Buyers Assess Fare Reform Consequences

BTN editors last month asked travel buyers about the impact of recent changes to corporate airfare structures and preferred carrier agreements. Roundtable participants were Tom Barrett, global strategic sourcing director for supply chain/material management for Piscataway, N.J.-based American Standard Cos.; Cynthia Gillen, director of procurement and travel management for BDO Seidman LLP in Chicago; Chris Staal, vice president of global sourcing strategies for Stamford, Conn.-based Thomson Corp.; and Doug Weeks, senior manager of global travel for Booz Allen Hamilton in McLean, Va.

Tom Barrett: Every airline is taking a different approach and we are watching the data very carefully. The first set of data to come out has shown some very positive and dramatic reductions across our major agreements, including, in one case, dramatic domestic cost per mile reductions. If we combine that with reduced fees for changes, etc., our people should see some interesting lower costs on average across our entire portfolio of companies.

Cynthia Gillen: Many of our key citypairs are ones where there is very fierce competition, both from legacy carriers and low-cost carriers. We have seen reductions in average ticket prices for six years in a row. Last year came in close to 10 percent and now with these new changes, we definitely will see a decrease, but I am concerned about the consistency of that decrease because the reductions we have had for the past six years have been from effective management of travel programs. The reduction we have been seeing in the past two months is the result of a yield-management decision beyond our control. We are grateful and appreciative, and I predict a great year for cost control, but it is too early to see what will happen in the long run. I want see where the chips fall, and then I will take action to rework agreements and make policy changes that will make savings something we can own and manage.

Doug Weeks: If you just take what the carriers have said about bottom-line savings, there are a lot of assumptions made on what was going to happen to the fare buckets you already were purchasing. When we ran the analytics on real data after these changes occurred for January and February, the savings were not as great as the airlines had said. It is going to have to be something we all continue to measure. The real fear I have is that we have taken a lesser discount on these lower fares and we are going to see a rate creep. All of a sudden, fares will be where they had been in the past and we will have less to show for it. Also, the applicability of secondary or tertiary deals will be less and less valuable. Why go through the headaches of managing that contract? Let's just push volume to a primary, and maybe one secondary, and simplify. Another thing is that there will be increased reliance on international discounts and soft-dollar items such as waiving fees to continue to try to add value.

Business Travel News: We understand the travel management team at Thomson had conducted a global request for proposals just as carriers enacted corporate contract adjustments. How timely.

Chris Staal: We were fortunate to have real current data on our program from around the world when all this happened. It showed that it was not quite as uniform as the carriers projected it to be. They would tell you that you are saving some big number, but there are some markets where that is not the case.

BTN: In general, if it no longer is all about the discount, what is driving the value of preferred airline agreements?

Gillen: The true savings will come from how we manage our programs. Travel management savings will come more from providing efficiencies through operations than from that discount that used to show instantly whenever you loaded a contract into a global distribution system.

Barrett: It is now going to get back to service, back to size of the equipment and back to the other things that will draw travelers. Are you really going to discipline people for $35? After you have had a managed program for a number of years, you have to ask what you are really looking at. You go back to your carriers and say, 'Let me look at the on-time performance in this market, let me see your completion factors in various other markets, let's understand why your reputation in the market is souring our travelers.' You have to find different avenues to develop the value proposition.

Gillen: The airlines are very open to soft-dollar advantages and whatever else makes your program easier to manage. Their solutions are not necessarily good ones yet, but we can all get there if we all work at it. My concern is that as airlines try to move corporate spend back up into the profitable market, how are we going to adjust our travel patterns to accommodate that, and is it worth the administrative work for us to adjust?

BTN: Are there other ways airlines can differentiate themselves in a price-neutral environment?

Barrett: Post-9/11, was all the customer service training put into place to allow an airline to differentiate itself? Are the crews not as peppy? Is high-level customer service not being enforced? Airlines that kept that in place a little bit now have that differentiation versus those that cut it out altogether. At least they are at the higher end of the low respectability of service.

Weeks: Right. It does not have to be about airline X having all leather seats. If you ask travelers what they really want from hotels, they'll say clean, safe rooms, and that is what we all expect from the airlines. We want to get there on time in an environment where we can be productive with good customer service interactions, without being hassled. The rest will take care of itself.

Staal: The value literally comes from the business relationship. How much do they understand the business you are in? How much do you understand their capabilities, their programs and their decisions? That kind of communication is key and is taken for granted. The customer experience is the other prong and airlines have to look at both. If they can offer a great customer experience but have a deficit in managing the business relationship, they won't get the other.

Gillen: The difficult issue we face as travel purchasers is, are we willing to pay more for services? We have a group of standard full-service airlines who are not differentiating themselves. If one stepped forward and did offer differentiation along with a price increase, would we do it? In the past few years we haven't, even as a few carriers made major efforts to differentiate. American's extra legroom in coach is one example, and they pulled it in many markets before we really even had a chance to find out if we would pay for it.

Weeks: Let me ask a question. With the fare domestically being $499 one-way, coast-to-coast in coach, versus $599 in first, and an awful lot of our travelers being frequent flyers who count on upgrades which now are more difficult to get because of the smaller differential in price, we are thinking about policy issues in which maybe they can buy first class if it's only $100 difference. Are you guys looking at that?

Staal: You have to be careful. It is not the price, but the message you are sending. It is always harder to take something away once you give it and then you start rationalizing.

BTN: Given all the recent changes, how do you budget for next year?

Staal: When looking at T&E, if you can't reduce it, at worst case you keep it flat. Early indications are showing we might be able to reduce it if some of these fares actually have legs that are not too short. Otherwise we are rolling the dice and trying to keep it flat. I would not have said this a few years ago, but that is why you need third-party expertise to mine the data, dissect some of these routes and understand the yield management that is happening.

Weeks: Budgeting is difficult any year, without this current situation, but there are metrics that we can look at in terms of our firm's revenue versus travel spend. We have to keep our eyes on those things.

Gillen: Changes we see this quarter will net us some savings, but maintaining those savings or growing them will come from policy adaptations. You have to be very careful about when you bring policies into play. We are doing a great number of what-ifs with all different internal departments to see how we can change policies to take advantage of the circumstances.

Barrett: There will be the same cost-drivers, from a corporate standpoint. No CEO is asking any of us to raise T&E spend in 2006. If anything, it should remain flat. But it's about taking costs out, so how do the airlines create a value proposition for its best corporate clients? There are still companies that drive preferred carrier agreements, get the management support behind those agreements and directionally spend. Low fare rules, but there are other things to put on top of that, like global traveler tracking through the travel management company. The value proposition has to be knitted together. What the airlines can do for me is greater flexibility, whether it is meeting fares, change fees or not penalizing us for people who leave the company while holding a nonrefundable fare, etc. Some carriers are much more flexible than others. And for us, it has to come back to the same management philosophies we have always had. Plan your trips in advance because you may now fall into different fare buckets that are not as deeply discounted as they were previously and we have to continue monitoring exceptions. We also have different types of metrics: how many trips were internal, how many were customer, how many were for training, relocations, etc.

BTN: As far as travel volume goes, it's all about managing end-to-end trip costs, correct?

Gillen: That is the direction that travel management is moving toward.

Staal: Let's remember that we are talking about airlines here, but overall our focus has to be to mitigate the incremental cost of travel because hotels and cars are going up. This is one piece. Granted, it is the biggest, but it is just one piece.

Weeks: We have two goals in our travel program. Save money and provide service: a cost-effective, easy means for travelers to book travel, get on and off the road and file expense reports.