<B> Cos. Land Quint Nets</B>
<I>Bulk Buying And Direct Settlement</I>
By Jay Campbell
While hundreds of companies worldwide are working with airline partners to reduce distribution costs through net deals, until recently none had managed to cut out virtually all traditional distribution costs.
Now, it seems several companies have negotiated airline deals not only net of commissions and overrides, but of credit card, CRS and ARC settlement costs as well--a quintuple net.
According to Richard Eastman, president of The Eastman Group of Newport Beach, Calif., for example, one travel buyer is saving more than $80,000 a month through a bulk buying/direct settlement agreement with an airline. Citing nondisclosure agreements, Eastman declined to name either the client or the airline.
Eastman did say, though, that the customer has committed to buy 600 seats a month from one carrier on one of the nation's busiest city pairs--half of them in bulk each month. The remaining half are paid for as the travelers fly them (<I>BTN</I>, June 15).
The seats in the bulk deal are limited only in that they cannot be flown on Monday morning or Friday afternoon. The agreement, which rolls over about every three months to allow for adjustments, is saving the company about $100 per ticket. In return for the deep discounts, the company has moved the vast majority of its share in the market, which previously was spread across four airlines, to the single preferred carrier.
The seats are paid for through electonic funds transfer using the company's existing EDIFACT (Electronic Data Interchange For Administration, Commerce and Transport) technology and Eastman's AutoLink software, which the company--not the airline--bought.
The airline benefited because it more than doubled the number of seats it was getting from the client, moving those off its competitors in the fiercely contested California corridor. It also benefited from a reduction in distribution costs, which amounted to 17 percent of single segment revenue for the client in question (not including ARC costs).
One third of that 17 percent, or roughly 6 percent of the average fare, was saved by avoiding agency commissions.
"Direct settlement will become increasingly more prevalent," according to Eastman. "It is less costly for airlines and for corporations. Corporations are beginning to take risk via direct pre-purchased seat agreements with airlines, some even holding their own seat inventory in local databases."
He said the companies leading the way tend to be mega corporations that have information systems capable of understanding where to take risk--and where not to. Eastman predicted that smaller companies, unable to guarantee huge volumes on their own, "will band together and hire a company to consolidate or manage their collective buying needs," much as American Express is doing with Continental Airlines (<I>BTN</I>, June 15).
Other industry sources agreed that this is one way the largest of corporate buyers are planning to go.
"This is the wave of the future," said Rolfe Shellenberger, senior consultant with Runzheimer International in Palm Desert, Calif. "In a way business travel will be almost totally consolidator, but with more flexibility. For the airlines, this reduces their costs and assures profitability way ahead of departure."
"Considering the number of companies out there, I would say that only a small percentage can benefit from direct settlement," said David Hillman, a consultant with Deloitte & Touche Consulting Group in Parsippany, N.J. "But I'd say a portion of the simple point-to-point tickets would be conducive to direct settlement and bulk buys. In those cases, you could strip away as much of the costs as possible, even down to costs for marketing frequent flyer miles.
"It's only a small number of companies now, but it will increase," Hillman added. "These days everything's fair game out there--it's closer to a real marketplace."
Carol Salcito, president of Management Alternatives in Stamford, Conn., praised the airlines for the increasingly open reception they have been giving to buyers' creative ideas.
"This is superb," she said. "I've seen a few airlines offer it, but very few corporations taking advantage of it. Getting support for a bulk purchase--or anything that is a little new or unique--is no easy task within a company."
Several buyers at large companies told BTN that even though they are not working on direct settlement now, they'd love for the airlines to bring it to them.
"I suspect a number of airlines are working on similar things," said Steve Cossette, Continental's staff vice president of distribution planning, noting that he will be testing a bypass of ARC and the CRSs with a number of travel agencies this summer (<I>BTN</I>, May 4).
"You can't do a whole lot of deals like this, because you want to have a standardized system for settlement. But if you keep it pretty clean, we think these kinds of programs can be very successful. We have a list of corporations anxious to talk to us," Cossette said.
While he didn't know which carrier was involved in the California deal, Cossette said that United Airlines, which along with Southwest has the biggest West Coast market share, is doing direct electronic ticketing using a feature of Apollo. United's distribution department did not return calls last week.
The travel buyer involved in the California deal did see some drawbacks to moving from four airlines to one, though. Travelers weren't happy that they could no longer earn miles on whatever carrier they chose, that they now had to drive to more distant airports and that they sometimes had to agree to less convenient departure or arrival times. Ground transportation costs increased and some frequent flyer costs were incurred.
Nonetheless the company is enjoying vast savings, not only from the negotiated discount, but also from reduced internal paper processing, better cash flow and reduced labor and management costs.
The company wants to enlarge the program, but internal politics and a shuffling of the airline's management are getting in the way.
"The politics of change have this one wrapped up," Eastman said. "But this company is looking to entirely remove paper in the travel booking process."
In 1993, insiders noted, Salt Lake City-based Morris Air had an arrangement with a corporation that guaranteed to purchase half of Morris Air's seats between Tuscon and Southern California, and paid for them through nightly electronic funds transfers based on daily lift reports. But the arrangement died when Southwest Airlines bought Morris Air later that year.
Elsewhere, two Japanese automakers have implemented a direct settlement deal with a U.S. airline for travel here. BTN contacted Mitsubishi and Toyota, both of which said they are not involved in such an arrangement. But Lufthansa and Siemens have acknowledged a direct plan in Germany (<I>BTN</I>, June 15).
One interesting and little-known concern airline investors in the Airlines Reporting Corp. and computer reservations systems might have with direct settlement is that they are contractually bound to use--and not bypass--those entities, according to Eastman. However, owner airlines are pursuing direct relationships anyway, he said, in order to remain competitive with airlines that do not own a CRS, or own only a small piece, like Continental.