Cut Air Costs Despite Hikes

<B> Cut Air Costs Despite Hikes</B>

By David Jonas

Despite forecasted increases in airfares for the year ahead, many industry analysts predict corporations will lower their air costs as a number of strategic developments accelerate into the new century.

Most analysts foresee modest price hikes for 2000, likely less painful than in past years. Terry Trippler, airline expert at Onetravel.com in Brooklyn Center, Minn., is predicting across-the-board fare increases of 1-2 percent. Runzheimer International, Rochester, Wis., said "realized fare gains"should be around 3 percent, while Topaz International in Portland is forecasting a 5-6 percent jump on domestic fares.

However, most industry observers said corporations need not bolster their budgets to handle the anticipated increases, but instead pinpointed numerous factors--low-fare alternatives, the emergence of the Internet, new contract options and others--that will drive actual air expenditures below current levels.

For starters, low-fare carriers continue to expand their networks and provide new choices in more city pairs than in the past. These smaller airlines are not a new phenomenon, but analysts said business travelers finally are beginning to use them. "There has been a gradual acceptance, and at the same time these carriers are beginning to gain equal footing," said Rolfe Shellenberger, senior analyst at Runzheimer. "Why bother fooling around with the big guys if AirTran and Southwest offer a much simpler pricing structure and little differentiation in service?"

However, low-fare carriers can benefit only corporations in the cities they serve. Steve Cossette, the new vice president of U.S. travel supplier relations at American Express, said low-fare carriers still are very localized and "will not have a major impact on the overall marketplace in the coming year."

Some buyers are more optimistic. Lisa Trenda, director of corporate travel services for UnitedHealth Group, based in Minneapolis, said she will try to tie in low-cost airlines with a new automated booking tool. "We are looking closely at how we can include non-CRS suppliers to pull in fares that we know are out there and want to use."

Kevin Iwamoto, global air & car supplier manager for Hewlett-Packard and Agilent Technologies in Palo Alto, Calif., said that low-fare carriers "are an insurance policy" against excessive fare hikes. "That is one reason why airlines like Frontier have seen explosive growth of their corporate client base," he noted.

Meanwhile, Cossette said that the general outlook that air costs will drop slightly is due to the "rapid deployment of net fares" and sees a trend toward a buyer's market in 2000. "Many corporations could decide to go with a conservative budget policy and may see costs dip a little next year," he said.

Indeed, usage of net fares has been mushrooming with many companies reporting a huge shift in that direction during the past 12 months. "Corporations are finding ways to be creative with different fare types," said Valerie Estep, president of Topaz International. "On top of nets, we are seeing more and more companies encourage, if not mandate, more restrictive and penalty fares."

While not yet having the tangible impact of net fares and alternate airlines in the corporate arena, the Internet promises to offer another bargaining chip in the year ahead. "The biggest push at the negotiating table for 2000 will be corporate travel managers asking carriers for more options, such as access to corporate rates through the Internet," said Terry Trippler, airline expert at Onetravel.com in Brooklyn Center, Minn., referring to the Delta-led initiative unveiled this summer (BTN, Aug. 2). "As such resources expand, corporate travelers will pay less."

Still, such resources have yet to come to fruition in the corporate marketplace. "Some airlines have put direct corporate Internet-based bookings on the table as a 'what if' scenario, but so far none have come forward with a definitive plan of execution," Iwamoto said. "But the million dollar question is will the airlines pass their distribution cost savings partially or entirely to their best customers?"

However, with the jury still out on the ability of Internet fares to provide real value to buyers in 2000, travel managers continue to push for point-of-sale discounts. Trippler, citing a recognition on the airlines' part of pressing business travelers as far as they can, also expects the carriers to offer deeper discounts. "In the past, it would have been quite rare to see a corporation in a hub city negotiate even a 4 percent discount up front and five on the back end," he said. "Now, there are cases of hub carriers offering 15 percent on the front end and another 15 percent on the back, and I expect that trend to continue throughout 2000."

Estep agreed. Topaz, which tracks domestic negotiated discounts, reported a Q2 average just above 19 percent, a full three points above Q1 levels. "Even though fares are rising, the average point-of-sale discounts have been consistently increasing, and we have no reason to believe that will change next year," she said.

Trenda expects to maintain air expenditures at current levels, even in the face of higher fares, as a result of good performance in discount programs, which make up 90 percent of UnitedHealth Group's mix. "Consequently, we are receiving stronger point-of-sale discounts," she said. However, despite improved discounting opportunities, some buyers stressed that deeper discounts do not necessarily offset substantial price jumps.

Similar in effect to low-fare carriers, secondary airports--often located farther from most businesses than hubs--can offer an overall better value. "In some corporations, there will be an edict from top management stating that you will take the inconvenience of an alternate airport until the big airlines solve the problem of overpricing," said Shellenberger.

Another cost control, of course, is trip avoidance. "There is much more price sensitivity now, and as a result, I am seeing more reductions in travel expenditures," said Shellenberger, noting that one client has mandated a 25 percent cut in travel costs.

Barry Friedman, travel manager for Canon USA in Dix Hills, N.Y., said each department controls its own spending and some have opted to maintain travel expenses at previous levels. "In those cases, if airfares are on the rise, that simply translates to fewer trips," he said. Canon has seen some relief by negotiating net fare agreements and using Southwest Airlines, which this spring moved into nearby Islip, N.Y.

While new options available to buyers is welcome news, the fact that fares likely will increase is not. As always, fuel prices will play heavily into the equation. "Fuel prices have been moving upward this year," said David Fuscus, spokesperson at the Air Transport Association. "And of course, it is a volatile commodity without any way to tell which direction it will go."

Topaz, which has forecasted hikes on the high end, expects demand to remain strong. "The airlines continue to have high load factors," Estep said. "They still feel they deserve a return for their dollars."

Furthermore, Runzheimer's Forecast of Travel Costs for the Millennium Year 2000, suggested that some of the majors will "look for vulnerable competitors" before the government lowers the bang on competition. However, that same report said "more competition and consequent fare war skirmishes, and continued growth of Southwest" will keep fares in check through 2000.

Several industry observers said capacity also could prevent the airlines from notching large fare jumps. "Overall, capacity growth will roughly equal traffic growth," Cossette said. "But, there may be some pressure on pricing as capacity, at times, moves ahead of traffic."

The general performance of the economy again will affect ticket prices. At least one travel manager said her company is maintaining current budget levels because "we don't expect any spike in fares since the dollar is hurting and very well could take a dive. We're already seeing some of the effects in the hotel industry.