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For the first time in a decade, Southwest Airlines will talk. The carrier with the second-largest domestic revenue base in the United States last week disclosed it empowered salespeople to offer reduced fares for business buyers.
With discount programs available to a corporate sales team that Southwest two months ago tripled in number to 15, the airline is hoping to capture more higher-yielding business travelers and counter the slimming of its cost advantage over "network" or "legacy" brethren. Both Southwest and JetBlue, often called low-cost carriers, are marching to make the "low fare airlines" stereotype even less accurate as they add or test business travel-friendly distribution options, travel procedures, marketing tactics and fare structures.
"It's simply easier to attract leisure travelers because, by and large, they're focused on the schedule and the price," Southwest CEO Gary Kelly said. "Road warriors are more difficult, especially [those from] big corporations. We have offered one-size-fits-all, for the most part, for 36 years. We do have a corporate sales force, but they will be much more energized and motivated [than before] to win more corporate accounts and travelers--and we are opening up their tool chest for them. If you're just going to walk in and say, 'Here's the rack rate, and what you see is what you get,' it doesn't give a salesperson a lot of negotiating leverage. So we will be more aggressive in that way.
"We have to at least be open to that, and if it makes economic sense for us, we should be willing to negotiate," Kelly continued. "It depends on what new business they can bring us and at what price. That's admittedly the customer [who] is harder to win, especially in larger and newer markets."
Already planning to list its fares and inventory in Galileo's Apollo global distribution systemstarting next month, Southwest last week also said it would later add Galileo's sibling firm Worldspan to its GDS mix--which also includes Sabre Travel Network.
JetBlue is selling $35 to $40 higher fares when passengers book through a GDS, the airline said this week. JetBlue began cooperating again with GDSs about a year ago, and said that as of September, those systems delivered bookings representing 6 percent of sales. A JetBlue spokesperson in March said the airline was "not actively pursuing creating a corporate discount program," despite founder David Neeleman saying the carrier should "take a look at it." One thing the carrier has been doing is testing refundable fares with users of its CompanyBlue Web booking tool.
"We're a leisure airline, by and large" that is now seeking the "opportunity to mine the corporate customer," said JetBlue CEO David Barger this week. "I think that portends well from a [revenue] perspective as we look at 2008 and beyond."
Southwest's Kelly last week told analysts the carrier in the third quarter began a "very focused sales campaign to win more large corporate accounts." Southwest has not provided commercial discount programs since the 1990s, when it offered a bulk purchase program designed for small and medium enterprises, according to senior manager of corporate and government sales Scott Anderson.
Anderson declined to answer questions about how new corporate arrangements may be structured, but said "initial conversations" have identified areas of "additional value." He said Southwest was not pursuing sales programs with travel management companies.
In addition to expanded distribution channels and increased negotiating flexibility, Southwest has altered boarding procedures to allow business travelers to report to gates closer to specified boarding times--though seats are still filled on a first come, first served basis. The carrier also installed more power outlets at boarding areas and is planning undisclosed "enhancements" to its fare structure and loyalty program.
"It's logical that they're trying to get the higher-yielding business traveler, although they had a fair amount of corporate travel before," said Calyon Securities analyst Ray Neidl. "They have pressure on the cost side as [fuel] hedges wear off, and so they're testing to see if they get incremental revenue."
Analyst Jamie Baker of JPMorgan Chase noted that cost increases during the current quarter, partly driven by Southwest's "gate makeover expenses and associated marketing," would eat into his profit projection for the company.
Like JetBlue, Southwest needs to spend before reaping higher business travel-related revenue benefits.
Unit sales and marketing costs grew 7.6 percent for JetBlue during the third quarter, mainly because of higher year-over-year GDS usage and costs. GDS fees alone "accounted for 85 percent of the year-over-year increase," said Barger. "However, we continue to be pleased with the incremental revenue we generate from the GDSs, which more than offset the increased expense."
As a result of growth in bookings via GDSs, as well as online travel agencies, direct distribution through JetBlue's Web site is in line to deliver a smaller portion of revenues in 2007 than it did in 2006. The Web site's share was already down to 75 percent in the third quarter, from 79 percent during the full year 2006. Southwest's site delivered 74 percent of sales in the September period, up from 70 percent a year earlier. Anderson said he did not expect Southwest's emerging "multi-channel distribution strategy" to dampen enthusiasm for its corporate booking site, Swabiz. Southwest remains "committed to" Swabiz, which he said is used by 60 percent of the Fortune100.
Four percent of 215 corporate buyers polled by the National Business Travel Association include "low-cost carriers" in their preferred supplier programs, roughly unchanged from 2006. However, 43 percent of respondents to this year's survey said they encourage bookings on LCCs.
Although some analysts believe a convergence of two airline models is complete--with Runzheimer International, for example, saying "discernible differences in value between legacy airlines and low-cost carriers are now gone or invisible"--others were not so sure.
"If Southwest Airlines is ever really going to be a player in the managed travel business, they are going to have to figure out the seat assignment issue," according to former travel management company executive Michael Share. "They are really missing out on the real pool of business travelers who avoid Southwest when there is another option. The system of A B C lines, and now A B C with 1-15, 15-30, etc. will never work for many 'road warriors.' When they have seat assignments, they will be a true player."
Meanwhile, American Express Business Travel Advisory Services air practice leader Mitch Cwanger suggested any blending of models is coming from both sides: "You could [also] say some of the legacy airlines have changed to what we're calling the low-fare model, so they're better able to compete on their costs with some of those low-cost carriers that are out there."
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