BTI UK: Market Picking Up
A flurry of data released by BTI UK at its annual client conference last month—including plummeting fares, declining bookings, the near-irrelevance of airline commission and a boom in net fare deals—showed just how dramatically the British corporate travel landscape has transformed in two years.
Fares have fallen more rapidly in the United Kingdom than anywhere else in Europe or North America. In August, BTI UK clients paid an average £306 per international short-haul flight, down from £361 in August 2002. The domestic average fell from £231 to £206. Although the fare cuts can be attributed to the rapid growth of low-cost carriers—now enjoying 25.5 percent marketshare on short-haul, exit-U.K. routes, according to a presentation at the same event from Merrill Lynch head of global airlines research Anthony Bor—the effect has been an indirect one. Budget carriers accounted for only 3.5 percent of short-haul bookings made by BTI UK, up from 2.5 percent in 2002 and 0.7 percent in 2001. Instead, it is the drastic price-cutting response from such mainstream carriers as British Airways, especially by ditching Saturday night restrictions, that has sent average fares for BTI UK customers plummeting.
Yet, even on long haul, where there are no budget carriers and fare restrictions have remained, prices are down. The average North Atlantic fare paid by BTI UK travelers fell from £1,650 to £1,380, although the decline is likely to halt soon, according to Spencer Smith, director of consulting for BTI UK. "There has been a huge bloodbath on fares, but the trend is bottoming out because of surgery on capacity," he said. "However, there are more reductions to come in Europe."
BTI UK is confident pressure from budget carriers will continue to push down European fares despite passenger volumes improving. The number of transactions handled by the agency grew significantly in September, and managing director Mike Platt thinks recovery is well on its way. "We don't think this was a blip. September was the start of a trend," he said.
It is difficult to predict what will happen to total air expenditures by corporations if some fares move down but bookings move up. BTI UK has measured the spend of 100 clients since business travel started to decline in July 2001. Since then, the clients have cut their expenditures by 25 percent through a combination of lower fares, fewer trips and downgrading. Bookings in business class are significantly down, leading Platt to speculate that European airlines will start to scrap their business class cabins on short-haul flights during the next 12 months.
Another area of change for corporations has been the decline of agency commission. The average commission BTI UK earned on an air ticket has fallen from 3.75 percent to 2.6 percent during the past year. This figure partly reflects many airlines reducing their commission in the United Kingdom from 7 percent to 4 percent at the beginning of 2003 but does not include BA and several other carriers announcing a move to 1 percent, effective Jan. 1, 2004.
What the average commission figure also illustrates is a shift by corporate clients to upfront net deals with airlines. Smith said that 57 percent of BTI UK clients now have all their deals on a net basis, while 5 percent work wholly on back-end rebates. The rest have a mixture of the two.
BTI UK's research also revealed that 87 percent of its clients' airline deals are for only 12 months. "I really believe there is a need for deals to be longer than one year," Platt said. 'The market is picking up, so it is best to push for a contract now because many fares will go up."