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."
TERMS OF ART
|•||Choosing:Traditional network carriers(also called legacy airlines) will negotiate preferred pricing with those organizations that have sizable air travel expenditures and/or can direct a disproportionately large share of traffic their way. They have been agreeing to raise corporate discounts since early 2006, to coincide with rising published airfares. Examples include American Airlines, Delta and United. Point-to-point domestic carriers(also called "low-cost" carriers) may be beginning to negotiate corporate discounts in some instances as they continue to expand. These airlines are more likely to offer soft-dollar benefits, ticketing flexibility and direct-booking options for corporate customers. Examples include AirTran, JetBlue and Southwest. Global allianceshave attempted to court high-volume multinational organizations by unifying the sales strategies of all or some participating airlines. The negotiating success of the three main groups--Oneworld, SkyTeam and Star Alliance--depends largely on levels of antitrust immunity, but each continues to add members in a race for global coverage.|
|•||Measuring:Average ticket priceand average segment priceare straightforward measurements of ticket costs, inclusive of negotiated discounts and affected over time by changes in published fares, buying behavior and travel patterns. They may or may not include taxes, surcharges and fees. For business travel, tickets average 2.5 segments. Net effective savings rate(also called aggregate discount or net effective discount) is the expected savings off non-discounted or published fares. Discount availabilityis key, since a great discount on international business class tickets, for example, is useless when that particular class of service or fare bucket has no remaining inventory. It is difficult for buyers to predict and sellers to commit to such availability. Price per milecan help summarize changing costs for an overall air program over time, assuming travel patterns and purchasing behavior remain fairly constant. Airlines measure their cost per mile which, like price per mile, is not useful for comparing different routes. Fair market share(FMS, also called quality of service index, or QSI) essentially measures the percentage of total seats flown by a given airline in a particular citypair. It can be weighted by time of departure, aircraft type, connections versus nonstop flights, elapsed itinerary time and other factors, which make the metric more of a calculation of how likely a passenger would use a given airline to travel between origin and destination. Customer service metricssuch as on-time performance and baggage handling are receiving more attention. They are available, in varying detail, from the U.S. Department of Transportation, third parties and the airlines themselves. Though airlines are hesitant to contractually commit to customer service targets, their performance can impact traveler perceptions and behaviors, and therefore contract performance.|
Now, Brindley continued, "the highest fares are getting discounts not quite at the level they were but still fairly high, and the mid-level fares, instead of maximum discounts of 10 percent, now are maxing at upwards of 25 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.
U.S. AIRLINE INDUSTRY MARKET SHARE, 2006
* includes America West
Source:Aviation Daily, Eclat Consulting, carrier reports
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."
All-Business Niche Operators Proliferate
Though they currently operate on just a few routes, new-entrant transatlantic carriers are using high-end products and competitive price points to draw corporate interest. Designed for the business travel market, this group of new suppliers—Eos, MaxJet and Silverjet among them—is forcing incumbent carriers to respond."Surprisingly, some of these startups look like they may be successful," said Brett Zabel, regional project manager at Carlson Wagonlit Travel Solutions Group. "They are already offering very aggressive pricing and we have seen flat fares and discounts that are certainly very attractive to corporate clients."These carriers join a transatlantic field that includes all premium-class operations marketed by Lufthansa and Swiss International Air Lines, as well as first and business class products flown by several U.S. and European network carriers.In the United States, Eos, MaxJet and Silverjet use primary airports in New York (and Newark), Las Vegas and Washington, squaring up against the well-entrenched airlines. In London, airport choice and geography are factors. Eos and MaxJet use Stansted Airport and Silverjet flies to Luton Airport. Most transatlantic operators use Heathrow and/or Gatwick airports.Noting that Silverjet, MaxJet and Eos offer a combined 300 daily business seats each way between New York and London, American Airlines senior vice president of global sales David Cush said his airline is starting to react. "Now we are redefining the 'London market' to include secondary airports, so if corporations allow their travelers to buy on these limited carriers, then it impacts their performance," he said. "We are not going to let these guys come in and skim off our best customers."In addition to the transatlantic competitors, new domestic and intra-regional business jet operators are building their services. In the United States, the ExpressJet Airlines Corporate Aviation division on Dec. 31 flew its inaugural charter flight. Planning this spring to launch new commercial service to 24 domestic destinations, the company allocated six jets to corporate business and plans to grow that fleet to 15.In Europe, Lufthansa and NetJets extended by five years cooperation on the Lufthansa Private Jet service, which for 2006 reported a 13 percent annual increase in segments. In Asia, Japan Airlines plans to add 100 charter flights this year and "proactively" develop corporate contracts for employee and incentive trips. Similarly, Japan's ANA announced ANA BusinessJet, "tailored for the business community."
"Big, publicly held corporations make sure they deal with good corporate citizens," said David Cush, American Airlines senior vice president of global sales. "That is something that several years ago we never saw, and now it is starting to creep into a lot of RFPs."
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."