OP ED: Distribution Reform Stalls

It has been three years since the airline industry began to focus on shifting from a high-cost distribution system model to a low-cost one. Today, costs remain high and customer needs remain unmet. A changed airline focus, misunderstood customer needs and a risky environment for technology investments are responsible for distribution system reform that is on a distressingly slow track.

It is true there has been the appearance of progress over the past three years: fee-based agency pricing became fashionable; net fares, all the rage; fresh ideas surfaced with new technology entrants; Internet, intranet and extranet entered the lexicon; and technology associations, newsletters and conferences proliferated.

However, for the most part, transformation to a low-cost distribution system has been characterized by much activity, but little accomplishment.

Why does reform seem stalled? There are a few important issues.

In the early 1990s, low-fare airlines with low-cost structures were putting tremendous downward pressure on major airlines' yields and causing the majors to retreat from price sensitive point-to-point markets. Major airlines had little choice but to respond. From late 1994 through 1995, there was an aggressive effort by airlines to address distribution cost problems.

Events of 1996, however, changed major airlines' focus away from cost reduction. As Robinson-Humphrey analyst Dr. James D. Parker notes, "1996 was a year like no other in the post-deregulation era of the airline industry. Cost reduction has taken a back seat to maximization of profits through revenue generation."

On January 1, 1996, the federal excise tax lapsed and most major airlines were projected to realize more than a billion dollars each in windfall revenues on an annualized basis. After the ValuJet crash of May 11, 1996, major airlines used the excise tax windfall to subsidize a flood of cheap seats in low-fare airlines' markets and pursued other initiatives directed at low-fare carriers.

In recent filings with the U.S. DOT, low-fare airlines point to strategic offensives against them by major airlines that include: predatory pricing, capacity dumping, following low-fare airlines into new markets, double point frequent flyer awards, biased CRS systems, exclusive corporate contracts, and anticompetitive commission override programs. Underscoring the concerns about how these practices affect the competitive viability of low-fare airlines, a recent BTCC Airline Competition Summit drew 225 attendees from 25 states including representatives of the DOT, DOJ, FTC, GAO and the U.S. Senate.

Off the record, some airlines lament that their net fare programs are not well received in the marketplace despite professed customer interest in net fares. Airlines are not responding to what customers really need and are promoting a new fare basis code instead of a true low-cost purchasing system. Most net fares proposed by airlines add little value and in many cases can be more costly.

Adding to the problem is that many airlines simply want to shift travel agency compensation responsibility to the corporation without equitably sharing distribution savings. With discounts pegged to a percent off "Y" fares, and business airfares up 28 percent in the past year, a few additional points of discount can be quickly wiped out, making a mockery of the negotiating process. Moreover, without multiple airlines participating in a corporation's low-cost purchasing system, a matrix of net and commissionable fares, transaction fees, overrides and rebates adds to the complexity.

Travel managers are under increasing pressure from their senior managements to find long-term solutions to what is becoming a very serious purchasing problem. A low-cost purchasing system that can solve cost problems for corporations should include: airfares unbundled of distribution costs, simplified airfare structures, guaranteed pricing, realigned supplier-buyer-distributor relationships, and redeployed technology resources.

While it is true there are high profile corporate technology projects underway, many firms are responding with caution to investment opportunities. Fare structure complexity, unpredictable pricing, illogical seller-distributor-buyer relationships, overrides and CRS kickbacks are blocking faster acceptance of technology solutions. Exacerbating the problem is confusion over which products actually work.

Without major airlines returning to a commitment to a low-cost distribution system model, and one based upon real customer needs, progress will remain frustratingly slow and risky. With 70 percent airline load factors, and attendant pricing power, airlines are unlikely to aggressively pursue true distribution system reform in the near term. However, other marketplace developments could offer opportunities.

Increasing industry concentration in the hands of a few superpower supplier groups, such as the proposed American Airlines-British Airways alliance, might encourage the formation of buying groups as a counter-balance to unprecedented supplier market power. Most analysts agree the industry profit cycle has peaked. When market conditions turn, the customer could be in a position to accelerate progress toward a low-cost distribution system designed to benefit all parties.

<I>Kevin P. Mitchell is president and founder of Business Travel Contractors Corporation (BTCC), a strategic buying and advocacy group representing 45 corporations with combined yearly business travel spending of $1.5 billion.