Predicting the future of airline pricing is as difficult as ever this year. With high fuel prices continuing to plague the troubled commercial aviation sector, the industry consensus is that upward pressure on airfares will persist throughout the rest of 2005 and into 2006, but the degree and duration of higher prices is anyone's guess.
For many small and midmarket companies that lost the benefits of negotiated discount programs when carriers restructured fare structures and corporate agreements in early 2005, exposure to rising prices will affect next year's budgets. Even larger managed travel programs are susceptible to airfare fluctuations that in the past were more easily mitigated through discount programs and fixed-fare arrangements.
As business travel volumes continue to increase, no one expects carriers to revisit their broad corporate discount strategies, regardless of the published pricing environment. "On the domestic side, we won't see many companies improve their discounts in any significant way," said Scott Gillespie, CEO of Cleveland-based Travel Analytics.
On top of implementing fuel-related surcharges and published fare hikes, carriers this summer raised caps on one-way fares, began re-segmenting business prices by adjusting minimum-stay requirements and stopped absorbing passenger facility charges
(BTN, Sept. 5).WorldTravel BTI in a recent benchmark survey predicted domestic airfares for corporate clients in 2006 would be up 4 percent to 6 percent.
"We are seeing airfares and air spend approaching or surpassing what these clients had spent, on average, in previous years," said Dale Eastlund, regional manager for Carlson Wagonlit Travel's Solutions group. Eastlund added that anecdotal information from clients suggests that average airfares could be up by roughly 5 percent in 2006.
"There is so much speculation that we as travel managers cannot really put a finger on it," said Ron Sharer, head of corporate support services for Ciba Vision in Duluth, Ga. "Considering fuel prices, common sense suggests that airline pricing cannot go down."
To cover both projected increases in his company's travel and general airline pricing, Sharer said he roughly estimated a 6 percent to 10 percent jump in 2006 corporate air spending. "Last year, I would not have envisioned it becoming ever harder to make these determinations, but it has. The crystal balls are cloudy."
Though American Express has not yet issued forecasts, the latest data from its Business Travel Monitor showed a continued increase in average fare paid by corporate customers. Though the second-quarter number of $218 one-way was down 7 percent from a year earlier, it represented an 8 percent jump since the first quarter of 2005. After hitting a five-year low of $202 in this year's first quarter
(BTN, June 20), the average airfare paid now is approaching the full-year 2004 figure of $225.
Meanwhile, American Express said average fare paid, business class fares, first class fares and discount economy class fares across 160 international routes each were higher in the second quarter, both year over year and as compared with the first quarter.
With increased fuel surcharges added by several carriers on international routes, average fares likely will move even higher. British Airways, for example, increased levies on long-haul tickets at U.K. points of sale from £24 per sector to £30 per sector, while short-haul fuel surcharges remain unchanged at £8 per sector. The airline said it is looking similarly to increase fuel surcharges on long-haul tickets sold outside of the United Kingdom. Like other international carriers, British Airways has raised passenger fuel surcharges several times since introducing them in May 2004
(BTN, June 7, 2004).At Virgin Atlantic, all tickets will include an upwardly revised $55 fuel surcharge for every sector. Virgin partner and partial owner Singapore Airlines made similar adjustments. For its part, South America's Lan Airlines this week planned to apply fuel surcharges of up to $60 each way for intercontinental flights. Lan said it would adjust the surcharges to match fluctuations in fuel prices.
In the domestic market, recouping fuel costs in 2006 likely would take the form of higher published fares—as it has for most of this year—but many uncertainties further complicate the outlook. For example, additional airline bankruptcies or industry consolidation likely would decrease industry capacity and theoretically provide additional upward pressure on airfares.
"Another big question is the longevity of the low-cost carriers," added CWT's Eastlund. "Can they sustain current pricing structures with fuel at these prices?"
Southwest Airlines, for example, gradually has emerged as the price-setter as it benefited from a lower-cost structure aided significantly in recent years by a successful fuel-hedging program. Those fuel hedges will wind down starting in 2006, potentially prompting Southwest to raise fares.
Whatever the combination of root causes, corporate buyers can expect higher air costs next year. "Many small and medium-size companies are at the mercy of whatever the airlines are looking to do," said Dan Beschloss, executive director at New York-based Valerie Wilson Travel. He said some accounts still make use of agency cluster deals arranged with airlines, as well as carrier small business incentive programs and upgrade plans.
For larger programs, cost savings efforts likely will focus on policy and compliance. Eastlund, for example, said he is seeing more companies go from typical seven-day advance purchase policies to 14-day advance purchases, whenever possible.
Travel Analytics' Gillespie also said more travel managers are considering transatlantic policies that require travelers to fly economy class on daytime flights while allowing business class for overnight flights.
"More people are looking at policy and the broader expense, which includes distribution costs and $25 agency-assisted transaction fees," Gillespie added. "Because budget owners budget for travel, not specifically for air travel or agency transaction fees, some are thinking they should take a hard look" at alternative distribution channels and online-originating travel management companies.