Finessing The Fortress

<B>Finessing The Fortress</B>
<I>First In A Three-Part Series On Hub Negotiating</I>

By David Jonas

Despite the long-standing pillar of airline economics, that carriers dominating a fortress hub can demand comparatively high market shares from corporations in return for discounts, buyers slowly are gaining some leverage.

While corporations based in a fortress hub market still are at a disadvantage, the current negotiating environment offers several ways to save a few dollars without giving up the farm.

According to a recent report by Salomon Smith Barney, "The 2000 Hub Factbook," Delta in Cincinnati controls more than 90 percent of scheduled seats at the airport. US Airways in Charlotte, N.C., controls more than 89 percent and nearly 86 percent in Pittsburgh. Other dominant environments include Northwest in Minneapolis (79.9 percent), Detroit (77.6 percent) and Memphis, Tenn., (75.8 percent); Continental at Houston Intercontinental (78.9 percent); Delta in Atlanta (75.3 percent) and Salt Lake City, Utah, (74.4 percent); and United in Denver (73.2 percent). The report states, "Generally speaking, carriers displaying the greatest percentage of seats flown out of their hub airports are able to obtain superior pricing power and command a disproportionate amount of high-yielding business."

For corporate travel buyers, a carrier's superior pricing power generally has equated to less favorable discounting.

However, point-of-sale discounts in 11 of the most highly concentrated hub markets have increased over the past few years (see chart). While those discounts have been affected by a migration toward net fares, a general buyer's market resulting from several factors, including the financial conditions of the aviation market, has played a critical role. "Net fares certainly have helped deepen discounts, but carriers are looking for more opportunities," said Michael Lynch, Rosenbluth's director of corporate strategies. "They increasingly are infringing on each other's markets, which has helped the negotiating environment."

In Houston, for example, Continental has seen the competition level increase a few notches. "We have heard anecdotally that other carriers are coming in here and throwing around some pretty big numbers," said Dave Bartels, the carrier's senior director of corporate programs. "We definitely are willing to do maintenance deals; we recognize the need to step up in order to retain our best customers." And while Houston has been one of the more stable markets in terms of average corporate discount, Bartels added, "We have seen share improvements from many of our customers that have gone net-net because there now is more of difference between our price and that of competitors."

Still, the most simplistic means of achieving a greater discount with a dominant hub airline traditionally has been to guarantee a larger volume or market share commitment. While a quick fix in the near term, such a strategy could backfire down the road.

Greg Moore, director of the travel industry program at Integrated Technology Research in Wilmington, Del., and former travel and purchasing manager for DuPont, suggested a cap on how much traffic is given to the dominant carrier on key city pairs. "In the past, the way to get a better deal was to concentrate volume with a limited number of suppliers," he said. "But the danger in this particular environment is that you end up eliminating the competition. Of course you need to deal with the dominant carrier with a majority of the lift but the idea is to support other players to avoid a monopolistic situation."

In other words, an increased discount by a few percentage points in a fortress hub may not mean all that much if the dominant carrier can raise fares without fear of a competitive backlash.

Aside from offering more market share, larger companies in particular can leverage from other areas to help fend off unreasonable carrier demands in their strongest markets. "We can gain more negotiating power for our clients in a hub if we are able to find other markets where we can give incremental share to carriers in other markets," said Alison Galik, Rosenbluth's general manager of product strategies. "For example, US Airways is strong in Philadelphia and Pittsburgh, but is interested in some transcontinental share. We use those segments as leverage to help keep a good discount in place."

Rosenbluth even reports successful negotiations for guaranteed fares in fortress hubs. "They are normally for certain key markets, but I also have seen them on monopoly city pairs," Lynch said. "The airlines are willing to do that in exchange for more long-haul coverage."

Airlines even are more disposed to extend deeper discounts from their hubs when the buyer dangles high-yield international traffic during negotiations, a tactic used successfully by many global corporations. However, a would-be-buyer advantage easily can become a liability. "Carriers will turn around and tell clients that if they don't hit certain international requirements, there will be an impact at the domestic hub," Lynch noted.

Furthermore, Bartels said such leveraging can be difficult for corporations to sell internally. "Those deals are hard because some travelers may be used to flying one airline internationally, or maybe the corporation is already getting a really good discount," he said.

However, there is one way buyers of all sizes can improve difficult hub negotiating, or at the very least, find cheaper fares. Feeding off continued calls for competition in fortresses, several low-fare carriers have made inroads in the corporate market. Denver is a prime example. "Pricing in the Denver market has been kept somewhat reasonable thanks to Frontier Airlines," said Kevin Iwamoto, global air and car supplier manager at Hewlett-Packard. "You need to support carriers like Frontier and some of the other tertiary carriers in order to keep price competitiveness alive and well."

Other recent low-fare entrants include Air Tran in Atlanta--which like Frontier in Denver is now the second largest carrier there and recently initiated new flights to six cities--Sun Country in Minneapolis and ProAir in Detroit. Vanguard also offers some options out of Pittsburgh.

Southwest is the ultimate wildcard. "If Southwest is not a factor, hubs typically are expensive," said Rolfe Shellenberger, senior consultant at Runzheimer International. The carrier has sizable operations in Delta's Salt Lake City hub and in TWA's St. Louis hub.

"We do a lot with Southwest as part of our low-fare analysis," Galik said, adding that nearly all 41 clients using the Dacoda analysis product now use low-fare carriers in some way. "We tell them if they have hit their goal with United and will receive their rebate, for example, and have room to book low-fare alternatives."

In a research paper on low-fare options, Moore said, "The savings generated from dealing with low-fare airlines will dwarf any concerns about missed discounts." He added that aggressive travel managers "could be seeing airfares drop by 30 or 40 percent in markets where low-fare airlines are supported."

In many cases, the use of low-fare carriers means routing through alternative airports. Southwest, for one, has made a living by going into uncongested airports within a reasonable proximity of large hubs. Its operations at Houston Hobby for example, where it accounts for nearly eight of every 10 seats, represents a viable alternative to Continental's dominance at Houston Intercontinental. In Detroit, ProAir uses the smaller Detroit City Airport, while both Dayton, Ohio, and Indianapolis, Ind., can be reasonable alternatives to Cincinnati.

While a prime benefit of a hub for travelers originating or terminating in that market is ample nonstop availability to a wide range of destinations, some corporations have sought less expensive connecting flights on other carriers.

"It is incumbent upon corporations to communicate to their travelers that a well-executed, and possibly painful, short-term strategy of using connecting carriers will pay off in the end with nonstop service," Lynch said. "Historic trends are a great barometer, and if you can show the ability to shift business, the dominant carrier is more inclined to come back with better pricing."

One Pittsburgh-based travel manager said his corporation now gives as much revenue to carriers offering connecting service as US Airways. "Our travelers have not complained of the inconvenience--yet," he said. "US Airways wants to base all revenue on beating out the other carriers. But we need those others because they offer the bigger discounts."

However, specific city pairs do not lend themselves to such flexibility. One travel manager at a New York-based corporation said he "gets killed by Northwest" on the route to Memphis because travelers are unwilling to use connecting flights on other carriers for such a short trip.

Furthermore, corporations oftentimes will have difficulty convincing travelers to connect on any itinerary--even transcontinental--when nonstops are available in the market.

"The real issue is, where is the self-regulating mechanism that adjusts the convenience of the hub passenger to the potential airfare increases?" said Brent Garback, chairman and CEO of Total Travel Management in Troy, Mich.

Meanwhile, Shellenberger said he "strongly advises"clients to request deals for off-peak departure times. "We believe a case can be made for concessions on monopoly city pairs if a client agrees to off-peak flights," he said. "Moving that traffic should be worth something because it frees up seats on popular flights that can get much higher fares."

In fact, one Minneapolis-based Runzheimer client earns a 10 percent credit with Northwest for every trip at an off-peak time. Once $600 has been accrued, it can be redeemed for a roundtrip to any domestic destination. "One problem with these types of deals is that sales reps have little or no empowerment even to explore them, so they go nowhere in most cases unless you are a $50 million airline customer," Shellenberger said.

The Web has opened another avenue for keeping costs down. Specials by competing carriers constantly beat out many negotiated rates offered by the dominant airline. One such battle between Delta and Northwest has each offering $198 roundtrip fares from the other's hubs. Though these non-CRS fares often are off limits for corporate travelers forced to book within policy, such alternatives will become more attractive as carriers begin to count Web fares toward contract goals (<I>BTN,</I> Feb. 21) and third-party self-booking tools develop functionality to cull the Web for relevant options.