Expected airfare hikes stemming from higher jet fuel prices in Hurricane Katrina's wake further will pressure managed air travel programs, many of which have experienced more pronounced lost savings since the spring when fares already had begun to trend higher.
Last week, several price hikes were implemented—some as high as $30 roundtrip—and Delta Air Lines increased minimum-stay requirements on many fares to and from Atlanta. Industry observers at press time were expecting more of the same, possibly including new domestic fuel surcharges.
"I am expecting a big one this weekend," according to Cheapseats airfare expert Terry Trippler, referring to the possibility of wider hikes of $25 or more each way. "These $5 and $10 increases won't cut it. That is like putting a Band-Aid on a severed artery."
For corporate travel buyers, Delta's ticket rule changes may be more detrimental than published fare hikes, especially if it is matched by competitors and expanded to other major markets. "Going to a two-night minimum cuts out a big part of the corporate travel market," said Bob Brindley, vice president and general manager of WorldTravel BTI's Travel Procurement Solutions division. "It is a new fence to limit a corporation's ability to use low fares."
Though major carriers are in desperate need of all the revenue they can secure from the business travel market—perhaps more than ever—the lost savings and higher average fares experienced this year by their corporate customers has begun to strain relationships, according to some travel buyers. Indeed, some airlines made commitments to keep neutral the overall impact of fare reform on corporate programs, but in many situations those commitments since have collapsed.
This summer, Delta raised by $100 the cap on one-way fares, Northwest stopped absorbing passenger facility charges, American increased by $20 the fuel surcharge on international roundtrip tickets and even low-cost carriers—including Southwest—raised many fares.
Data from WorldTravel BTI's latest benchmarking study found that the average fare paid by the agency's clients, while still below levels from previous years, was up significantly from January, when reductions of 10 percent to 20 percent were observed. Now, average fares—factoring in corporate discounts, fuel surcharges and all other pricing components—are running higher than during the second half of 2004.
"Initially, for a lot of clients, it was pretty much a wash," said TPS' Brindley, "but as fuel price increases continue to creep in, it no longer is a wash for a lot of clients. The airlines may have set themselves up for some relationship problems."
Results from the WorldTravel study help to explain why. Of 183 surveyed corporate clients, 39 percent said carriers cancelled contracts or reduced discounts "due to a lack of volume performance" and 43 percent said their companies now require travelers to "book lowest cost over preferred supplier" when using an online booking tool. That's because the only real incremental savings available to many buyers is through travelers' booking of non-preferred carriers, including the growing low-cost airlines.
"A lot of flat fares also have been removed, which makes it hard to do budgeting," said Norma Rohrbach, vice president of services sourcing for Citigroup. Speaking during a panel on airline contracting at last month's National Business Travel Association convention
(see story), Rohrbach noted that carriers may offer waivers, upgrades and other soft benefits to compensate for reduced discount levels and lost savings, but such perks are difficult to manage within online booking systems.
"Relationships are difficult and weakening," added Charles Franklin, manager of corporate services for Torrance, Calif.-based American Honda Motor Co. "It is difficult to keep loyalty with preferred carriers."
Addressing delegates during the NBTA conference, Franklin detailed how his company in the first half of 2005 saw lost savings swell into the hundreds of thousands. "Our average ticket price domestically is down 4 percent, but on my top five city pairs, we are losing," he said. "International discounts have not changed—and they are too large to ask for more—but fares have gone up."
The sole airline representative on the panel, Delta corporate sales director Bob Somers explained that Delta's SimpliFares initiative was meant to address the needs of both managed and unmanaged business travelers and was devised when crude oil prices were substantially lower than current levels.
"We cannot map the fares you bought in the old environment against the fares you plan to buy in the new environment," Somers said. "It is up to you and savings will vary. Contract performance will drive everything."
Travel managers agreed, but many highlighted availability challenges. As always, airline yield-management departments constantly are tinkering with low-fare inventory, meaning many business travelers cannot take advantage of cheaper, advance purchase fares. Instead, they are forced to purchase full-economy fares, which are higher than restricted fares but well below full-economy fares of a year ago. WorldTravel clients, for example, are buying roughly 50 percent more full-economy tickets than they did last year.
Despite new and familiar challenges in maintaining preferred airline agreements, more than half of those responding to the WorldTravel survey said their organizations benefited from airfare reform. After all, one of the biggest complaints buyers had about traditional fare structures—the huge gap between the highest and lowest fares—was minimized in early 2005 when carriers significantly narrowed that gap in most markets. Furthermore, average fare paid by many clients in many markets still is lower than last year and markedly below previous years.
The latest carrier-by-carrier benchmarking data from WorldTravel provide evidence, but any year-over-year reductions in average fare paid appear likely to shrink or vanish in the coming months.
A primary factor for that likely will be additional fuel-related price hikes, either in the form of new passenger ticket surcharges or direct published fare increases.
"We will have to get more sophisticated in how we measure," said one corporate travel buyer. "Considering surcharges and fuel charges and PFCs, everything now appearing on the radar screen is taking its toll."
Furthermore, airlines continue to report high overall load factors, due in part to recovery in the business travel sector. Delta's Somers, for example, said fare reform produced "more stimulation than we thought and much more quickly than we thought." At the same time, major carriers have trimmed domestic growth plans, opting to direct new capacity to overseas routes.
In any case, gravely unhealthy airlines should be expected to wring every dollar possible out of Corporate America. With oil prices and the specter of Chapter 11 defining the status of major network carriers
(see story), at least revenue trends are moving in a positive direction.
According to the Air Transport Association, domestic industry yield in July improved more than 5 percent, year over year, marking the third consecutive monthly increase. Analysts suggested that airfare hikes this summer would add hundreds of millions of dollars in new revenue for the reeling industry.