<B> Amex Makes Bulk Air Buy</B>
By Jay Campbell
Signaling one way large travel agencies can operate in the current business environment, American Express has just bought tens of millions of dollars worth of deeply discounted Continental Airlines seats on Virgin Atlantic flights to London Gatwick and Heathrow.
The bulk purchase deal, good for a year, provides American Express with a set number of Upper Class and coach seats on certain Continental-Virgin codeshare flights from Boston, Los Angeles, Newark, New York-JFK, San Francisco and Washington-Dulles. Eric Altschul, vice president of American Express' consulting services group, said the company will offer the seats to its corporate clients, not the general public, at a "highly preferred rate."
Asked whether these rates will beat what a company could get from Continental directly, Continental vice president of national sales Dave Hilfman said, "It really depends on how Amex negotiates with their clients--it's up to them to decide how to price it. We've offered Amex a very aggressive discount, but certainly Continental is always willing to talk to companies directly about their volume and ability to shift share."
Virgin Atlantic's senior vice president for the United States, Charlie McKee, gave a slight indication of how many seats Continental might be dealing with. He noted that while the number of seats Continental buys from Virgin varies by market, it represents less than 25 percent of Virgin's capacity between the United Kingdom and the United States.
Hilfman said this deal accounts for a "substantial" portion of that capacity.
"We think it's good for about 90 percent of the types of clients out there--it will service the majority of our clients' London needs," said Altschul. But it will not meet the needs of every client, perhaps including larger companies that already have a broader relationship with Continental.
To determine which seats it wanted and where, Amex analyzed the patterns of existing client bookings and focused on peak business travel days and times. "We have a certain number of seats per flight, and that varies by client demand," Altschul said.
For Continental, the deal is a way to help "spool up" its London traffic and to make some quick cash. "Based on what we see, this is one of the most attractive programs to London," said Hilfman. "It's always a challenge entering a new market, and this code-sharing exercise with Virgin has required a lot of time and effort in terms of getting into the marketplace, so this is a great opportunity to accelerate that."
Fresh from signing the agreement, Amex and Continental had yet to inform some of their top corporate clients about it as of last week. But travel managers at those large companies were interested in learning more.
"I'm not sure how we could utilize this," said Iraj Amirseif, travel manager with Amoco Corp. "It sounds like sort of a consolidator thing. If the fares and the discounts are good, we may dig into that."
"I don't think Amex is paying less than I am," said another buyer with huge volume. "Continental needs cash? We have cash," he joked.
Amex and Continental had been in negotiations for this deal for several months, pouring over accounting and access issues. One stumbling block had been that Amex needed to determine how to manage the inventory. While Continetal helped Amex with the required technology, the airline will not be involved in managing the seats going forward. Amex is in the midst of upgrading its inventory management capabilities, said Altschul.
Hilfman said Continental had offered the deal to other agencies, but Amex was the only one to put up the money. "We're one of the few travel agencies that has the capital to take the risk," said Altschul. "Most corporate travel departments wouldn't be able to do this on their own, so as we monitor client participation, our desire to do these things can only increase. We're willing to do it with other airlines."
Indeed, interviews with other travel agencies in recent weeks revealed that very few have similar arrangements, though David Radcliffe, chief executive of U.K.-based Hogg Robinson, said, "We are taking inventory, yes, and we're experimenting with allocated stock. It works."
But a Rosenbluth International spokesperson said, "Bulk buying is not an area we are pursuing as a matter of strategy," while Carlson Wagonlit president and CEO Travis Tanner pooh-poohed the Amex deal and McCord Travel Management acknowledged, "It's not high on our list of priorities right now."
It could be that hotel rooms are the more likely candidate for bulk purchases by agencies. Travel One senior vice president of strategic planning Charles Roumas said the agency has helped clients negotiate bulk purchases of hotel rooms in a few instances, but the agency did not itself put up the money.
Woodside Travel Trust president and CEO Ivan Michael Schaeffer said he hopes to pursue airline bulk deals by the year 2000, but is exploring bulk hotel rooms for next year.
"Taking inventory positions is one of those things no one wants to say they won't do," said Mike Boland, president of Maritz Travel. "We've looked at it over the years, but it's probably still a little further down the road. If it becomes necessary, we'd do it, but I think the real value to the customer remains to be seen."
The concept of bulk buying is not brand new, but Altschul and Hilfman believe it never has been explored to this extent. "You hear people talk about being willing to take risk, but generally speaking, the airline takes the risk. This is something we haven't seen happen very often, certainly not to this magnitude," Hilfman said.
Richard Eastman, president of The Eastman Group in Santa Ana, Calif., said this idea is one he's been suggesting, or forecasting, since 1993. "The airlines have an increasing capital asset recovery problem. An airplane is an expensive capital asset and like a manufacturing plant, it has a basic minimum quantity of 'units' that it must manufacture and sell to simply break even," he said. "After it exceeds that volume/revenue base, then all additional sales go toward overhead and profit.'
With the increasing number of seats entering the market, Eastman added, "Continental and Virgin have derived a way to ensure a steady customer base to fill the capacity of their 'manufacturing plant' and they have found a buyer that is willing to take the risk to keep that plant functioning in order to obtain a guaranteed lower volume price. Thus, the base 'commodity' price sustains the manufacturing price and allows the airlines to stabilize their last minute departure flights."
Rolfe Shellenberger, senior consultant with Runzheimer International in Palm Desert, Calif., noted that of the agencies, "Amex, of course, has the deepest pockets. But I think this kind of thing will happen throughout the industry. Even corporate buying should be looking in that direction, but you have to be sensitive to the best flights. 5:00 p.m. is a lot different than 7:00.