<B>Corps. Cutting Air Costs</B>
By David Jonas
Fear of a continuing economic slowdown is prompting many corporations in certain industries to eye business travel cost reductions.
Though several buyers said a softening economy either has not or will not affect their companies' mission-critical travel and air purchasing habits, many others from tech-oriented and manufacturing companies are following the old adage that desperate times call for desperate measures. Once stricter policy compliance has been exhausted, those measures would include policy modifications to curtail or even eliminate premium class bookings, emphasis on lower-fare carriers, reductions in meetings attendance and even travel freezes.
From the airline perspective, demand generally is still strong and there isn't much evidence showing a decline in bookings from their corporate accounts. But some have acknowledged a degree of hesitancy in terms of corporate purchasing.
"We do know of some companies that have travel freezes in place for a set period of time, but it is hard to characterize anything across the whole spectrum of corporate accounts," said Steve Praven, United Airlines' director of strategic accounts and business development. "It is certainly specific by industry."
Meanwhile, Total Travel Management, a Troy, Mich.-based travel management company, is looking at ways to eliminate travel entirely for some of its clients, including Web-, video- and teleconferencing. "After all, our mission statement is 'to help our clients facilitate their business meetings and business communications in the most time-efficient and cost-effective manner,' " said CEO Brent Garback. "The word 'travel' is not used once."
A travel freeze, however, is the most extreme strategy, impossible for most corporations. Instead, senior management and travel managers are targeting cost--not trip--reductions, and premium class is one of the first victims on the chopping block.
"There has been a tremendous amount of activity as a number of corporations at least have taken the first step of analysis," said Carol Salcito, president of Management Alternatives in Stamford, Conn. "And many already have gone from first class to business class, or business to coach. Some have even taken the firm position of going all the way from first class to coach."
Hewlett-Packard, Palo Alto, Calif., late last year handed down a new temporary policy prohibiting business class globally. "It really is the only way to seriously reduce costs and meet the numbers," said Kevin Iwamoto, H-P global air and car supplier manager, adding that no end date has been set for the new policy.
Similarly, Indianapolis-based Thomson Consumer Electronics recently introduced new language into its travel policy encouraging coach class travel to Europe for flights not arriving on the morning of a business day. But a proactive internal effort to cut costs had taken hold even before the policy modification. "Prior to the new language, we had been seeing a 50/50 split between coach and business class to Europe just from recommendations by individual department managers," said Cindy Heston, Thomson manager of worldwide corporate travel.
One airline source added that many companies have looked at downgrading class of service only on certain heavily traveled city pairs where savings can be identified clearly and immediately, citing New York-London as a prime example.
At Delta, general manager of corporate programs Scott Slater said while the carrier has not been told of any new policies at its corporate accounts dictating coach class for transoceanic travel, he has heard of financial incentives for employees downgrading on a voluntary basis. Overall, Slater said, "We have heard of some reductions from our larger corporate accounts but know of no complete freezes at this point."
Domestically, where premium class usage generally is quite low to begin with, travel managers faced with cost reduction mandates must explore other options. From the list of usual suspects, which also includes connecting flights, reliance on upgrades and trip avoidance through increasingly sophisticated video- and Webconferencing, lower-fare carriers are getting plenty of attention.
Indeed, Southwest Airlines is among the industry's strongest financial performers, JetBlue Airways claims to be "built for the recession" and Frontier Airlines is getting calls from corporations that had shown little interest in the past (see story, page 10).
"When we move into these economic downturns, it plays into our model, especially as United Airlines and others are unwilling to bring fare structures down," said Sean Menke, who is Frontier's vice president of planning and revenue management.
A recent report issued by Raymond James & Associates, in conjunction with its conference on growth airlines held last month in New York, backs up that assertion.
"Greater revenue per available seat mile growth in the low-fare sector versus the majors is evidence of increasing price elasticity among business travelers," the report concluded. "The slower economy has caused more businesses to adopt and/or more strictly adhere to travel budgets for their employees. This has resulted, we believe, in a more pronounced shift in business traffic from the higher-fare major carriers to the low-fare airlines." The report further stated that prices offered by lower-fare carriers "maximizes the number of trips that business travelers may take under travel budgets relative to the major airlines."
Many travel managers, particularly those based in a lower-fare carrier's hub, agreed.
"Obviously, it's the cost savings that sell a low-cost airline and we really need Frontier," said Betty Moilanen, worldwide commodity manager of travel and conference services at J.D. Edwards in Denver. "We definitely are experiencing travel reductions, but the major focus is on lowering those costs."
Despite such cost-cutting initiatives underway at many corporations, most major airlines have reported higher year-over-year load factors and no significant drop in bookings by their contracted accounts. And even if they did see a drop in corporate bookings, many carriers need not adjust contract goals as most are based on market share and not revenue targets.
"We have not seen evidence of a slowdown, and we're amazed because layoffs have been so publicized," said June Bennett, Continental Airlines vice president of sales.
Northwest Airlines' new chief executive, Richard Anderson (see story, page 8), speaking earlier this month at the Masters Program in Washington, said, "We see no fall off in demand, even as you see the Federal Reserve talking about a softening economy."
Even at United, where revenue goals are used more often and could be more prone to adjustments related to the economy, Praven said, "We have not yet been down that road with anyone."
But that could change if the economy stays south. In fact, sources indicated that carriers relaxed revenue targets during the recession of 1990-91. Furthermore, a prolonged downturn could spell tougher times at the negotiating table for the airlines.
"When things soften, there will be a lot of pressure to grab as much demand as possible, giving a lot of travel managers the opportunity to negotiate," said travel industry veteran Mike Buckman, now president and CEO of Homestore.com. "It is tough to be an airline in that kind of environment."
But such an environment has not, and perhaps will not, take hold. And in the current climate, only certain industries have been affected.
In his latest Travel Industry Indicators, James Cammisa Jr., said, "Economic slowdown in the final quarter of the year appears to have impacted travel much less than other product and service categories, as travel cutbacks tend to occur more slowly."
Cammisa added that tightening controls established in travel policies usually precedes any travel reductions.
"The second phase would be cutting out trips," he told Business Travel News. "But you won't see that happen to any large degree until after the first quarter is over and companies see where there profits are and how they themselves are performing."
Though he is unconvinced a recession is imminent, Cammisa added that recessionary reductions in business travel would be "more pronounced among heavy industry and manufacturing companies," traditionally in the manufacturing-focused Midwest and this time around also in Silicon Valley.
Therefore, it is not surprising to see the Hewlett-Packards and Thomson Consumer Electronics of the world already searching for cost-saving opportunities, while professional service firms, banking institutions and the like press on with a business-as-usual approach.