analytical tools for setting strategy, creating requests for proposals, negotiating preferred airline agreements and monitoring contract performance (see Bank of America case study).
But buyers also are interested in components beyond pricing, notably customer service. "In the future, we will be utilizing a unique airline value analysis scorecard that we have developed that ranks each air carrier based on their Wal-Mart average ticket price, [U.S. Department of Transportation] customers service metrics, associate surveys and specific data that each carrier is asked to provide," said Wal-Mart global travel services director Duane Futch. "If our share commitment to a specific supplier is not met, it is typically because of their pricing, scheduling, customer service and in some cases non-participation in the global distribution system. Basically, our associates have the ability to vote with their feet when it comes to booking a ticket."
According to travel management professionals, another recent trend is airlines being decidedly stingier in handing out class-of-service upgrades, airport lounge passes, and--perhaps to a lesser degree--matching elite status for frequent flyers. Moreover, when some airlines provide such soft-dollar benefits, they are tracked, measured, analyzed and factored into the overall value of the relationship. Airlines also may be less likely to provide credit for unused nonrefundable tickets and to waive ticketing restrictions, but in some cases, companies still can insist.
In their requests for proposals, buyers also increasingly are asking airlines to detail their carbon footprints and provide information on other new sourcing considerations. "We are seeing questions related to avian flu and our game plan on how we would handle that," said Steve Smith, vice president of sales in the Americas for Japan Airlines. "We also are seeing a lot more on how we are addressing ecological issues and about our community involvement."
The impact of relatively newer, point-to-point airlines in the domestic market is not new but has become more widespread. Intense price competition permeates more markets than ever before, leaving fewer monopoly routes for the relatively older, network carriers. At the same time, low-cost competitors are warming to the idea of preferential treatment for corporate accounts.
Southwest Airlines, now the largest domestic airline and an influential fare-setter, has insisted it does not negotiate discounts. For years, it was not the only one. But nowadays, the likes of AirTran and JetBlue--which long have offered soft-dollar benefits and some ticketing flexibility for corporate travelers--are considering deeper relationships as they pursue larger market shares. Some travel management professionals reported modest across-the-board discounts, back-end rebates and pre-purchase agreements with free tickets.
"The trend has been that the legacy carriers are making money and the low-cost carriers are starting to get squeezed in some areas," said Mitch Cwanger, advisory services practice leader for air at American Express Business Travel. "Those that are feeling the pinch are trying to get more corporate business and may offer something."
On the opposite end of the spectrum, the international market presents its own set of evolving challenges and opportunities. U.S. carriers are funneling most of their new growth to international routes, where demand is high and low-cost competition is low. The result has been high fares with lots of price competition and high discounts, and a higher likelihood that carriers will agree to fixed fare arrangements (an increasingly scarce pricing element in the domestic market), especially for citypairs in which buyers can bring sizable volumes.
Meanwhile, because the U.S. domestic market is characterized by low-cost competition and many spot-buy, lowest-fare corporate policies, U.S. carriers may not always be as well positioned to design a holistic preferred agreement covering all of a company's travel patterns. That, according to executives at foreign flag carriers, has opened the door for them to present attractive pricing on one or a few routes.
But U.S. carriers are looking to improve their competitive standing by investing in premium-class cabins, key to globetrotting business travelers. AA's Cush said that "the advent of the lie-flat business seat" has brought about more product inquires in corporate RFPs, and is "certainly part of a lot of our negotiations recently, particularly in New York, where a lot of our overseas competitors have lie-flat business class."
On a larger scale, the major global airline alliances continue to add members, improve sales and account management functions and generally aspire to be all things. By racing toward a ubiquitous global presence, Oneworld, SkyTeam and Star Alliance can provide larger networks and consider harmonized discounts and/or marketshare goals for multinational clients. But alliance contracting still is a tricky prospect, hindered in some cases by a lack of antitrust immunity or conflicting carrier interests.
"When [corporate buyers] start the bid process, they are thinking, 'I can bid this as SkyTeam versus Oneworld versus Star,' " said Lee Macenczak, executive vice president of sales and customer service at Delta, a SkyTeam alliance founder. "Sometimes, they back off and choose to just negotiate on a carrier-by-carrier basis. It has picked up steam over the past year or so, but the market still is learning."
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