Air Dealing In The Aftermath

Northwest Airlines last week dramatically changed its discounting policy for corporate clients. The move enables all of the carrier's accounts—not just select ones, as in the past—to take discounts on its "full portfolio of business fares." However, all other fare categories, aside from full coach and first class, are no longer discountable, including all advance purchase leisure fares.

At press time, other majors had not matched, although United Airlines already had been moving away from discounting most leisure fares.

"We have to get rationality back into pricing," said Frank Kent, United vice president of North America sales. "We are not discounting already-discounted leisure fares. Doing that just makes no sense."

Northwest's new approach is the latest turn buyers must navigate within an industry hard-pressed to generate revenue. Because of issues ranging from far-reaching schedule changes and possible bankruptcies to stricter compliance requirements and reduced salesforces, corporations have to carefully consider their carrier commitments.

Northwest said its new pricing structure, which includes its BizFlex, BizFlex First and ConnectFirst offerings and also chops 25 percent off most leisure fares, will generate 2 percent to 4 percent in incremental revenue by stimulating traffic and boosting yields. Yield improvement will come from corporate travelers booking more expensive, but more flexible, fares than they may have in the past.

That the carrier more clearly delineated business versus leisure fares may not sit well with accounts accustomed to receiving discounts for the full value of their business. Further, it may alter corporate buyer perception of the value of leisure fares, including those that require a Saturday night stay.

"Northwest is sending a message that you can't have your cake and eat it too," said a source at a mega agency, speaking to BTN on the condition of anonymity. "They have drawn a line in the sand, which really is a half-step toward value pricing."

The airline also acknowledged that the pricing change does "essentially nothing" to narrow the growing gap between business and leisure fares. "This will cause a further disparity between discretionary and non-discretionary travel," said Mark Walton, principal at Consulting Strategies in Rolling Meadow, Ill. "It exacerbates the issue, which, in the long term, may be problematic for the airline industry."

Northwest said the new fare structure, which applies throughout the United States and Canada, except Hawaii, has been in the works for "many months" and the fallout from Sept. 11 "only expedited the need for an improved and more stable fare structure."

The changes also include a revamped leisure fare structure that in addition to lowering prices also relaxes the advance purchase requirement from 21 days to 14. That could pacify, to some extent, those corporate buyers who had been receiving additional discounts on leisure-oriented fares.

Sources contacted immediately following Northwest's announcement said matching by other carriers was unlikely. "Most airlines have allowed discounts to be applied to all fares except the very lowest," said John Heilner, vice president of Management Alternatives in Princeton, N.J. "This now flies in the face of the current business environment by truncating the fare sets available to corporate discounts."

However, Tim Griffin, Northwest executive vice president of marketing and distribution, said, "We live in a competitive world and we are hopeful competitors will match the structure." He indicated that the carrier would stick to its guns, even if competitors do not fall in line. Northwest, a known foiler of pricing actions, could stand alone for a while. It is, perhaps, on more solid financial footing than others and well-protected in its three main fortress hubs.

Aside from pricing, buyers entering new negotiations must consider many factors as they search out the best carrier mix in a changed environment. For starters, they must realize that airlines now are more likely to cancel contracts for nonperformance, thus placing greater emphasis on traveler compliance.

"We are not in a position to continue having unprofitable deals and we will cancel or terminate those that don't make sense," said Monisa Cline, managing director of corporate sales at Continental.

In that context, Scott Gillespie, CEO of Travel Analytics, during a recent Association of Corporate Travel Executives Webcast, listed a series of challenges that buyers need to overcome. He suggested corporations work to provide carriers with good faith estimates on air spends by annualizing travel data against a pre-Sept. 11 baseline. "September and October travel data clearly are anomalies and should be ignored," he said.

Buyers also should carefully examine airline capacity reductions. Though cutbacks have been fairly uniform—roughly 20 percent—changes on specific city pairs could determine which carriers are best suited to fulfill corporate needs.

"We have been discovering, through Dacoda primarily, schedule and equipment differences that change all the numbers," confirmed Ron DiLeo, senior vice president of North America for Rosenbluth International. "Airlines have not proactively gone out and said, 'We've done this, this and this.' Things are moving at a quick pace and travel managers are saying they'll fall short of commitments because of changes the airlines have made."

That type of analysis is in overdrive at other mega agencies as they try to better position their corporate accounts for both existing and future deals. "Capacity cuts require corporate clients to take a second look at deals. Maybe they need to switch to a new airline to fit their needs and that impairs their ability to meet commitments," said Brian Mogler, director of American Express Consulting Services. "A result of that is potentially lower discount offerings, which can change the attractiveness of a deal."

Another factor is airline viability. Though no majors have yet declared bankruptcy, the potential for widespread service disruptions could sway a corporation's decision on suppliers. Laurence Smith, partner at Roseland, N.J.-based Wolff & Samson and adviser to corporate travel departments, said the potential for airline bankruptcies now is the biggest risk borne by buyers. Speaking during the ACTE Webcast, Smith said financial instability compromises not only an airline's ability to fulfill its contract commitments, but also traveler confidence. "Another risk of bankruptcy is the tenuous nature of rebates or back-end payments," he said. "If you are concerned, it is best to go for upfront discounts."

After initial analyses, buyers should try to negotiate more flexible, achievable deals, according to Gillespie. "Try to use stair-step pricing agreements," he said. "If the buyer gives more, the buyer should get better pricing. It is just a matter of writing a contract that allows both parties to understand how the pricing changes." Gillespie, who predicted a "bloody dogfight over market share," also suggested shorter evaluation periods and indexed goals versus a carrier's fair market share in given city pairs.

With uncertainty still pervasive in the marketplace, it remains to be seen how successful buyers will be in deepening discounts. Airlines are stuck between the need to generate and retain as much revenue and market share as possible, and the need to maintain and develop corporate relationships. That dilemma is apparent at US Airways, for example, which already has lost $1 billion this year. "US Airways is just not willing to add to the discounts," said a travel manager at a Pittsburgh-based company. "The way they are bleeding cash, I don't see them bumping them up for a while."