Airlines, struggling through a prolonged downturn, and corporate travel buyers—tasked with cost-cutting mandates even as business travel volumes decline—are taking a fresh look at such unconventional contracting models as tiered discount programs, shared-risk arrangements and reverse auctions.
Though such ideas today are not necessarily attractive to both sides, they will gain more traction "when the dust settles and the cycle changes," according to Larry Restiano, director of the customer value program and consulting group for American Express supplier relations. "For customers with the right travel policy and an ability to drive share, and for airlines looking for more share than the marketplace might dictate, there are possibilities."
Tiered discounting programs, while conceptually not new, recently have gained more support, specifically from American Airlines and some of its corporate accounts. Delta Air Lines and US Airways also said they have been using tiered programs. Under a tiered scenario, an airline's corporate client agrees to deliver a certain volume or marketshare in exchange for a point-of-sale discount, similar to traditional corporate discount programs. That percentage discount level then adjusts along a pre-set schedule, usually quarterly, depending on how far above or below the account performs against the baseline goal.
"It is probably the quickest fix today," suggested Michael Lynch, managing partner of airline procurement services for Eclipse Advisors, a Rosenbluth International technology unit. "It is a better way for buyers to get more of a discount if they can move the needle further."
American has engaged corporate accounts with tiered programs for at least a year, according to travel manager and agency sources. "I feel like my clients work harder to meet their goals," said Christy Prescott, president of San Antonio, Texas-based Corporate Travel Planners. "That means it is in the airlines' best interest, but I have not seen anyone else beyond American offer this type of program."
One travel manager, whose company moved to a tiered program with AA, said the model was emphasized last year as carriers were eliminating corporate discounts on lower-bucket fares
(BTN, June 26, 2002). "AA at least gave us an opportunity to get something back," the travel manager said.
"It gets down to actual performance as opposed to promised performance," said Scott Slater, Delta general manager of corporate programs. He added that such a model may be more advantageous than front-end/back-end combination deals in which agents at the point of sale do not see the effects of back-end payments. AA would not comment on existing contracts.
US Airways for several years also has had in place a tiered program, dubbed Comparative Corporate Performance Factor
(BTN, Sept. 4, 2000). The program takes into account US Airways' quality of service index in relevant markets, an account's historical profile from a combined passenger share and total revenue perspective and forward-looking expectations. "The higher you perform, the more you're awarded," said Paul Leyh, the carrier's director of global programs. "We review performance on a monthly basis and adjust discount levels on a quarterly basis." To accomplish that reconciliation, an airline must have robust and timely account performance data. They also must have the ability to routinely file new, client-specific discount levels. Increasingly popular fare-filing functions available through the Airline Tariff Publishing Company facilitate that process
(BTN, May 12).On the other side of the equation, and in light of changing airline service levels precipitated by two years of industry upheaval, some buyers are seeking adaptable models that calibrate their commitments to changing QSI figures.
If an airline requests a share premium 10 percent over its QSI in a given market, for example, that request can be fulfilled by a client at a lower share than initially determined when the QSI shrinks. "Those considerations do come into play for those that take a vested interest in changing the terms, and we recently have seen some of those changes," said Amex's Restiano, "but other customers prefer to just let it go and airlines are not real interested in changing a contract once they have been set."
AuctionsAirlines also have been generally disinterested in reverse auctions, an emerging e-procurement model used for various types of purchasing. Though it can generate cost savings on specific city pairs for some companies, reverse airline auctions thus far have presented too many challenges to garner wide support. Several carriers recently told BTN they want no part, despite contrary claims by reverse auction facilitators. That is a fundamental problem for buyers who need enough participating players for the process to work. Carrier hesitancy stems from a desire to have meaningful, one-to-one relationships—a principle that similarly has squelched most attempts at consortium buying—to an inability to quickly adapt yield management processes to spot bidding. Airlines, like suppliers in many other industries, also do not want to further commoditize their product.
"A reverse auction by city pair decouples strength markets from opportunity markets and we lose our leverage," Slater said. Nevertheless, Eclipse, for one, is optimistic. "It can be pretty lucrative for particular markets, especially international, which were among the hottest when we launched MyTravelBid," said Alison Galik, Eclipse managing partner and an architect of the MyTravelBid bidding platform. MyTravelBid thus far only has been licensed to Rosenbluth for its Rosenbluth Exchange platform
(BTN, June 24, 2002).FreeMarkets, a global supply management company, said buyer interest in reverse airline auctions is accelerating and that many airlines participate, though the company would not divulge specific carriers or even a ballpark number of participants. "There is good reason why airlines do not appreciate this: In face-to-face negotiations, they come out ahead, and buyers are trying to change that," said David Clevenger, FreeMarkets market development manager. "But if a piece of business is truly attractive, suppliers will participate, no matter the format."
Clevenger stressed that auctions never will replace traditional negotiations and acknowledged difficulties in making inroads with "a small, tightly knit supplier base within the hub structure."
Both FreeMarkets and Eclipse, however, noted their technologies can handle more than simple, price-only bids—they also can encompass other service and relationship terms—and that reverse auctions minimize, if not completely eliminate, the traditional lengthy and frustrating RFP cycle.
Some travel managers, like the airlines, have reservations. Honeywell, for example, has explored air auctions for specific city pairs, but has not yet decided to follow through, according to outgoing global travel director Jim Lee. "The challenge is what to do about the balance of the program in terms of achieving discounts if you are taking out a big chunk," he explained. "It is a line that you have to walk very carefully."
Shared RiskYet another contract type—shared-risk agreements which hold clients financially liable for meeting commitments—also have not been used extensively, but continue to be of interest to airlines. Dissension, of course, comes from buyers unwilling to risk corporate funds on something as variable and volatile as airline contracting.
Airlines, routinely dealing with accounts that cannot meet goals and a challenging environment that demands risk-avoidance, obviously favor the concept, which can be tweaked to include letters of credit from corporate clients.
"It is certainly something we would like to see happen," said US Airways' Leyh. "It may become more apparent as the trends start to change and procurement is used more in travel programs." US Airways, like other airlines, would not specifically comment on shared-risk clauses involved in any current corporate contracts.
British Airways in the past few years has used shared-risk programs including clawback clauses, but has since backed off that strategy. "It served its purpose at the time, but it wound up being not nearly as valuable as we thought," said Woody Harford, BA vice president of North America field sales. "There was a lot of incremental work in tracking and managing those programs."
Certainly, there are many other innovative ideas floating around. British Airways, for example, recently has had one-off conversations with large accounts looking for the absolute lowest costs. "Maybe we'll look at a contract without account management," Harford ventured. "Might the account be willing to purchase without that interaction, other than a hello once or twice a year?"
Another emerging trend, after years of promise, may be alliance contracts as carriers expand partnerships
(see story).