Setting budgets for the coming year's corporate air spend is not getting any easier for travel managers facing an evolving marketplace. Considering major overhauls underway at network carriers, the growth of low-cost airlines, continued economic uncertainty and sophisticated decision support tools used by suppliers to carefully analyze client travel patterns, this year's cycle arguably is more challenging than ever before.
In years past, travel management companies, consultancies and other industry observers offered varied forecasts on projected corporate air spend but generally agreed at least on the direction. For 2004, predictions and perceptions are so wide-ranging that buyers are approaching their budgeting season with less clarity and more caution. Many travel managers simply are assuming their companies' air spend will be flat based on several offsetting factors.
Nevertheless, there are several elements in play that suggest air travel expenditures will move in one direction or the other. Of course, an improving economic environment not only would boost corporate growth and spur more business travel demand but potentially also could empower airlines to raise fares. Deutsche Bank Securities economist Peter Hooper predicted economic growth in the second half of this year to rise to 4 percent, versus 1.9 percent in the first half.
Many travel managers and analysts agreed that overall business demand will pick up, barring unforeseen circumstances, but low-cost carriers may be the primary beneficiaries, prompting a further revamp of corporate sales strategies at the major network carriers.
Aside from determining which airlines would make the best partners for next year, travel and procurement managers also must assess specific corporate financial performance, internal travel policy compliance and negotiating leverage dependent on market conditions, volume and travel purchasing patterns. Then, of course, there are airfare projections.
Moving into 2004, airline pricing is wildly unpredictable. Some travel buyers and industry experts insist fares must increase, citing tighter capacity control and an acute need by struggling carriers to generate revenue. For the airlines, certain numbers already are moving in the right direction. Domestic passenger yield, measured as fare per mile excluding taxes, rose 2.3 percent in July, according to the Air Transport Association, representing the fourth consecutive monthly improvement and the first positive growth this year. Furthermore, revenue per available seat mile in July rose more than 10 percent, according to Deutsche Bank. Full industry numbers for August were not available at press time, but Continental Airlines estimated August RASM increased 4 percent to 5 percent, and US Airways estimated a 6 percent to 7 percent increase.
Looking ahead into 2004, Deutsche Bank predicted RASM and passenger yield growth each in excess of 4 percent, which would be the best annual industrywide performance for both measurements since 2000. "A slow, yet steady recovery in air travel/pricing is underway. We are encouraged by recent discussions with the airlines that points to signs of increased future corporate sales activity," said the firm's airline analyst Susan Donofrio in a recent research note. "As such, we expect to see airline revenues continue to strengthen."
"Our average ticket price is down this year, but that simply can't last," noted a CT 100 travel manager.
Runzheimer International, in its business travel cost forecast this summer, predicted a 10 percent increase in corporate air travel expenses for 2004, despite "highly competitive pricing in some markets." The consultancy cited stronger demand and an inability by stressed network carriers to engage in price wars. Anticipating difficult negotiations as major carriers offer less in the way of discounts, Runzheimer suggested travel managers "concentrate on city pair negotiations and bypass systemwide initiatives."
Of the 20 companies that responded to an Eclipse Advisors client survey, 11 predicted their air spend would rise next year, with most of those companies citing corporate growth and potentially higher ticket prices.
Of 27 account managers recently polled by WorldTravel BTI—each representing corporations with an air spend of at least $3 million—60 percent said clients anticipate increased airfares. The most cited reasons included rising fuel costs and the current financial state of many airlines.
According to the survey, however, only 22 percent said clients are budgeting for greater air spend in 2004. The vast majority—70 percent—said clients expect spend to remain flat, primarily a function of cautious budgeting, which includes greater use or consideration of low-fare carriers and policy mandates. A separate WorldTravel survey, recently completed directly by 112 clients, found cost (46 percent) is more important than schedule (40 percent) in selecting a domestic carrier.
Several other travel managers contacted by BTN anticipated flat air spends in 2004, despite potential airfare increases, accomplished through a commensurate cut in travel or offset by improved contract performance with preferred carriers. Improved decision support and contract monitoring tools in use at network carriers, however, likely will drive down discount levels for many companies, potentially increasing corporate air costs, depending on pricing movement.
"Airlines have learned how to manage corporate relationships and contracts in a down environment by adding technology and expertise," said Larry Restiano, director of the customer value program and consulting group for American Express supplier relations. "They are not going to relinquish what they learned when the market improves. If you are a buyer, it is more important than ever to shift share to preferred suppliers."
Meanwhile, some industry observers predicted airfares would fall for another year. "The low-cost carriers clearly are in the driver's seat. Maybe they will raise fares in certain markets, but their overall growth will drop fares in many other markets and more than offset isolated fare increases," suggested airfare expert Terry Trippler of Trippler & Associates. "As such, majors will have to put more fares into low-fare buckets. It is getting to the point where the only discounts left for corporate travel managers to negotiate are on international first and business class and maybe domestic full Y."
"Network carriers may choose to rescind certain discount fares as business travelers gradually open their wallets," said J.P. Morgan analyst Jamie Baker in a recent research note, but "to the extent that business travelers do return, it will likely be a volume-, not price-, driven recovery. Recovery rates are likely to be muted by continued proliferation of the $299 one-way cap."
Such fare ceilings, established by the likes of AirTran, JetBlue and Southwest, grudgingly have been matched by the major network carriers in head-to-head markets. Depending on travel patterns, that fact alone could help corporate buyers lower annual air spend. On a systemwide and year-over-year basis, business fare levels have been dropping all summer, while leisure fares have been on the rise, according to Deutsche Bank's analysis of Harrell Associates fare data.
A procurement manager at a midmarket company expects incremental traffic increases throughout Corporate America next year as the economy slowly improves but said determining the average ticket price for his own firm's program at this juncture is pure guesswork. "The airlines have taken away discounts on lower-bucket fares, but I do not see prices going up dramatically," he said. "The airlines will have to be very cautious in trying to push through any fare hikes."
Added Amex's Restiano: "It really is hard to put a number on it. In order for airlines to get back to profitability, they will have to find the Holy Grail—fares at a level where it is profitable for them and where customers are willing to pay."
Meanwhile, new restrictions established last year on nonrefundable tickets that had generated upward pressure on some corporate airfare budgeting
(BTN, Sept. 23, 2002) now have been reversed by each Big Six carrier. On the other hand, the suspension of security fees paid by airlines to the federal government is scheduled to expire at the end of this month. When the suspension went into effect in June, as part of the Emergency Wartime Supplemental Appropriations Act, carriers raised published prices by an equivalent amount—$10 roundtrip. That meant essentially no change for passengers but additional revenue for carriers. Assuming the government does not extend the suspension, carriers either will be forced to absorb the reinstated costs or again attempt a fare hike to offset them.