Fare Formula Needs Fixing

As more travel buyers, airline sales execs and other industry professionals sound the alarm that the airline faring structure is broken, they increasingly are calling for carriers to develop new models to salvage corporate client confidence and point airlines down the path to recovery.

Potential modifications—ranging from small tweaks and tests to a less likely second attempt at full-blown value pricing—will force buyers to reassess preferred programs and scramble to maintain corporate discounts. For many, that is well worth the effort, if it means narrowing the gap between business and leisure fares, altering sky-high walk-up fares that very few travelers actually use, eliminating underperforming contracts currently subsidized by performing ones and clearing the air on Web fares.

"We all know that airline pricing today is not broken, it's shattered and needs to get fixed," said Frank Kent, United Airlines vice president of sales, last month during The Masters Program in Washington, D.C. "We are going to have to see who is bravest first. Someone is going to have to take the first step."

With airlines legally barred from signaling any sort of pricing initiative, it is impossible to pinpoint when that first step will be taken, and by which carrier. However, some saw Northwest Airlines' November fare restructure (BTN, Nov. 12, 2001) as the first formalized move.

"Northwest will lead the way. They see this as something that has to be done," said Terry Trippler, president of Trippler & Associates in Minneapolis. "The follow-up could be eliminating various fare levels because Northwest realizes that in order for any of this to work, they need to narrow the gap between business and leisure fares."

Though Northwest's BizFlex offerings add to, rather than simplify, the fare structure and steer business people away from leisure fares, they do more clearly delineate business versus leisure passengers—an important issue for all major airlines—and provide corporate discounts for all of its business fares. In fact, the category of alternate business fares—defined as those that do not require a Saturday-night stay, but are nonrefundable and require a 10-day or less advance purchase—is growing. In a January study, New York-based Harrell Associates found 53 such fares available for the 20 top business routes. Those fares, up from 19 a year earlier, averaged 43 percent less than the standard business fare. "Corporations should be incorporating this data into their benchmarking analysis to accurately reflect current market conditions," said Bob Harrell. "Walk-up fares are becoming obsolete."



Value Pricing

American Airlines in 1992 tried stripping out all but a few basic fare levels under its ill-fated value pricing initiative. The idea has resurfaced in some travel industry circles.

"If the timing is ever going to be right to try something like value pricing again, now would be the time," said John Heilner, vice president of Management Alternatives in Princeton, N.J.

But Heilner, similar to other industry veterans who remember the failures of value pricing a decade ago, pointed to some of the same challenges, as well as a few new ones.

"If carrier A sets four fare types, carrier B decides for whatever reason it needs one more to improve its overall revenue and the whole thing begins to unravel," Heilner explained. "In a nutshell, that is what happened to value pricing and it would be very hard to prevent that from happening again."

In addition, major carriers today compete against a much more vibrant low-fare segment led by Southwest Airlines and have made available a multitude of distressed inventory fares through the Internet.

Access and applicability of Web fares for the airlines' corporate clients, of course, complicate matters for buyer and seller alike (see story, page 1).

"You need to recreate the fences around Web fares because the last thing you want is our travelers on the Internet," Kevin Iwamoto told airline representatives at The Masters Program. Iwamoto serves as president of the National Business Travel Association and global air and car supplier manager at Hewlett-Packard.

Rather than a bold move that would fundamentally change the fare structure—and potentially include a complete elimination of traditional travel agency commissions and/or substantially minimized corporate discount programs—Randy Malin, a veteran of the airline and travel technology industries, suggested a gradual, experimental approach.

"Strategically, American Airlines in the early '90s may have tried to bite off too much by cleaning up both business and discretionary fares at once," Malin postulated.

Instead of systemwide change, Malin said small-scale tests on certain routes could be more effective without "setting off World War III," and risking entire revenue pools. "Take a few markets and eliminate the weekend stay or try a value-pricing clone," he said, "but don't gore someone else's ox or they will come back and retaliate."

Mark Vilcsek, senior purchasing manager for travel services at National Semiconductor Corp. in Sunnyvale, Calif., favors a system using mileage-based fares from which corporate clients would negotiate volume or share discounts. "At least it would remove the inconsistencies and make fares more realistic," he said, noting that corporations would use that mileage fare as a ceiling while seeking out any lower Internet fares. Mileage also could be bought in bulk by the client, assuring a corporate discount and critical cash flow for the airlines.

While airlines remain hesitant to fundamentally change corporate contracting standards during a time of depressed revenues, they already have begun to scrap programs for many of their accounts.

"The new reality," Vilcsek said, "is that we are going to have to make some concessions with regard to our choices of travel, really favor the preferred carrier and be more forceful about adhering to policy."

As such, it has become critical for travel managers to quickly build compliance and accurately monitor contract performance.

"We'll see the airlines give a lot more attention to how corporate programs are administered and priced. Simply rationalizing the corporate discount may not be enough," said Jack O'Neill, president of corporate travel at TQ3 Maritz Travel Solutions. "Many of the airlines' best customers are losing interest."

Heilner said travel managers at smaller companies, however, still must keep their negotiating skills polished even if they are dropped by preferred carriers. "There is always a maverick airline that breaks the norm," he said. "Carriers weak in particular markets or going through a bad period may decide they need to negotiate with the next tier of clients."

Solutions are far from clear at this point, but Vilcsek, for one, fears the federal government may step in. "The fact is pricing is clearly broken, more customers are complaining and there will be enough of an outcry that the general public may force the government to look at re-regulation, which no one wants," he said.