Air Travel Promises To Be A Mixed Bag For Buyers

Nineteen ninety-seven is sure to be a volatile year for air travel as recurring issues like rising fares, airline consolidation, distribution changes and low-cost competition come to the industry forefront.

In addition to new developments on those issues, questions regarding Federal Aviation Administration funding, labor relations and possible new regulations for airline alliances will be resolved. And a new era of air transport will begin as Europe enters the final stage of deregulation.

More than ever, corporate buyers will explore new negotiating tactics such as net fares, methods of guaranteeing seats and new technologies that will help manage compliance and cut costs.

Domestically, the U.S. airline industry is at an impasse in terms of growth. Assuming there is no economic downturn, major American carriers will continue to look closely at consolidation. If American, Delta, Northwest or United buy another carrier, the other three would surely respond in kind.

Alliances Uncertain

Internationally, carriers will continue to focus on alliances to take advantage of significant growth opportunities. However, as the lobbying machine of American and British Airways fights its competitors and regulators in the United Kingdom, and as the United States and the European Union chide each other over bilateral agreements and antitrust policies, there is no way to gauge the viability of long-term international alliances.

"Whatever happens from a market consolidation point of view, all we're asking is for the government to allow us to compete," said Continental Airlines CEO Gordon Bethune. "A lot of corporate travelers need to go from London to Lubbock, Texas, and from Sapporo to Saipan, so their companies are going to want the airline consortium that gives them the best global service for their travel dollar."

On the fare front, prices continue to climb. Initial forecasts of no more than a 5 percent increase in fares in 1997 over 1996 (BTN, Sept. 9, 1996) have been eclipsed by recent predictions by American Express (an 8 to 9 percent rise for typical business fares) and Travel One (an 8.5 percent increase). And the consulting firm Management Alternatives predicted that fares could jump as much as 16 percent. "It's a pretty chilling forecast," said Eric Altschul, director of client travel purchasing for Amex.

Unlike last year, when the expiration of the 10 percent ticket tax lowered fares, airlines are pocketing it this year. The tax probably won't be reinstated until spring. Carriers also are bickering over how the FAA should be funded-through the tax or a user fee. The seven major carriers support a user fee, but low-cost airlines, led by Southwest, feel they would be unfairly hurt by such a policy. The General Accounting Office agrees.

Another possible fare benefit could come about with European deregulation. Beginning in April, flag carriers from EU countries will be allowed to operate domestic services in another member country. According to an Amex study, deregulation will result in the consolidation of existing majors, new start-ups, development of hub-and-spoke systems and intensified competition in scheduling, costs and service quality.

Net fares will continue to proliferate this year, creating new distribution savings by netting credit card and CRS costs in addition to commissions and overrides.

Direct settlement practices are almost sure to begin this year as well. The Business Travel Contractors Corp.'s most recent proposal was accepted by several, mostly smaller airlines, so 1997 should be the year Kevin Mitchell's ideas get tested.

Sources also expect travel managers to explore more bulk buying and/or bartering options with carriers, helping to stabilize fares and guarantee seats amid a high-demand environment. According to Delta Air Lines executive vice president of marketing, Bob Coggin, "if demand stays as high as it is, securing seats will be an issue."

Technology will make major headway this year as electronic ticketing becomes available nationwide on all of the majors. Interlining among at least a few carriers will add to the product's appeal, and travel managers will begin negotiating based on their companies' usage levels.

Hundreds of travel managers also plan to install corporate booking systems this year, theoretically reducing costs by ensuring compliance with air contracts. "The implementation of new technologies will be a huge story for 1997," said consultant Steven Schoen, president of The Global Group in Burke, Va. "We'll see how they affect airline deals; if a company gets online, does it really get them a better deal?"

For suppliers, the year-over-year growth might not be what it was in the past few years, but U.S. airlines are expected to make lots of money once again in 1997. The numbers aren't in yet, but 1996 was probably the airline industry's best year ever.

While it was not a good year for discount carriers, they cannot be counted out. Southwest is expected to continue its slow but steady march into the Northeast, evoking a response from USAir that could come in the form of a low-cost airline. American, too, admitted that it is "feeling the effects of transcontinental competition from Pan Am," said AMR CFO Gerard Arpey.

Several carriers also are facing major labor negotiations because employees want a higher share of the profits, including American, Northwest, United, TWA and USAir.