An 18-month trend of declining industry airfares may come to an end later this year as carriers implement aggressive capacity reductions and other yield improvement strategies. Despite competitive pressure on fares, largely from low-cost carriers, the sobering possibility of price hikes and reality of more restrictive nonrefundable ticket policies make air travel budgeting for 2003 a confounding task.
"Travel managers should put their calculators away and get out the dartboards," said airfare analyst Terry Trippler.
The guesswork begins with fares, which are impacted in many ways by many factors, not the least of which is the price of oil
(see story). All things considered, some industry observers expect carriers to raise leisure fares and maintain, if not lower slightly, business fares to retain their bread-and-butter corporate business.
However, according to Eclipse Advisors, Rosenbluth International's wholly owned travel procurement subsidiary, published airfares in 2003 will be flat to 2 percent higher, while the average domestic fare paid by corporations will increase between 4 percent and 8 percent. Eclipse COO Michael Boult cited capacity reductions, greater ticket restrictions and elimination of underperforming corporate contracts.
American Express said it would predict a 3 percent to 4 percent increase in the typical business fare category when it releases its Trends and Forecasts Preview 2003 this fall. "However, the average fare paid by corporations will vary from that benchmark based on their own corporate deals and use of discounted fare categories," said David Marcus, a manager with American Express Consulting.
A separate American Express report, the latest Business Travel Monitor, found the average fare paid by the agency's corporate clients in the second quarter was $285 one way, a 12 percent year-over-year decline representing the steepest drop since 1994. On a quarterly basis, the average fare paid had not been as low since 1998.
Some buyers said their company's air costs will be flat in 2003 as a modest uptick in travel is offset by what they expect to be a further, albeit slight, decline in average fare paid. Others still are digesting all the recent changes and have yet to finalize budgeting numbers and strategies.
Beyond actual fare movement, many other developments may affect corporate air costs in 2003, including progress on meaningful fare reform, establishment of new and mutually agreeable corporate contract models, ramifications of industry bankruptcies, formation of mega-alliances and, of course, the health of Corporate America.
"It is not as easy a job as it had been. We have to make many more assumptions," said Mark Williams, Tampa-based director of Americas travel and meeting management for PricewaterhouseCoopers.
What is certain is that business travelers, in some cases, no longer will choose lower-price nonrefundable fares. Though corporations increasingly have encouraged their travelers to book those traditionally leisure-oriented offerings—currently six times cheaper than business fares, according to the American Express BTM—new restrictions may counteract that trend
(BTN, Sept. 9). In fact, usage of nonrefundable fares by corporations was the primary reason carriers implemented the new restrictions.
As such, corporations nationwide that already are focused on cost control may become more exposed to higher business fares.
Roughly 63 percent of 205 corporate travel managers polled by the National Business Travel Association at the beginning of the month said new nonrefundable ticket restrictions are the single factor most dramatically increasing costs. The economy was the second-most cited factor, at just 32 percent.
Overall, 43 percent of respondents predicted air costs next year would increase more than 5 percent. About a third expect no change or a decrease in air costs.
"This move could serve as the largest fare increase in the history of aviation," said Mark Walton, principal of Consulting Strategies in Rolling Meadow, Ill., regarding the nonrefundable ticket changes. "Should a company see a 10 percent or more increase in the cost of travel, which is very possible, their remedy may not be to move the business, it may be to cut out travel."
Travel avoidance will be one strategy likely employed by Santa Barbara, Calif.-based Tenet Healthcare. "We have been able to turn in unused nonrefundables for vouchers or name changes, and that is where it really is going to hurt us," said Diane Calvert, the company's director of travel administration. "Overall, our average fare paid during the past three years has been pretty flat. I have no idea how this next year will look."
Some see opportunity embedded within changing nonrefundable ticket policies
(see story)."The new nonrefundable policy may not be as much a setback as a leveraging chip in corporate programs," said Ron DiLeo, Rosenbluth International senior vice president of North America. "Going forward, an obvious notion is that we make it a requirement for negotiated fares, even at nonrefundable levels, to be refundable. We already have had some success at that. From the carrier perspective, it is all about track record."
Also assured, in most cases, is removal of corporate discounts from lower-fare buckets. A year in the making, that trend was completed this summer when remaining major carriers joined their competitors in adopting the policy change
(BTN, July 15). Extrapolating from its own client base, Eclipse Advisors determined that the new stance by the airlines, combined with new policies on nonrefundable fares, will eliminate $800 million in annual cost savings for North American companies.
"Fares have got to go up, that is the reality," DiLeo said. "If the airlines raise their prices $30 to $40 per ticket versus the existing cost base—and not necessarily the actual ticket price, but in distribution fees, for example—they'd be in Profitland big time."
Executives at WorldTravel BTI agreed that prices likely will rise. In the latest edition of the agency's Insight newsletter, president Danny Hood and executive vice president Dee Runyan anticipated an increase in business fares as a result of recent industry developments.
"The airlines are reinstating rules that have been relaxed over the years, so we don't see them returning to the practice of looking the other way," they wrote. "The elimination of discounts off the lower fare categories has a lost savings value that can be calculated. This loss needs to be recouped. Companies should look at their other fare categories and make proposals to the carriers in exchange for additional volume benefits."
Others are not certain prices will increase in the coming year. "Despite supply constraints on airline inventory, I expect average prices for business travel to drop, because demand has really plummeted," said independent consultant Rolfe Shellenberger. "Airlines will be faced with continued corporate resistance to excessive price levels, even on monopoly routes."
Runzheimer International, in its 2003 forecast issued earlier this year, predicted air travel costs would decline by as much as 5 percent.
"We expect business customers to insist on getting more for their money," the report stated. "If airlines make the necessary upward adjustment in leisure fares, and stop giving the store away on connecting flights just to steal a few of their competitors' customers, resulting overall yield should be higher than in 2000."
Robin Buzzeo, corporate travel manager at Taro Pharmaceuticals USA in Hawthorne, N.Y., expects major airlines to attempt price hikes but then back down. "Capacity will go down, but carriers will see a bigger dip in nonessential travel by businesspeople who fill their seats Monday through Thursday and they will have to rethink any fare increases," she said.
Nevertheless, Buzzeo is not expecting any additional fare reductions to translate into net savings for Taro's overall 2003 airline expenses. "Our volume will go up, at least I always budget that way, but it won't be as bad for us as it could be because of JetBlue and Southwest."
Indeed, Taro, like many other companies, intends to move more travelers to the growing low-fare carriers because "the major airlines are giving us bupkus," according to Buzzeo. "They are using self-destructive tactics that will achieve the opposite of their desired results."