As more business travelers book lower-bucket airfares excluded from corporate discount agreements, travel managers are seeking new ways to validate their preferred airline programs. In some cases, airlines that recognize the pitfalls faced by corporate clients in maintaining share compliance in price-competitive markets are willing to craft creative programs or offer enticements to hold onto the business.
Travel buyers this year likely will press harder for a middle ground as low-cost carrier growth compels major airlines to match low fares in more business markets, while the majors continue to withhold corporate discounts from the lower buckets. Such options include flat fare arrangements, tiered discount programs and negotiated waivers for certain fare restrictions.
Meanwhile, to mollify senior management, some travel managers will continue emphasizing the value of preferred airline relationships that provide corporate customer support, traveler perks like upgrades and airport clubs, and discounts on international and higher-priced domestic fares.
It has been more than two years since Northwest Airlines formally removed corporate discounts from low-end fares
(BTN, Nov. 12, 2001). Since that announcement, most major airlines adopted or expanded similar policies while also promoting competitive, published, nondiscountable airfares versus low-cost carriers.
A recent example was Frontier Airlines' decision last month to cap at $299 nearly all one-way domestic fares from its Denver base, a move promptly matched by United Airlines' Ted unit, scheduled to make its debut this week. "Frontier believes the market for last-minute travel has permanently transitioned in the past few years," said Sean Menke, senior vice president of marketing.
That development follows several similar airfare squirmishes in the past year, such as American's $299 cap on one-way transcontinental fares that matches JetBlue. On a systemwide basis, American now can be described as the airline offering the most discount fares. It also has been described by some as the most active in creating entirely new low-fare buckets on a market-by-market basis, most of which are not subject to corporate discounting.
According to airfare expert Terry Trippler of Trippler & Associates, airlines in general nearly have doubled the number of fare buckets in recent years. He cited American's prices between Chicago O'Hare and New York LaGuardia, which now are segmented into 15 buckets, up from what had been a norm of eight. "Thirteen of the 15 are in coach," Trippler said.
There are many other examples. United and American matched Southwest's full Y coach fare of $233 between Chicago and Orlando with a $233 M fare "rather than messing with their own full Y fare of $786," said Bob Brindley, vice president and general manager of Travel Procurement Solutions, a division of WorldTravel BTI. "Mainline carriers usually will be price competitive, but still capacity control the fare matches."
Indeed, new fare buckets don't always translate to additional low-fare inventory, but some industry observers suggested the trend toward lower-bucket fares may start diluting the value of a corporate contract.
Mark Walton, a principal of Lincolnshire, Ill-based travel management consultancy Consulting Strategies, cited two examples: one client who has a 90 percent utilization rate of nondiscountable fares on the primary preferred carrier and another, with an annual air spend near $50 million, who watched discount coverage on the primary preferred drop from 90 percent in 2002 to about one-third last year, resulting in a $1.8 million savings loss. "Arguably, these companies still benefit, but internal benchmarks show a negative impact even though they provide similar degrees of support for the preferred airline," he said. "As a travel manager, how do you justify that support throughout the corporate entity?"
"When the excluded buckets account for 70 percent to 90 percent of your spend, then you have problems," said one corporate travel manager.
One well-documented problem is the difficulty in convincing travelers to book on the preferred carrier when a competitor offers an equal or superior product at an equal or lower price.
"Preferred carriers, of course, want marketshare compliance in all buckets," said Mark Vilcsek, senior purchasing manager for travel services at National Semiconductor in Santa Clara, Calif., "but I ask, 'Where is the incentive to book lower buckets with the preferred versus anyone else?' It is something I will look at when I start to rework contracts."
For many, the straightforward rationale to choose a preferred's low fare simply is to maintain corporate discounts on higher-bucket fares and in less competitive and/or international markets. Tiered programs, for example, are growing in popularity and provide deeper overall discounts at higher levels of systemwide marketshare
(BTN, July 7, 2003)."We also have seen a few carriers in recent months put an incentive in the form of rebates on the back end, to encourage clients to overperform," said Nick Vournakis, director of air sourcing for the Carlson Wagonlit Travel Solutions Group.
Vournakis added that CWT has moved away from the "inherently flawed" standard of calculating savings off full Y. "You should be measuring savings off what could have been purchased, how often you use low fares and the overall segment price," he said.
"It is hard to substantiate savings off full Y, since no one really purchases full Y. Our management says it's fictitious when we generate those reports," said Melinda Samp, State Farm Insurance Cos. business travel center supervisor. "So we take a different angle. There is the back-end value of dealing with weather delays, no shows, en-route support, etc. We don't want people booking on their own. It defeats the purpose of having preferred relationships."
Meanwhile, some buyers continue seeking other advantages from preferred airline relationships as discount applicability wanes. "Corporate travel managers will start negotiating for perks and waiving of advance purchase rules," Trippler predicted. "Rules and restrictions may become the number-one point of negotiation."
Some already have moved toward that approach. "If you can be creative and find suppliers with that mindset, you can still bring value," suggested Cindy Heston, manager of worldwide corporate travel for Thomson Corp. in Indianapolis.
Travel agency sources confirmed an increasing prevalence of flat fare arrangements, conceptually not new but perhaps now more relevant in a company's attempt to meet contractual goals, especially in highly competitive, high-volume markets. Not all airlines are willing to guarantee fares, and some that are "recently have increased those guarantee fares in the middle of a contract," according to WorldTravel's Brindley.
Such attempts are not surprising, given the industry's lack of pricing power. Based on a recent poll of 220 buyer members and airline proposals to those members, the National Business Travel Association said 2004 airfares will remain flat. About 11 percent anticipated a decline between 1 percent and 5 percent. More than 60 percent of those surveyed said low-cost carriers will play a larger role in their air programs this year, leading NBTA to predict low-cost carriers will "seize one-fourth of all corporate air travel revenue by the end of 2004."