Buyers: Airlines Unyielding

Deemed too rigid and uncompromising by some travel buyers, but accepted as an essential recovery element by others, tougher negotiating stances by some carriers' corporate sales forces promise an extremely challenging buying environment for 2002. Without much wiggle room to improve decimated revenues and passenger yields, airlines are expected to withhold deeper discounts—even for the largest companies—unless demonstrable share shifts are committed.

"It used to be that all someone had to say was, 'Corporate' and the airline pricing people would say, 'Big discount,' " said Fay Beauchine, vice president of sales and customer relations at Northwest Airlines. "But the mood now is rationalizing traffic against price. Corporate travel managers now understand that much more clearly, and even client CEOs understand there is a point at which airlines have to stay in business."

Staying in business in 2002 means adhering to new safety and security standards (see story, page 6), cutting costs in any conceivable way and incrementally increasing traffic.

It also means taking a harder line with corporate clients and refocusing on basic negotiating tactics: taking full advantage of dominant positions in hub markets, leveraging domestic and international deals against one another and canceling underperforming contracts. However, in an industry difficult to generalize, airlines starved for high-yield business passengers may, in certain cases, float more attractive corporate deals, as they have in past industry downturns.

"It is a mixed bag. Some airlines are more entrepreneurial than others and the ones that are flexible and trying to meet customer needs are going to win market share," said Ed Gilligan, group president of American Express Global Corporate Services. "But it may not even be consistent within the same airline."

Corporate buyers, for the most part, understand the predicament that airlines are facing today, but it is not making their jobs any easier, and others are dismayed, and even angered, by the changing tone.

"I am finding the airlines take a more threatening posture with me, which is bad for negotiations," said one travel manager speaking to BTN on the condition of anonymity. "Partnerships used to be more personal and market share commitments came with lots of variables, but it is a lot different now."

Some buyers predicted radical changes in negotiating philosophies within two years as carriers try to maximize corporate revenues. In fact, change already has arrived by way of carriers jettisoning corporate discounts on nonrefundable, lower bucket fares, an initiative formalized by Northwest Airlines and now practiced by several others (BTN, Nov. 12, 2001). Incidentally, Beauchine said Northwest already has seen success from that policy change and that "only a few companies have balked."

But more change is on the horizon. For example, one obvious measure, confirmed by most majors, is to cancel underperforming contracts more readily than in the past. Buyers, therefore, may opt to contract with fewer preferreds in order to meet stricter market share requirements.

"Airlines, now more than ever, are holding you accountable and they are segmenting their customers more than before simply because they have to," said Kevin Iwamoto, global air and car supplier manager at Hewlett-Packard. "Those companies that do perform will reap the benefits of the best deals. Those that don't will get either moderate deals or no deals. That is the way it always should have been, rather than successful corporate deals subsidizing all the others."

Meanwhile, buyer and seller both will look long and hard to leverage any advantage they might bring to the table. The transatlantic market—traditionally lucrative and competitive—is now that much more meaningful as airlines clamor for every last business passenger. It is not surprising, therefore, to see carriers repeatedly request slots and gates from American Airlines and British Airways at London Heathrow, as those two carriers plead their case for an immunized alliance.

Stateside, buyers—notably those in hub cities—must find opportunities to leverage traffic from more competitive markets. Conceptually, that is nothing new. But even the larger companies, accustomed to throwing their weight around and extracting attractive rates in even the most heavily defended fortress hubs, may be challenged by the reversing trend of lower hub discounts, reportedly whittled down to single digits, in some cases.

To position themselves for improved discounts while protecting against possible contract cancellations, corporate travel departments more than ever must stress traveler compliance and carefully monitor contract performance. "Performance monitoring and ongoing contract maintenance is a critical success factor, bar none," said Steve Shook, vice president of strategic sourcing at Carlson Wagonlit Travel. "There no longer is such a thing as reviewing every six months. Clients need to optimize those programs monthly. "From our perspective, there has been an uptick in business. Clients need help and tell us that what had worked four months ago does not work now."

"This year is going to be an absolute nightmare for corporate travel managers and there will be no let-up, even after deals are signed," concluded one industry consultant. "For the rest of the year, as the airline reps continuously measure and track performance, travel managers will feel like they are being bitten by a thousand little fleas."