Delta Air Lines' decision this month to introduce simpler and lower airfares nationwide has brought long-awaited and fundamental change to airline pricing. With American Airlines on board and most other legacy carriers at least partially matching, the new fare regime—one that more closely resembles those of healthier low-cost carriers—appears here to stay. Many travel buyers last week were assessing the impact to their managed programs, but most anticipated at least marginally lower corporate travel costs and new flexibility for travelers. The reaction from the corporate travel community was that Delta finally acted on years of complaints, triggering system-wide pricing reform demanded by many since the Sept. 11 attacks deepened an industry financial crisis.
The ramifications at press time seemed certain to spread beyond Delta's corporate clientele. Assuming the initiative is matched across the board—undoubtedly with variations, at least in the short term—most domestic negotiated airline programs would be impacted. Relationships between airlines and travel management companies would shift as carriers develop new incentive models. Highly coveted upgrades may be more difficult to obtain as first class published pricing comes within reach of many more travelers. The competitive dynamic throughout the domestic market could be thrown askew as value pricing drives market share shifts and alters the industry's financial mechanics
(see story).Delta's decision lowered business fares, reduced fare types and loosened restrictions, including the elimination of the much-maligned Saturday night stay requirement
(BTNonline, Jan. 5). To bring corporate contracts in line with such changes, negotiated discounts will be reduced and de-emphasized, but not entirely eliminated for many accounts. At press time, many travel buyers expected existing corporate contracts to remain in force as they awaited clarity from preferred suppliers.
"On the surface, it appears we will benefit from Delta's move," said Phil Dunphy, director of global travel for Pfizer. "This could give divisions an opportunity to be more flexible to travel. The industry for years has been talking about price compression and fare rationalization and in one swoop, Delta appears to have done both."
For many of the carrier's corporate clients, new fare categories generally with single-digit discounts will replace more heavily discounted corporate fares based on the traditional fare structure. Delta also said it no longer would offer programs through the Delta Meeting Network
(see story).Beyond the Delta network, however, changes were more difficult to summarize. "We definitely are seeing significant restructuring in the way airlines are responding, in terms of corporate pricing," said Scott Gillespie, CEO of Travel Analytics. "With wholesale adoption, corporate discounts would get very small or lost entirely. If it is mixed bag, there would be a two-tiered discount structure for buyers to struggle with."
Market share leader American Airlines at press time had gone farthest in publicly announcing matching fare reform, but had not clarified its position on corporate programs. Specifically, American eliminated Saturday night stay requirements, reduced fare types on average to eight coach class categories and substantially lowered many business fares. In all, at least 90 percent of the airline's markets were impacted by at least certain elements of the announced changes. This latest move is reminiscent of American's Value Pricing initiative 13 years ago, an effort quickly derailed in part due to its total elimination of corporate discounting.
"Although American has matched pieces of Delta's program, we have yet to understand the full impact to the corporate marketplace, as further negotiationsfor discounts off those new fareshave yet to occur," said WorldTravel BTI in a statement.
Officials at Continental, Northwest, US Airways and United initially confirmed varying competitive matches in Delta markets but offered no official statements on corporate programs.
During Delta's transition, existing contracts will be honored until they expire. New and modified contracts will include smaller discounts based on BV fare types, a new category introduced in August as part of the Cincinnati fare redesign
(BTN, Sept. 6, 2004)."Delta clients previously had signed addenda on the BV fares so, contractually, Delta felt like it was done," said one travel agency executive. "For now, clients can have their cake and eat it too, until Delta closes out traditional fare classes."
Delta vice president of sales and distribution Pam Elledge said the carrier now is working individually with corporate and agency accounts "on several levels" to construct programs based around the new published fare structure. "There are going to be some lanes, such as international lanes and other specific markets, where unpublished pricing programs will be as preferable as SimpliFares," she said, referring to the newly branded fare structure. "On the corporate side, those unpublished programs remain in place."
Agreements covering the Delta Shuttle also remain untouched, as Delta views the shuttle operation as a separate entity apart from the rest of the North American network. In certain markets, notably those featuring AirTran Airways service from Atlanta, Delta already had matched lower pricing and waived certain restrictions.
From a sales perspective, Delta plans to maintain its Corporate Data Solutions group, including use of a data aggregation and decision-support tool furnished by the Prism Group, though much of the complexity traditionally involved in corporate contracting would be minimized. Meanwhile, the airline has revamped its sales organization with an eye on efficiency and meeting the companywide mandate to reduce overhead expenses by 15 percent. "We have our sales team positioned in key locations to call on 97 percent of corporate contracted revenue," Elledge said. "For the other 3 percent, an alternative is our [SkyBonus small business program]."
Delta executives said its new strategy would not impact its domestic alliance with Continental and Northwest, nor the larger SkyTeam alliance, but Delta's SimpliFares do not cover partner-operated flights. Elledge would not comment on implications for joint alliance deals.
Meanwhile, she suggested Delta's corporate clients may benefit from lower travel agency costs. "The complexity of what the agency had to do on behalf of the corporation could, and potentially would, increase the transaction fees that would be charged by that agency," she said. "This approach is so simple and easy to understand versus the previous structure, it should lower the cost to the corporation in working with that agency."
Those companies that opt to shift bookings to Delta's Web site also would see costs reduced; supplier-direct channels generally do not incur transaction fees. Delta anticipates increased corporate traffic on its Web site as it builds new functionality into the booking tool. "There will be companies that want to come to delta.com and those that want to work more closely with their travel management company," Elledge said.
On the travel agency side, Delta's relationships have not yet been modified, though Elledge said there would be changes as a result of revenue reduction. "We have and will continue to call on 98 percent of agency incentivized revenue," she said. "Today, there are no changes to agency incentive programs."
She hinted, however, that a new agency incentive program to be announced in the second quarter would include customized arrangements for agency partners. Though the airline has not finalized its plan, sources said Delta at least has considered shifting from traditional market share and revenue-based override programs to a more simplistic program measuring passenger count and transaction totals.
"It makes sense," said Dan Boehm, president of Boehm Travel, a $20 million Atlanta corporate agency. "Delta wants to put more people on their planes and revenue volume no longer matters."
Sources also suggested agencies may prove to be the only avenue for smaller corporations to obtain favorable pricing from Delta and other carriers that adopt new pricing schemes since modest corporate volumes would be less likely to attract airline attention.
On an industry level, many in the corporate travel industry agree that discounts would remain an important component of preferred agreements, even at dramatically reduced fare levels.
"Airlines have to provide better discounts to corporations with a combination of high volume and strong policy," said Travel Analytics' Gillespie. "It is a fact of corporate life."
He also noted a few interesting tidbits in recent airline proposals to corporate buyers, including specific discount levels tied to day of week. "Yield management is king in this simplified fare environment," he said. "Buyers at many smaller companies may start to see fares inch up without a corresponding increase to discounts."
Many other negotiating points are expected to remain unchanged, or perhaps grow in importance, including corporate discounts tied to international routes, which for the foreseeable future won't be subjected to comprehensive changes seen in the contiguous 48 states.
"There still is an advantage to having a contract and I am glad we have one," said Suzanne Fletcher, Weyerhaeuser director of travel and meetings.
In response to a survey conducted last week by the Association of Corporate Travel Executives, more than half of 152 respondents said the new, simplified fare structure will prompt their companies to renegotiate existing agreement.
"There is no indication that corporate customers will not continue to receive consideration for their business," ACTE said in a statement. "Concern over the impact this program will have on the travel management function has been determined to be premature, considering the broadened scope of responsibilities carried by travel management executives today."
Certainly, many supplier relationships won't change, depending on with whom you are dealing. "We have always been opposed to corporate discounts because all of our fares are discounted versus the industry," said Southwest Airlines CEO Gary Kelly. "For us to match the Delta fares, we'd have to raise ours."
Nevertheless, analysts predicted simplified pricing would start shifting share back to network carriers following years of business travel migration to low-cost carriers. They also predict an increase in price-sensitive business travel.
"In the long run, business travelers will note that trips cost less, and either travel more because they can now afford to or bring other team members along because they can now afford to," said UBS analyst Robert Ashcroft.
Nine of 10 respondents to the ACTE poll said the new fare structure would cause their companies to travel more.
Delta over the years has been a leader in enacting new policies dramatically impacting corporate clients. In 1995, the airline first reduced travel agency commissions, prompting corporate travel programs to begin reworking agency relationships and agencies to continue evolving into multi-faceted travel management companies.
Its latest initiative was praised by many. Ron Sharer, head of corporate support services for Ciba Vision in Duluth, Ga., encapsulated the sentiments of many travel manager peers: "Maybe they finally got the message."