Fuel Fees Foreshadow Airfare Hikes

<B>Fuel Fees Foreshadow Airfare Hikes</B>

By David Jonas

As corporate buyers begin planning budgets for next year, they will have to factor in predicted business fare increases between 5 percent and 8 percent and account for this year's second fuel surcharge, levied earlier this month by the major airlines.

In the face of these continually climbing fares, travel managers with more mature programs acknowledged that they are running out of ideas about how to offset further increases.

Predicting fares is by no means an exact science. Last year's sampling of projected fare changes for 2000 ranged around the 4 percent level (BTN, Sep. 20, 1999), but Deutsche Banc Alex. Brown last week noted in its Weekly Air Fare Index that business fares already were up 13 percent year over year.

After traditional spoiler Northwest Airlines followed suit, it became clear that another Continental-led fuel surcharge survived and will cost passengers another $20 on most roundtrip tickets. In what amounts to another fare hike immune to corporate discounts in most cases, the latest surcharge--and the second this year (BTN, Feb. 21)--brings total fuel-related add-ons to $40 on most roundtrip itineraries. American, Delta, TWA, United and US Airways were the first to match Continental; others--notably Southwest--have not. In fact, the major carriers have held back on applying it to markets in which Southwest operates.

Buyers voiced concern about the continued impact of fuel, even beyond the most recent surcharge, and how the airlines opt to apply it. "While it is a significant amount of money for us, it is difficult to ascertain exactly what the surcharge costs will be because the airlines reserve the right to pick and choose which routes they include. It makes budgeting that much more difficult," said Ross McBride, director of corporate administrative services at Ft. Worth-based Alcon Laboratories. Also, he pointed out that senior management does not necessarily understand that lower fuel prices in the future presumably do not equate to surcharge rollbacks.

Fuel is only one part of an equation that will move business fares upward in the year ahead. American Express, in its Trends & Forecasts for the Business Travel Industry-Preview 2001, is predicting a 5 percent increase across North America.

"There are a few key drivers, the most significant of which is that the industry is experiencing the highest load factors since 1946, and affecting that is pressure from corporate customers to enhance coach class products," said Brian Mogler, director of consulting services at American Express. "When you take available seats out by expanding leg room, for example, the yield on the aircraft will be more difficult." Mogler said the overall domestic fleet grew by 6 percent and 5 percent in the past two years, but only 3 percent growth is projected for 2000-01, further straining capacity.

Under the American Express forecast, the typical domestic roundtrip business fare, which is the lowest fully refundable economy class fare available to business travelers, will rise to $817 in 2001 from $778 in 2Q00.

Topaz International predicted an even steeper business fare hike. The Portland, Ore.-based airfare auditing company forecasted an 8 percent increase in business fares, while overall airfares are forecasted to jump by as much as 15 percent. "The smaller increase is due to the accelerating use of negotiated rates by business travel buyers and behavioral changes on the part of the business traveler," said Topaz president Valerie Estep, highlighting an average discount of 23.41 percent in 2Q00, up from 19.88 percent a quarter earlier.

Like American Express, Topaz pointed to high demand and stabilized aircraft inventory, but also cited higher airline cost structures. The tentative contract for United's pilots, for example, is expected to push up labor costs industrywide (see story, page 6). Topaz further noted the potential for greater pricing power by the largest players should merger scenarios play out.

Runzheimer International, which examines costs instead of fares, said corporations ought to budget an additional 6.8 percent to cover air travel expenses in 2001.

While predicting business fares to rise about 5 percent next year, Onetravel.com airline expert Terry Trippler expects the average business traveler to actually pay about 5 percent less. "The reason for that is that there will be better corporate contracts and because many more business travelers are now buying discount fares," he said.

Amex also noted that tightened travel policies and increased usage of corporate online booking systems will help corporations keep overall T&E costs in check. "Our corporate customers in the past 12 to 18 months have been trying to understand all the variables and all the different areas from A-Z to see which expenditures they can control, including booking, ticketing, processes and policies," Mogler said. "Some are looking at increasing the percent of fares covered by discounts with preferreds and others are looking at expanding their preferred list to include secondary and tertiary carriers."

After examining predictions from several sources, Alcon Laboratories' McBride decided to look at budgeting based on a 7 percent increase in business fares. In the past, he has tried more aggressive negotiating and expanded usage of group travel to offset costs. For example, the company seeks out opportunities to include other travelers on a zone fare if they are traveling to the same destination as a corporate group or finding groups of 10 or more travelers headed to the same destination for separate purposes.

Last year, McBride implemented an innovative idea: adding onsite agents to cut costs. "So many people try to save $30,000 by refusing to hire another travel agent, but I added a few so they could spend time explaining all the options to travelers, including lower fare alternatives," McBride said. "Our cost per mile dipped five cents on 20 million domestic miles, resulting in savings close to $1 million. Now it's hard to come up with an encore. It is getting more and more difficult each year because there is only so much you can squeeze out. We will have a hard time overcoming that 7 percent."

Eastman Kodak in Rochester, N.Y., is factoring a 6 percent business fare increase into its 2001 budget, but expects to offset it with a few strategies, including stricter enforcement of its lowest fare policy.

"It is a campaign we began in April to uncover lost savings by reporting travelers who did not take the lowest available fare, for whatever reason," said Doug Baldy, coordinator of corporate travel services. "The financial director of each business unit is given these reports on a monthly basis to follow up with the individual travelers. We already have seen a bit of a downturn in lost savings."

Baldy added that usage of low-fare carriers and reduction in total number of trips should help the company maintain average ticket costs, despite the rising fares. "Actually lowering costs is almost too much to ask for," he said. "We have pushed the envelope to 88 percent of all travel with preferred carriers so there is not much more to be had on the negotiating side. We are running out of initiatives to try."

While there are many other tactics that can be tried with varying degrees of success--including guaranteed fares, using alternative airports and such substitutions for travel as video- and Webconferencing--buyers clearly can see the skywriting up above. "If load factors continue to increase and seats become more and more scarce, guess what will happen?" asked Darryl Jenkins, director of the Aviation Institute at George Washington University. "Business fares are the only fares the airlines can get away with such increases, and if the economy stays robust and traffic stays at all time highs, business travelers will take the hit.