Midmarket Upturn

<B>Midmarket Upturn</B>
<I>Competition, Tech Foster Better Air Deals</I>

By David Jonas

Though they do not have the leverage of their larger counterparts, many midmarket corporations today are finding ways to formulate healthy agreements with their airline suppliers. Their agency partners cited several factors for many recent successes, including increased competition among carriers, sophisticated analytical tools, travel management maturation and the emergence of low-fare carriers.

Midmarket companies, roughly defined as those with annual air spends between $1 million and $10 million, have not always been fortunate enough to garner discounts in exchange for volume or market share. However, the airlines now are being very aggressive with corporate contracting and many more of those midsize companies are the beneficiaries.

"The actual level that carriers start giving discounts has gone down," said Bob Brindley, vice president of marketing at McCord Travel Management. "A few years ago that bottom level was in the $3 million to $5 million range, but now it's as low as $1 million."

Michael Lynch, director of North America supplier relations for Rosenbluth, agreed. "The majors just weren't looking at companies in the sub-$3 million range," he said. "Now they are crafting programs specifically for them."

While intensifying competition amongst the carriers is one factor, John Smith, vice president of Tower Travel Management in Oakbrook Terrace, Ill., suggested the changing commission structure is at the root of the situation. "It is my opinion that reductions in travel agency commissions, which have led to lower distribution costs, provide the airlines with more money to redirect toward corporate deals. There may not be a direct correlation, but that is the one area that is very different now than a year ago," he said.

Smith added that negotiations for all midmarket contracts--which account for 50 percent of Tower's volume--have been fruitful during the past 8 to 10 months. "Midmarket travel managers are becoming more sophisticated and understanding how to better negotiate with preferred suppliers, with agency partners and for technology," he said. "And the driver for all those things is that they now are paying for services and are more attentive to their cost structure."

Mindful of commission woes, Brindley said McCord is advising its midmarket clients to negotiate net agreements instead of net-net, where the base commission still is part of the discount but the company remains eligible for override programs. "Where we are earning superior overrides it makes more sense to have higher net-effective discounts for the clients," he said.

Meanwhile, as a result of the airlines offering deals to more smaller companies, more travel managers are turning to their agencies for help in analyzing potential programs that will yield the best discounts. McCord, for one, said 55 percent of its accounts fall into that $1 million to $10 million range, all of which will have access to new internally developed analytical tools. "We have been implementing these tools to analyze a client's city pairs by automating the process," Brindley said. "The base part of that service will be included in standard account management and we will charge additional for more in-depth analyses."

Most agencies, in fact, provide some level of analysis during RFPs and negotiations. Rosenbluth, for example, said several of its midmarket clients successfully have used its Dacoda product for years (<I>BTN</I>, Nov. 1, 1999) and Maritz recently signed a licensing agreement with Travel Analytics to use its Tango air program analysis product.

Lynch added that many lower midmarket travel programs have moved away from rebates and toward point-of-sale discounts, especially in highly competitive markets like New York, Chicago and a few West Coast cities.

"The airlines have been particularly aggressive in those markets, and it has been a good time for midmarket companies to take advantage and negotiate if they are lucky enough to be in any of those places," said Brindley.

Andrew Corp., based just outside Chicago in Orland Park, Ill., is one such corporation. Despite an annual air spend last year of only $7.5 million, the company has many international destinations and as a result, travel manager Jimette Newton said both dominant carriers in Chicago were very competitive. "I found that they are very willing to negotiate at this time," she said. "And they are not necessarily looking for a large market share, but just want some of the business." She added that other foreign carriers--including Virgin Atlantic, which recently started service between London and Chicago--have approached her.

Newton said McCord helped with some of the analysis, but her own internal studies helped sort out which carriers to select. "The market here is very aggressive and there are many new players," she said, referring to low-fare carriers Southwest Airlines and American Trans Air.

Industry insiders agreed that Chicago has been a particularly embattled market as American and United have stolen accounts from one another and reacted swiftly by going on the offensive in their corporate contracting strategies. "Carriers may be more aggressive in a certain market if they have recently lost a significant corporate account and are trying to get that volume back," Brindley said. Bidding wars emerge from these tactics and buyers of all sizes come out with better deals.

Of course, regardless of a corporation's size, its home market will factor heavily into how lucrative a deal an airline will offer. Traditionally, midsize companies in fortress hub markets face a more difficult negotiating scenario than larger companies in that same market that have higher volumes in more city pairs. However, there are indications that even the dominant carriers are easing up a bit in what continues to be an overall buyer's market.

"Even in their hubs, the carriers are more aggressive with the midmarket now than they have been," Lynch said. "It contributes to their overall strategy of dominance in that market." Even so, the carriers carefully balance the push for corporate accounts with the ability to ask for more volume or share.

Aside from the carriers trying to secure as many corporate accounts as possible, Jack O'Neill, Maritz's new president of corporate travel and former vice president of airline partnerships, suggested that timing may play a role for midmarket companies in certain markets. "Given the time of year and softening of traffic--the gap grown between revenue per available seat mile and total available seat miles--there is more interest in discounting for midmarket companies in the highly competitive markets," he said. "There will be more success in the first and fourth quarters because airlines are looking at stronger numbers and a stronger business yield mix in the second and third quarters, and have been for the past few years."

Meanwhile, corporations of all sizes, including the midmarket, continue to emphasize cost savings. Andrew Corp., for one, expects to slash its air spend by 20 percent--down to $6 million--through a new lowest economy fare policy instituted earlier this month. Because 65 percent of the company's travel is international, Newton worked an upgrade program into the new contract. "We were looking for an upgrade program and a value-add to make international travel more comfortable," she said. "We had very good relationships with the airlines and they were understanding of what was happening."

At the same time, many midmarket travel programs are showing signs of maturing by seeking out multiple airline contracts. "We have seen clients in this market only able to afford one airline program, but now they are looking to us to help them analyze all city pairs and extend to a second or third carrier," Brindley said. "It works really well in some cases where it won't impact too heavily on their deal with the number-one preferred carrier."

As buyers look to expand their air programs to multiple carriers, many are finding value in the low-fare airlines. "We have a significant number of accounts, maybe 70, that are in the $1 million to $10 million range, and most are very cost-conscious," said Brent Garback, chairman and CEO of Total Travel Management in Troy, Mich. "As such, the need to find lower airfares and hotel rates is getting greater attention."

One low-fare carrier grabbing the attention of an increasing number of midmarket buyers is Denver-based Frontier Airlines. "From a creativity standpoint, we get approached by corporations looking for flat fares, zone fares, nets and so on," said Tom Allee, Frontier's national director of sales and distribution. "Sophistication in the midmarket is increasing because of the absolute need to reduce costs. Corporate travel managers are seeing that they can shift some share without damaging their contracts with the big guys."

Allee added that midmarket companies are much more sensitive to budgets than Fortune 500 companies relying on frequent flyer programs to keep travelers in line. "The primary difference between us and the large hub-and-spoke carriers for the small- to medium-size corporations is that they are offering soft dollar benefits, while we are offering lower fares, i.e., a bigger point-of-sale discount."

Minneapolis-based Sun Country Airlines is another low-fare carrier making inroads in the corporate market, despite a base of operations located in a fortress hub of a larger, well-entrenched carrier. A new corporate pricing program is complemented by $260 roundtrip fares to any of the airlines' destinations, based on availability.

To qualify for the "one-fare" program, a corporation must commit to purchasing 20 roundtrip tickets in a 12-month period and book them all through the carrier's Web site, an obvious distribution savings for the carrier. The one-fare tickets require no advanced purchase or Saturday night stay and also can be applied to leisure trips. In fact, family members traveling with an employee from a participating company also get the special fare.

"Regardless of the size of your travel needs or the size of your business, all businesses should be able to enjoy the same travel benefits as big corporations," said Bill La Macchia Jr., president and CEO of Sun Country. The carrier said nearly 50 Twin Cities-based companies have committed to the program and at least 26 more have expressed interest.