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Airline revenues are down worldwide as businesses trim travel budgets and adjust class-of-service policies. At the same time, many carriers seek to further coordinate sales and other activities under the protection of antitrust immunity. Panelists speaking here at an Association of Corporate Travel Executives conference last week broached these and other topics. American Airlines vice president of global sales Frank Morogiello was among those fielding questions from a Business Travel Newseditor and members of the audience.
People are talking about demand being down, and buyers shifting from premium class to coach. How do you go about getting that business?
We are kind of at a crossroads. The real key question--which is quite alarming to us and should be for many of you, as well--is how important is corporate travel these days? The answer is that it is at least a third less important than it was before. That is about the average of how much corporate business has disappeared. Of the top 200 buyers in the country, or in the world if you will, there are less than four who are about the same size or a little larger [in travel volume] than they were last year. My CFO looks at corporate discounting as decrementing revenue. So we have an internal battle to explain how this works. That's not easy. When we look around to see what is valuable, what other revenue we can bring in, clearly the basic stuff has to occur. At a bare minimum, whatever you agree to has to occur. Even if you have less, you have to perform on that, or the model quite simply doesn't work. That is the fear of what might occur out there. Corporate programs are very important--but with less premium [traffic] and with lower yields, because of policy changes. So where do the crossroads really lead? American Airlines is about $20 billion or $21 billion in total revenue. Only about $3.5 billion is corporate revenue. The reason it is so attractive is because of the yield. When we get into the battles that we are all familiar with, you have to realize immediately some of the challenges we have. It is a re-educating of our own company as to why we do this. The answer isn't always explainable. In fact, we are dealing less. We are not calling on as many customers, but we still have the same size sales force overall with our large customers.
What is the state of alliance contracting right now?
Alliances are nice to write about. The reality is that most buyers don't need a full-blown alliance-type program. There are probably less than 20 in the world. But you can call it a global contract or whatever you like, and the suppliers will listen to the customers and we'll call it whatever you like, as well. The reality is that unless you have antitrust immunity, it is very difficult. There are two alliances today that have it, and one doesn't have as much of it as it may like, and hopes to have that by the third or fourth quarter--that would be us with British Airways and Royal Jordanian. Even if we had antitrust immunity now, we wouldn't be doing things much different in the corporate arena. That is the part that people don't get. It is easier to have the conversation, but there aren't many deals that we have that would need that exactly. It goes outside the corporate arena where a lot of the value comes in with service, mileage programs, round-the-world fares, etc. What happens is you have an alliance department running out there trying to staple everything together and tell you they have a lot of [corporate] alliance deals to keep their department going. Some of it is real, and some of it is not. We'll do what we need to do. We'd like to have antitrust immunity for a lot of reasons, but it isn't just corporate programs.
For corporate international travel, are you seeing significant changes?
If we listen to what everyone has been saying [about tightening class-of-service policies]--and it's all real because we see the numbers--it means all our aircraft should be coach cabin, and I know darn well that no individual wants that. There's the corporation and then here's the traveler--and some of you are both--and the corporate challenge is on price. It's a very slippery slope. Thank God we can't get to Boeing and change the configuration, and get our maintenance guys to strip out B777 first class and business class seating and make it all coach and snug in another 100 people, so you'd feel really refreshed after you get over there after 10 hours to do some business. In my company, if I were running it, maybe I'd send one instead of two guys and still have that business meeting. The easiest thing to manage is the price first. And that is the slippery slope. You become less valuable if there are no business- and first-class buyers. The equipment out there isn't going to change. The capital expense is not going to go away. Maybe some of the carriers will. Maybe some of the programs will. So you have to be careful during this crisis. If it stays really long, maybe you end up with a no-frills airline product. I doubt that, because the people who really travel a lot will fight that. But if we were building airplanes right now, based on what you tell us, everyone wants coach and wants to eat their knees for 10 hours, and I do not think that's really what you want.
There are a lot of fare sales going on. What are the spot-buy sourcing opportunities?
I think spot buying is actually very dangerous and detrimental to any real program you have in place. You lose the data, you lose the information, you lose on security issues and communication issues, and you lose your share commitment. Keep in mind, the airlines are doing different things to stimulate business because it is becoming necessary, and that makes the corporate programs less attractive. So if we can do that on the $17 billion of revenue for the airline, then these programs become collectively less important. So we have to figure out how to show value--all of us--and deliver what we are committing to. So going outside the program, which I call leakage, and going to lowest logical fares outside of preferreds and really tearing the walls down and letting that occur is like taking a hit of heroin. You'll become addicted and then die eventually.
Has there been more demand for soft-dollar benefits like upgrades and elite-level frequent flyer status matching?
So, do you mean how much more can we give away? (Laughter) The program is set up so the membership becomes more valuable. If you are AAdvantage Gold or above, you don't have to pay a lot of the different fees [on checked baggage, etc.]. And the fee thing is kind of interesting. If you take it out of our industry, we pay fees without even blinking for services that you incur anywhere else in business. Our business has been pretty immature in getting to business principles. The revenue streams are well-enjoyed for whatever people want to buy, whether it is three beers or a checked bag. People have learned to pack better. We actually have programs where our inflight crews will come out and teach you how to pack like a flight attendant. But if you need the service, you pay for the service, whether it be checked bags, etc. Maybe we need to figure out how to bundle or unbundle certain things for buyers. But it is a revenue stream we are going to keep going with. It looks like people are paying. It doesn't mean they like paying for something that they didn't have to pay for before, but we have not had that much pushback.
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