Buyers: Air Conditions Unclear

BTN editors recently discussed the state of airline negotiating with travel managers Gabriel Eshaghian, PricewaterhouseCoopers manager of airline and car rental programs; Caro Cook, senior transportation officer at the International Monetary Fund; and Ralph Davis, manager of travel for North America at H.J. Heinz.

BTN: Gabriel, in the past you said you'd rather work with more airline partners than less to make sure your bases are covered. Can you expand on that strategy, particularly as it relates to the current environment in which carriers are paring down schedules?

Gabriel Eshaghian: I've always said I'd rather have as many partners that make sense for our program. That means having more for us because we have more volume than most travel programs, and we have the need for some overlap in our network of our preferred airlines. The fact that networks actually are contracting is going to make it difficult to keep so many players in the program.

Caro Cook: We're all watching the schedules to see what happens. We need to keep a close eye on it in the next few months. For me, it's important to have the choice. We have 80 percent of our people from foreign countries. It isn't always convenient to have a domestic carrier. We like to look at a variety so they don't feel they have to select a carrier they don't want.

BTN: Ralph, being in a hub city, you are in a slightly different boat. I would imagine you have not seen the impact of severely reduced service to your markets.

Ralph Davis: No, not really. We haven't had many problems at all. Our markets for Heinz are Dallas, San Francisco and Los Angeles. They have not really cut back on that. Of course, there are places like Bentonville, Ark., but, generally, because most of our business goes to US Airways, we haven't seen a significant cutback in any of our regular services.

BTN: Which concerns are top of the list in terms of maintaining contractual relationships?

Davis: The top of my list is to get back the favors and waivers. Some never went away, but if you want name changes, you can't get them anymore. If you want credits, you can't get that anymore. Moving forward, that's what I'm shooting for in any agreements we do.

BTN: Would you be willing to give something up to get all that stuff back?

Davis: Yes, if you look at the big picture and what we're losing on worthless tickets. Give us a smaller discount, but give us the chance to change the ticket or put it in someone else's name. It's too early to tell right now how receptive they have been.

Cook: Maintenance is at the top of my list. I'm trying to work with my suppliers in longer-term relationships and more consistent relationships. I'd like to see some more consistent behavior. I know it's a difficult time but one minute an airline is putting in a restriction and two days later they're taking it out. That's not a good thing for the travelers or us. It looks like we're badly managing something.

BTN: On the negotiating side, are we in a buyer's market? How can you make that determination?

Eshaghian: I don't think we're in any market. People are just sitting and waiting to see what happens. I don't think anyone is taking any initiatives to prompt better negotiations or better deals, and I don't think airlines are really going out there at this stage of the game because they don't know what the future is going to hold. They're willing to do it if a buyer is also willing, but they are not as aggressive as they have been in the past.

Davis: I agree with Gabe. I don't think it's a buyer's market. They are not knocking down my door, especially in our hub city, and the other major airlines are just extending for another year the current agreements we have.

Eshaghian: There are changes going on in the different airline salesforces. There are reassignments to accounts and changes in the way they do business. The airlines are so keen in getting their costs down and their sales organizations restructured that they haven't been focused on actually being proactive.

Cook: It depends on where you are. They've probably been a bit more aggressive in our area, but perhaps I expected a bit more. I think it is a strange market, and there is so much change going on within those companies that there has been no chance for them to get out there and be more aggressive. Yet, some are being more aggressive about it, particularly the Europeans.

Eshaghian: Definitely.

Cook: The transatlantic still seems to be a profitable marketplace, unless they overload it. Of course, it depends on where you are based.

Eshaghian: I do believe that, but I believe the transatlantic will always be the prize, especially with advance bookings down so much over last year. If they are going to make any short-term or quick deals, they're going to be on transatlantic. There is way too much capacity vis-à-vis demand, especially for today, given the situation.

BTN: How much capacity needs to be removed?

Eshaghian: It depends on where and what, but it's hard because without capacity you don't have frequency. When you don't have frequency, you don't appeal to the business traveler.

BTN: Switching gears, let's talk about the frustration with city pair goals.

Davis: That has been a thorn in my side. They come at you with an agreement, and they want it all. They say, "Our equipment is better here, and our service is better here." It handcuffs me. You can't just have one carrier. US Airways is a great airline, but they don't go everywhere we go. You need two or three carriers to cover the Atlantic and Pacific. When I go to strike an agreement with the airlines, I don't want city pairs, especially in a hub city. I'll give an overall goal on a share basis, but I can't guarantee the different city pairs. Some of the other carriers are very receptive and others are not.

Eshaghian: It depends what your patterns are. I think everyone would love to see city pair goals eliminated. The reality of the fact is in order for the airlines to measure the value of a program, goals are a lot more useful to them at a city pair level. Yields from revenue per mile are a lot more measurable than an overall share basis, especially if you're running a large program. It gives them a better understanding of what incremental revenue is derived from the program they are working with based on what return on investment is to them.

On the flip side, I like city pair goals. They allow me to leverage on hub markets and maybe transatlantic, transpacific and international points of sale. So, there are two sides of the coin here. It'd be great if they were eliminated completely, but if you really want to maximize the value of your program, that's the best solution.

Cook: They have value, to a certain extent. It depends on how the airline runs its business as to whether it asks for city pairs or whether it asks for revenue- or market-based shares. If it asks for city pairs, it tends to be micro-managed at a very local level.

BTN: Let's talk about the increasing relevance of growth carriers in your programs.

Eshaghian: We are definitely seeing more people who are more apt to use low-cost carriers. One of the reasons is there is now much greater transparency, even though we don't have a lot of utilization of low-fare buckets. Now there is a massive discrepancy in low fares minus what used to be a discount on some of our programs now not being discounted at all and the low-cost carrier fares when they are indeed low cost. I don't necessarily think low-cost carriers are more cost-effective to fly.

Cook: It also is looking at the price of the fare, the taxi fare from the other alternative airport and adding all that into the scenario. That may not, in fact, be as cheap as you think it is. We have to be careful in this industry to not run after fads. We are very fast to chase after things. It's like dogs after cars sometimes. The dog gets there and then doesn't know what he's going to do with the car. Yet, low-cost carriers have a very good role. We need them to keep travel managers on their toes.

BTN: Ralph, it would have helped you out more if lower-cost alternatives had stuck around Pittsburgh.

Davis: Definitely. In our market, a low-cost carrier comes in and US Airways immediately matches the fares. We really don't have any problem with that. If they match the fare, we'll go on US Airways. Of course, the travelers all are US Airways frequent flyers.

Eshaghian: At the end of the day, full frills versus no frill versus some frills, frequent flyer miles drive more than you can imagine.

BTN: So where do you draw the line between wanting to support the low-fare carrier so they keep the major dominant carriers honest and also keeping your travelers happy as long as you're getting the same fare?

Davis: When a low-cost carrier comes in, like America West with three flights a day between Pittsburgh and Phoenix, we support them. It is not a mandate but we encourage our travelers to go on America West. Of course, US Airways is a major player in Pittsburgh, and a major employer, and we're a Pittsburgh company that has to support them. We'd hate to see them leave or go under, but we do encourage other airlines to come in, and we do our share to get people onto their flights. We tried to support AirTran, but they just couldn't take the heat and pulled out.

BTN: Ralph, please talk about the process of auctioning and why it hasn't been able to work.

Davis: We explored the possibility of sourcing our air, but none of the major domestic airlines would participate. If the major player does not participate, no one else will participate.

Cook: I looked at it and dismissed it. We don't just look at discounts. There are all sorts of things that play into our programs, and auctioning did not seem to allow us to bring those pieces out. It might suit the domestic market quite well.

BTN: On the topic of alliances, will the Continental-Delta-Northwest partnership do more harm than good?

Cook: It is really difficult to say. If you look at the strength behind Star Alliance, there really needs to be another alliance with some strength to oppose it and cause competition. My only fear with alliances is if they affect prices. Do they really give the global service that you need? I still don't think we're there today.

Eshaghian: It really depends on what your travel needs are. At the end of the day, when you're looking into hub-to-hub markets or monopolized markets, you actually have the potential to see increased prices, especially when you are in a higher cabin of service. In the back of the plane, when you are looking at making one or two connections, the alliances actually promote better fares in the marketplace for travelers, but we are looking at business fares.

Cook: There are lots of things that have been talked about that keep coming up, but I have not seen the benefits of those things yet.

BTN: Do you have any reason to think you'll see the benefits any time soon?

Cook: No, not really.