<B>Flat Fares On The Rise</B>
By David Jonas
Travel buyers more aggressively are seeking fixed fare airline contracts in response to last year's repeated rises in business fares and this year's softening economy, according to some of the biggest spenders, some airlines and other sources.
Fixed, or flat, fares reduce complexity by enabling corporate travel buyers to pre-determine their travel budgets. Though nowhere near ubiquitous in airline negotiating, and problematic in many respects, they represent a small step in achieving rational pricing and some level of protection in exchange for beefier market share commitments.
Pre-paid bulk purchase programs, based on large mileage purchases, also can generate corporate savings and predictability in certain circumstances for companies both large and small.
"We are seeing a considerable increase in the number of contracts that are a combination of flat fares in specific markets, as well as a percentage discount," said Valerie Estep, president of airfare auditing company Topaz International in Portland, Ore. "And these are not only for basic shuttle markets, but for other specific markets driven to increase market share in competitive areas." Topaz said that of nearly 1 million audited segments flown by travelers at 120 companies in 2000, those using flat fares nearly doubled from a year earlier to 6.2 percent(see chart, page 1).
The American Express Survey of Business Travel Management 2000-2001, meanwhile, found that 21 percent of surveyed companies used flat fares. Larger travel programs--topping $25 million in annual T&E spending--were the most likely users at 35 percent.
"They are becoming much more common in key markets for the individual buyer, particularly in markets where that buyer is one of the more dominant single entities and plays a big part in a carrier's profit or loss," said Dan Pirnat, client services analyst at Solon, Ohio-based Travel Analytics.
PricewaterhouseCoopers has used flat fares in the past but significantly increased usage as of Jan. 1. Now, the company has flat fares with more of its preferred carriers for U.S. point of sale transactions. "We were very pleased with what the carriers came back with this time and now we have a good amount of these fares in place," said Gabriel Eshaghian, PwC manager of global airline and car rental programs. "It needs to be an accelerating trend, and to the extent you can negotiate them, they are no-brainers."
Eshaghian added that corporate cost cutting and a higher level of education throughout the industry have made flat fares more attractive to more buyers. "Like anything else, it's a give and take," he said. "But when airlines are looking to drive incremental revenue, fixed fares can be the solution."
Several buyers participating in last month's Corporate Travel 100 summit indicated a stronger move toward fixed fares (BTN, April 9). Phil Stumpf, manager of national sales at Northwest Airlines, later told Corporate Travel World attendees that he has seen fixed fares effectively alleviate clients' budgetary concerns. "It does take away airline flexibility," he said, "but in particular markets where you can deliver, it is a way to go."
Greensboro, N.C.-based Sealy applies flat fares as a cost driver on its most heavily traveled city pairs where annual segments reach the thousands.
"The big air buyers have the ability to segment their purchases for flat fares while not diluting their negotiating leverages for the balance of air spend," said Tony Milikin, Sealy vice president of supply chain and purchasing.
Some carriers will work with buyers in that way, folding city pair-specific rates into a larger systemwide program. Others are a bit more hesitant to do so, but in some cases will later convert a traditional discount to a flat fare. Or, flat fares can be negotiated on the front-end in exchange for lower overall discount levels, though carriers focus primarily on share shift as compensation.
"Knowing exactly what you will pay comes at a cost, just like us and our fuel hedging," said Dave Bartels, Continental Airlines senior director of corporate programs. Also, carriers like to imbed some level of protection within these contracts by adding clauses based on dynamic factors such as inflation, fuel, capacity controls and even product differential clauses. Longer-term flat fare deals--typically not longer than two years--oftentimes will call for a general review after the first year.
Meanwhile, some buyers are finding it easier, and more attractive, to negotiate fixed fares on international routes, with both U.S. and foreign carriers. Sources pointed to less complicated pricing structures, difficulty in achieving net-nets and recent fare hikes on international city pairs.
Sealy in the past few years, for example, has focused on flat fares for high-frequency international routes, not only as a means of cost savings, but also to keep travelers on familiar airlines while avoiding connections, Milikin said.
"Especially with recent belt-tightening, senior management has taken a bit of interest in markets with higher prices and many times domestic fares have less visibility," Travel Analytics' Pirnat said, noting that Air France, Alitalia and Singapore Airlines are carriers known to prefer flat fares over traditional discounts.
Despite the savings and consistency that flat fares can offer, buyers have reported obstacles. A few cited implementation and GDS loading issues, while others said the fares are more prone to agency errors. Furthermore, some travel managers said benchmarking on the front end and monitoring pricing throughout has been more trouble than it is worth.
Meanwhile, another way to predetermine travel expenditures is through pre-paid bulk purchase programs offered by several major carriers. These cost per mile models, though generally designed for individuals, can be used effectively by a corporation for its most frequent travelers, particularly on higher cost routes.
Steve Ross, United Airlines manager of business development, said the carrier still isn't sure if the current economic downturn will spur or stymie interest in such programs, including United's own PassPlus. "The program gives travel managers the ability to have a preset limit on travel expenditures as well as allow individual travelers to take advantage of fares lower than what is available in the market," he said. "But right now, many companies may be hesitant to commit the upfront cash outlay."
Despite that skittishness, pre-paid programs can offer savings in certain circumstances, such as shorter routes with higher costs per mile and less competitive city pairs in and out of dominant hubs.
With the ability to float the upfront financial commitment, larger banking and law firms traditionally have been, and continue to be, the most likely users, but Ross said all sorts of companies have been exploring the option.
"Now we are seeing smaller corporations take advantage, as they are doing a better job identifying frequent travelers and managing travel more than in the past," he said, while confirming that most PassPlus clients are located in United's hub cities. However, Ross acknowledged that some large corporations that provided substantial pre-paid volume have since secured corporate discount agreements and abandoned PassPlus. Even so, PassPlus sales overall, though not as brisk as certain periods in the past, still have shown some growth during the past few years.
Both PassPlus and American's competing AAirPass program come in two- or five-year terms and require a purchase of 25,000 miles per year. However, United's price for either the two- or five-year plan equates to 46 cents per mile, while American's costs 51 cents per mile.
American's offering, however, linked in last summer with Sabre BTS, enabled buyers to compare the pre-determined pricing with other American fares available to them in Sabre BTS (BTN, Aug. 14, 2000). United said it is exploring such functionality. It also is looking into applying passes on a companywide basis rather than strictly by individual. AAirPass reportedly allows such corporate flexibility in limited cases, but the carrier would not comment.
While PassPlus and AAirPass are the two most popular programs of their kind, other carriers offer similar but less marketed configurations.
US Airways, for example, offers a bulk buy configuration but, because of customization in each case, has opted not to formalize or brand the program. Unlike the mileage-based formulae of AAirPass and PassPlus, US Airways' pre-purchase choice assigns a set cost per ticket based on the amount of tickets to which a corporate client commits, conceptually similar to fixed fares.
"Many clients want to go down that road, but after sitting down and explaining the details, only a handful choose to go in that direction," acknowledged Paul Leyh, the carrier's global director of corporate programs. "The financial commitment certainly is a skepticism, and oftentimes a more comprehensive traditional discount program is preferred in the end."
Continental Airlines has had similar experience. "The devil is in the details," Bartels said, citing difficulties for a corporation's internal billing processes. "Someone has to cut a check and the concern is the internal financing and whose cost center takes the hit."
Nevertheless, Continental said some larger clients opt for bulk purchasing, which, unlike AAirPass, would center on specific markets with heavy volume.
Most other major carriers do not even offer such an option. Delta Air Lines, for example, had considered a bulk purchase program for corporate customers, but opted not to pursue the concept after research found its corporate customers prefer incentive-based programs that do not require financial commitment.
And from the carrier point of view, it may not even be necessary to offer their corporate clients the option. "The heart of the yield management system is elasticity of demand and bulk buying conceptually is viewed as dillusionary to carriers," said Jack O'Neill, president of corporate travel for TQ3 Maritz Travel Solutions. "With load factors where they are and all the different distribution options available, most carriers struggle with how it fits in the overall strategy."
Even so, O'Neill said American, United and US Airways must be satisfied with the balance they have found between customer flexibility and yields.
Like the major carriers in the United States, travel buyers as a group are split over the value and utility of pre-paid bulk purchase programs.
Mike Mary, director of travel services for Adidas in Portland, Ore., said that "unfortunately" his company does not use these types of programs. "Any time we've done the due diligence on it, the numbers just don't add up," he said. "We seem to fly into cities that have more competition, and the rates are actually less using our negotiated contracts, but I'm sure it wouldn't be the same story if we were headquartered in Dallas."
Though his company does not use any pre-paid bulk air purchase program, Comdisco acquisition manager for travel and facilities Kevin Ellison said, "I think cost per mile programs are going to become more popular once people understand all the issues.