Fixed Fare Fervor Is Rising

<B>Fixed Fare Fervor Is Rising</B>
<I>DaimlerChrysler Drives Set-Pricing Deal</I>

By David Jonas

DaimlerChrysler in recent weeks inked a massive fixed city-pair fare agreement, an emerging contract configuration that has garnered attention throughout the industry.

Though DaimlerChrysler would not reveal certain details of the contract, or even with whom the deal was struck, director of global travel management and business services Charles Braswell said the agreement has the potential for huge cost savings, depending on the economics. "This is brand new for DaimlerChrysler and we think we probably will save in the neighborhood of $28 million globally," he said, adding that the contract will run for the next two years.

That projected cost savings will be generated by specific fixed rates on up to 20 percent of all the corporation's city pairs. Braswell would not comment on clauses that will allow for potential fare fluctuations, but said there was give and take throughout the negotiations. "Now that we are a global company, there are more opportunities than in the past," he said.

Many other travel managers are looking for similar opportunities to cash in on what BTC chairman Kevin Mitchell called "The Holy Grail of purchasing," despite risks to both the buyer and the airlines.

For the buyer, the ability to lock in rates allows for more precise budgeting and, of course, can be an avenue to cost savings in the face of rising airfares. For the airline, the primary benefit is the capture of additional market share.

Harold Seligman, CEO of Management Alternatives, said fixed fares will find their way into contracts as buyers prepare to take some inventory risk. "If a company is willing to pay in advance or make some sort of guarantee, we will see some point-to-point agreements," he said, adding that many are in place, including on shuttle routes and in Pro Air contracts, for example.

"The whole issue of set fares is not understood by the carriers or the buyers yet," said Earl Foster, director of corporate travel for Joseph E. Seagram & Sons. "I have had discussions with a number of carriers on this subject, but they are very preliminary and are conceptual at this point. That is not to say that some of us do not have a city-pair set fare agreement, but they are extremely limited in scope and use."

Foster added that all sorts of problems arise during fixed fare negotiations, including financial responsibilities of both buyer and seller and the trust factor. "If the buyers were as ethical as they want the sellers to be, then we would be a lot further down the road," he said.

Aside from DaimlerChrysler, other large companies have had some successes in negotiating fixed fares, including Eastman Kodak, which last year signed a deal with two of three airline partners (<I>BTN</I>, March 8, 1999).

While corporations explore the possibility, fixed fares are more prevalent in the government sector. Norman Wilson, statewide travel manager for the State of Colorado, has had fixed fares in place for many years and currently uses United and Frontier to cover 225 city pairs. "We bid them out on a yearly basis, and have had as many as nine airlines contracted in this way in the past," he said. "We have an advantage because we are in the government sector, but we have remained successful by demonstrating a good deal of control over our travelers' buying habits." As a result, the State of Colorado now achieves a 30 percent discount on contracted fares, which account for 35 percent of all fares purchased. Overall, the fixed fares have saved the state 10 percent on its annual total air expenditures of $15 million.

While Colorado's state travel management program will not agree to contracted market share guarantees, Wilson said the carriers "have a clear notion of what they will obtain, otherwise they will not bid on our business next time around."

For every organization that has signed fixed-fare agreements, scores have discussed the concept, but ultimately opted against it. "We have constantly looked at it, crunched all the numbers, but concluded that it would be too time consuming to monitor the fluctuations in pricing," said Kevin Iwamoto, global air and car supplier for Hewlett-Packard and Agilent Technologies in Palo Alto, Calif. "In certain city pairs, some months you win and some months you lose, so it certainly is a quid pro quo process."

As in the past (<I>BTN</I>, Nov. 3, 1997), American Airlines appears to be the most willing to negotiate fixed fares. Craig Kreeger, vice president and general sales manager, said, "It is a part of the process we go through in many corporate agreements. There can be more value, as perceived by them and us, in locking in a specified rate for a subset of the routes they fly frequently."

However, many of the other airlines, in general, are not enthusiastic to sign set city-pair fares because of the inherent risks. "When you attempt to change the very way the carriers price their products, you will meet with resistance," Foster warned.

Bonnie Reitz, Continental's senior vice president of sales and marketing, said the carrier always is willing to explore new models, but set corporate fares may not be the answer. "If we thought the world was totally stable and that companies could live up to guaranteed volume commitments for each guaranteed flat rate, you could do that sort of thing," she said. "But it's an extremely competitive marketplace and even our best customers come up short."

Moreover, enhanced technology and a vast array of new Internet-based distribution outlets have allowed the airlines to get a better handle on their inventory and, in many cases, sales representatives are trained to focus on more traditional systemwide discounts in return for overall share.

To counter airline concerns, the buyer may consider various clauses to cement the deal. Rolfe Shellenberger, senior consultant at Runzheimer International, has seen some fixed fare deals and suggested a few built-in protections to incentivize the airlines, including fuel adjustments, blackout dates and a two-tiered structure that accounts for peak travel times in busy markets. "Also, the airline that gets most of your business cannot necessarily afford to discount heavily on some routes because they already are full," he said. "A buyer needs to compromise, pay attention to airline demand and accept higher costs where demand is high."

Clearly, travel managers must think long and hard about fixed fares to determine the specific value to their corporation. Though "there is momentum in this area," Mitchell said these negotiations "require all the knowledge and financial skill a travel manager can muster." And many agree that the airlines will progress even more carefully with fixed fares.

"It took over 10 years just to get everyone to understand the rationale behind fee-based pricing," Foster said, "and it could take just as long before we see a set pricing model be adopted.