Continental Airlines is taking the next step in ongoing corporate pricing reform in the airline industry by aligning negotiated discounts with actual published domestic and international prices rather than basing contract terms on airfare classifications.
The carrier's strategy eliminates much of the complexity associated with varying corporate discount eligibility and affects all Continental contracts. Meanwhile, Northwest Airlines also is in the process of amending corporate contracts with lower discount levels but at press time, many still were waiting for news from American Airlines. Though the world's largest carrier was first to broadly match Delta Air Lines' fare reform last month, American has been vague regarding potential adjustments to corporate contracts.
Indeed, buyers expect there will be a period of fluidity until preferred suppliers decide specifically where and how to match competitors' pricing and settle on definable strategies. "No one carrier will decide the fare structure in the U.S. market," said American CEO Gerard Arpey.
The impact of fare reform on an individual company's air program is dependent not only on which preferred carriers it uses most, but also on the types of fares it normally buys. Some sources, for example, suggested corporate clients that use a higher mix of lower-fare buckets actually could see average fares paid marginally increase. Many early analyses also have shown either corporate savings or negligible net changes.
Continental's corporate clients will receive three types of discounts. Existing domestic discounts apply to fares over $599 one-way, while 2-percent net-net rate discounts remain valid on published fares below $299 one-way. For all published fares in between, accounts will receive "new, lower levels of discount appropriately based on current economics," said Monisa Cline, Continental managing director of sales, North America. "In the previous structure, we could make changes or reclassify fares and the customer would have no control over that. In the new structure, anyone can understand these discounts, from the individual traveler to the CFO."
The same concept applies to all international flights, though at different published fare levels than those in the domestic market. "This structure will expand the number of fares that receive discounts, resulting in a higher net effective discount on international routes for the vast majority of customers," Continental said in a letter last week to corporate clients.
In all markets, the new structure applies only to Continental-operated flights, though Cline said the next step is to expand the new format to joint contracts with alliance partners.
Continental still will negotiate flat fares and other unpublished corporate pricing programs on an account-by-account basis. It also will maintain its Corporate Insight decision-support program and continue managing accounts based on volume targets and other factors.
Clients can opt out of the new program on international routes and maintain existing contractual terms but do not have that choice for domestic flying. Continental's letter to accounts said, "We do not take our termination of your current Continental corporate discount agreement lightly but we have little choice based on today's economics."
Meanwhile, Northwest currently is sending out amendments to contracted accounts detailing downward adjustments to discounts "commensurate with airfares going down," said Fay Beauchine, Northwest vice president of sales and customer care. "We took the amendment approach rather than cancelling every existing contract because we want to wait for the industry to settle down a little bit."
American has not yet detailed any plans for changing corporate pricing, but the intention is for it to be a wash for accounts. "We are not trying to claw anything back from corporate clients," Arpey said, during a conference call last month with analysts. "We are trying to come out neutral and have them come out where they started." He cited recent success in south Florida following a localized pricing redesign in November
(BTNonline, Nov. 18, 2004).United Airlines also is working to offer corporate and agency accounts new programs in the first half of this year (see story, page 3). "Because of the increased focus on discount, discount, discount, the industry as a whole has lost sight of trying to understand that not all agencies are the same, not all corporations are the same," said Graham Atkinson, United senior vice president of worldwide sales and alliances. "There is not much doubt that there is and there is going to be a need and desire to have preferential relationships based around loyalty and volume commitments. And the preferential offering does not necessarily have to be price. It can be a number of other benefits a customer gets by virtue of driving business to a supplier."
United had altered fare rules and reduced business fares in many markets, following Delta, and is using fare basis codes including 'X' and 'NX' to indicate new pricing, according to a recent WorldTravel BTI industry update.
Delta's corporate contract changes, though different for each account, thus far have been the most well-communicated to the market. In most cases, the new fares—identified with a 'BV' designator
(BTN, Jan. 17)—either include reduced discounts or none at all for corporate clients.
"The results we are seeing generally are a little less favorable for the corporate customer if you start comparing the old fares and the old levels of discount versus the new fares and some of the early trends we're seeing in terms of how they're discounting the new fares," said Nick Vournakis, director of air solutions in North America for Carlson Wagonlit Travel. "In general, it's not a very big impact. In fact, it's much less significant than the carriers' moves two years ago to reduce and eliminate discounts on the lower fare buckets."
CWT's Vournakis said some of Delta's previous fares still may be available and it may take time "to see what they're going to eliminate completely and how they're going to rebalance their yield management systems and remap old fares to new fares."
The key factor in determining the impact of networked corporate deals "is the mix of fares you have been buying in the past," said Tom Barrett, American Standard Companies global strategic sourcing director. "I am not sure our average fare would be reduced. Each company has to determine if it will be enough to hold share or if it will be back to managing frequent flyer allegiances."
"Essentially, what you have now is a leisure traveler who is booking two trips a year, receiving pretty much the same ticket price as someone in a corporation with millions of dollars in annual spend," added Richard Wooten, director of corporate travel services for Lockheed Martin. "If we determine that the domestic marketplace is pretty much equal, then why are we going through all this effort to continue to manage it? Maybe one of the things we need to consider looking at is un-managing it."
Wooten said the fare restructuring came at a critical time as Lockheed Martin is in the midst of negotiating the company's airline deals, which "are all concurrent and they all expire in April."
To help assess the impact of the fare changes, Wooten hired Travel Analytics to cross-check historic purchases and average segment prices with current U.S. published fare prices.
"In the press reports, the airlines were claiming as much as 40 percent reduction in airfares," he said. "What we found through the Travel Analytics analysis—at least for Lockheed Martin—is that we're still in the single digits and did not see all that much impact. I talked that over with Travel Analytics and one of the things that we believe is that we have a strongly managed travel program, a strong travel policy and we encourage our travelers to book pretty far in advance. We understand some of those last minute trips do occur; however, on the whole, I don't believe our travelers were purchasing all that many pricey, last-minute fares and it appears that most of those big discounts or lower prices came from those last-minute fares."
"Generally, what we're finding is that the Delta fares are going to result in cost reductions, the extent to which varies substantially from company to company," Travel Analytics CEO Scott Gillespie said. "The things that really seem to swing the needle are the booking classes that the company has been booking in, how we project the company to buy going forward, and the discounts that they had in 2004 on each of the airlines."
As Wooten's airline deals near expiration, "I don't expect a huge percentage discount on the lowest fares," he said, "but there's value to the airlines to give us pricing that recognizes the volumes that we're able to move to them."
Though many buyers will keep options open, and most observers expect airlines to maintain fewer negotiated contracts—especially for underperforming accounts—the prevailing wisdom is that carriers can ill afford to alienate their best customers. Some travel managers anticipated their preferred carriers simply would eliminate more fare types from corporate programs, but maintain fixed fares, net-net fares, attractive international discounts and other contracting complexities.
Continental evidently settled on a middle ground that simplifies contracts but recognizes the value of preferred agreements. "Corporations and high-yield travelers still are a top priority for us," Cline said.
As sales managers and their clients work on new mechanics of corporate contracts, airline executives are banking on traffic stimulation and share recovery from low-cost carriers.
"Some of the stimulation is, in some sense, permanent," said AMR's Arpey. "There are lots of travel departments at lots of companies that had put restraints on travel because of high walk-up fares. We think there now will be higher levels of business traffic throughout this year and next year."
American said it has reclaimed market share from low-cost carriers in Miami and between Dallas Fort Worth and airports in the Los Angeles basin, following earlier pricing changes in those markets. Delta reported similarly encouraging signs in Cincinnati after debuting the new fare structure in that market last summer
(BTN, Sept. 6, 2004). Meanwhile, January unit revenue growth estimates by Continental last week came in near 4 percent. "While still too early to draw long-term revenue conclusions, the initial reality of fare reform appears better than feared," said J.P. Morgan Securities analyst Jamie Baker.
~Jay Boehmer contributed to this report