No Fairness In Recent Fare Increases

<B>No Fairness In Recent Fare Increases</B>

Veteran aviation journalist Adam Bryant, just before leaving <I>The New York Times for Newsweek</I>, told his replacement that when a domestic airfare punches through $2,000 he would have a front-page story. On Jan. 11, 1998, Larry Zuckerman made the front page of the <I>Times</I> with the headline "Business Air Fares Climb, Prompting Calls For Remedy," reporting that the $2,000 barrier had been broken.

Today, hardly three years later, the $2,500 level has been breached, without even adding in two pernicious fuel surcharges. There does not appear to be an end in sight. This year alone many corporate travel managers are reporting that a trip on a major airline is up more than $100, or about 20 percent, due to fare increases and fuel surcharges.

The recent fuel surcharges were the subject of an Oct. 12 U.S. House Transportation Committee Hearing at which the Business Travel Coalition testified. In preparation for the hearing, the Business Travel Coalition secured the input of scores of corporate travel and purchasing executives.

From BTC's research, it would appear that suppliers in industries that face upward spikes in the cost of feedstocks, such as jet fuel, have alternative courses of action to consider.

One is to partially offset a cost increase by reducing expenses in other areas, and to absorb the balance of the increase as a cost of doing business. This is how Southwest Airlines handled this year's upward spike in jet fuel costs. Futures contracts, or other securities, can play an important role.

One travel manager reported to the Business Travel Coalition, "I work for a newspaper company that must undertake hedging to protect raw newspaper prices. Raw newspaper is the company's third largest expense and prices are rising this year. I have yet to see the newspaper raise the cost of subscriptions or add a surcharge to cover the rising costs."

Another alternative course of action is to sit down with your customers and work out a fair and rational plan for sharing in the cost burden. Here is how one purchasing manager at a large pharmaceutical company described how the company addresses upward spikes in cost in other commodity areas:

"We are open in concept to the use of surcharges during periods of extraordinary market crisis, as long as they are administered fairly and evenhandedly. We have price escalation and de-escalation clauses in many commodity areas where prices of feedstock fluctuate often.

"When this issue arises within our supply base, we discuss the nature and extent of the impact on the supplier and agree on benchmark costs for the feedstock involved. We agree on a mechanism by which the surcharge will go up as the feedstock price increases and how we will reduce it when the feedstock drops back to the benchmark level, or below."

What this manager describes is, of course, true supplier-buyer partnering premised upon win-win outcomes.

A third strategy is to impose your will upon your very best customers in lockstep with your competitors wherein, for example, a fuel surcharge is a) loosely linked to actual fuel cost increases, b) disproportionately applied to business airfares and c) causes a burden on your best customers. Some major airlines have imperiously imposed their will in this fashion twice this year.

One travel manager stated, "I find it offensive that the airlines can simply raise rates or impose surcharges whenever they feel the need. When other suppliers take this tact, we have the option of redirecting our business.

"However, with the airlines, once one of them does something like this, the others follow like lemmings, leaving us with no alternatives."

Many problems for business travel buyers have been discussed in these pages recently, such as skyrocketing business airfares and eroding passenger service levels. A major systemic cause of airlines' mistreatment of their best customers is a lack of sufficient competitive alternatives in what has become an excessively concentrated industry.

One BTC participant approached his primary airline supplier in February, after this year's first fuel surcharge was imposed, to discuss putting into place contractual language that would address future fuel cost spikes in a win-win manner. The airline did not say, no, it said, Hell No! This is the type of market power some airlines exercise.

With respect to this current fuel surcharge, the Business Travel Coalition is advocating three remedies:


1. The Business Travel Coalition is spearheading an industrywide initiative to encourage corporate buyers to immediately enter into discussions with their airline suppliers. The purpose is to agree on a contract addendum that addresses large swings in fuel prices. BTC participants have developed and distributed boilerplate addenda to 1,300 corporate buyers of air services. (See www.globalbtc.com/press/release/surcharge101100.pdf.)



2. U.S. Department of Transportation studies have demonstrated that it is the presence of low-fare carriers that makes the difference in disciplining major airlines' policies. The Business Travel Coalition urges corporate buyers of air transportation services to join state attorneys general in their long-held belief that the DOT Competition Guidelines need to be issued. Investors in startup airlines must be assured that the government will not allow unfair competitive practices by established carriers.


3. The Justice Department should move to block the proposed United Airlines-US Airways merger. It is a bad idea at a bad time. The Business Travel Coalition has launched www.AirMerger.com to ensure that policy makers weigh the strategic concerns of customers in their final determination about this merger.


<I>Kevin P. Mitchell is chairman of the Business Travel Coalition in Lafayette Hill, Pa., which conducted an Internet Air Competition Summit in Washington, D.C., on Sept. 28. Summit proceedings can heard at www.globalbtc.com/summitschedule/.