U.S. low-cost carriers' infiltration into the corporate market has been accelerating to the point that it threatens to devalue traditional airline-corporation contracting and help alter the very underpinnings of the nation's commercial aviation system.
Playing into the hands of low-cost carriers, major network airlines have retained an unbalanced fare structure, slashed many service elements and tacked on new fees and restrictions for tickets attractive to business travelers. Furthermore, carriers have been alienating many travel managers by eliminating discounts on many lower-fare buckets and mandating that buyers provide them with sensitive travel data.
In an informal poll conducted by BTN last week, the vast majority of 57 select travel managers said usage of low-cost carriers by their companies will accelerate in the year ahead beyond already elevated levels.
According to those polled, the average portion of segments booked on low-cost carriers by their respective companies currently is 14 percent. That is a five percentage point increase over the penetration two years ago when segments, on average, accounted for just over 9 percent of those companies' bookings. Respondents said that five point shift will be repeated—though in half the time—when, on average, low-cost carriers next year will represent 19 percent of all their bookings.
Some of the surveyed companies by next year will not increase low-cost usage beyond single digit percentages, but 21 of the 57 respondents said such carriers will account for a quarter or more of all segments booked, some as high as 50 percent.
Those results resemble the overall domestic marketshare swallowed up by low-cost carriers—currently about a fifth and up five percentage points from a year ago, according to Deutsche Bank Securities analyst Susan Donofrio. Lee Macenczak, Delta Air Lines senior vice president of sales and distribution, speaking late last month at a business travel forum sponsored by Austin Travel and the Long Island Business Travel Association, said low-cost carriers by 2012 will control one-third of the domestic market. Other airline executives in recent weeks have said marketshare for low-cost carriers will grow even greater, and more quickly.
All the while, the airlines in this group continue to develop their operations and distinguish themselves from larger competitors. American Trans Air, a carrier that recently received conditional approval for a federal loan guarantee, last week announced lower administrative fees for itinerary changes and excess baggage. Delta nemesis AirTran Airways launched a new regional product in conjunction with Air Wisconsin
(see story) and JetBlue Airways this month plans to add a fifth daily frequency between its New York JFK base and Long Beach, Calif.
Other domestic carriers in this category include low-cost poster child Southwest Airlines, Denver-based Frontier, bankrupt but operational National Airlines in Las Vegas and America West, which, while technically a "major" carrier, now more closely resembles a low-cost carrier, considering its relative cost structure and new pricing system
(BTN, April 8).
Everything isn't entirely rosy for the nation's less costly carriers. Southwest's legendary efficiency is slipping—evidenced by the latest U.S. Department of Transportation on-time arrival numbers—and JetBlue will start to see increasing costs as its new planes begin to age. Plus, ATA's recent good news from the Air Transportation Stabilization Board on the loan guarantee request highlights the carrier's precarious financial state, which prompted the request in the first place.
Still, these concerns pale in comparison to the difficulties plaguing the Big Six, not the least of which is passenger migration to the low-cost carriers.
Those troubles have led to increased interest and usage of low-cost carriers by corporate travel managers nationwide, like those polled last week by BTN, and explains the changing business mix.
"More than 60 percent of our passengers are business travelers, versus two years ago when the cornerstone of our business was leisure travelers going to Florida," said AirTran sales director Bill Howard, speaking last month at a Corporate Travel Association meeting in New York. "Our agency and corporate Web sites have increased traffic exponentially and travel agency usage has skyrocketed." AirTran still pays 5 percent commissions on bookings through its Web site.
"We have seen a vast increase in business travel demand, particularly as we add lots of frequencies," said Tim Claydon, JetBlue vice president of sales and distribution, also speaking at the business travel forum on Long Island.
Frequencies certainly attract time-sensitive business travelers, but low fares are the obvious differentiator, especially as Corporate America limps through the challenging economic environment. That's why JetBlue always characterizes itself as "recession-proof."
Using their lower fares to stimulate discretionary traffic and lure corporate travelers, low-cost airlines continue to expand while the Big Six retrench.
JetBlue, for example, grew traffic in the first eight months of this year by 112 percent versus last year. Measured in the same period, AirTran's traffic was up 15 percent, Frontier's 11.3 percent and American Trans Air's 6.7 percent. Year-to-date through August, Southwest's traffic was down less than 1 percent versus last year, compared with the Big Six, which have been running between 10 percent and 20 percent lower.
The most recent traffic reports detailing September performance cannot be used as effective benchmarks, as year-over-year numbers are dramatically skewed by the events of last September.
A long-held belief by some industry observers—that the Southwest model will proliferate nationwide, leaving legacy carriers to service transcontinental business routes and international travel—slowly is materializing. Though the majors are not sitting on their hands—Delta, for example, is in the process of concocting a new low-fare product—history has shown they have difficulty mounting a successful defense.
Shortly after the terrorist attacks of last September, United ceased shuttle operations on the West Coast and US Airways pulled the plug on MetroJet. Even Delta significantly pared down Delta Express operations.
"Delta's new version of Delta Express will only lay off employees and try to emulate Southwest," said AirTran's Howard. "At the end of the day, they'll never be like us and the other low-fare carriers because you cannot have seven different aircraft types. They are trying to be all things to all people."
Low-cost carriers have marked advantages in other areas, namely labor, and distribution also plays a key role. JetBlue, for example, funnels 60 percent of all bookings through its Web site, and like Southwest, only participates in a single global distribution system—Sabre. Instead, Southwest continues to attract companies to its online Swabiz portal and JetBlue is evaluating relationships with corporate self-booking tools.
AirTran's A2B Corporate Travel Program provides additional ticket flexibility and free space-available upgrades, while Frontier's business travel program provides companies with a 5 percent credit toward future bookings on all tickets purchased, including those booked on the carrier's Web site.
Despite availability of such programs, fewer than half of BTN's poll respondents said their company has some type of formalized program with a low-cost carrier, either related to sales, distribution, traveler services or ticketing flexibility.
Some said they simply do not need any such contracts. "We don't have to do any deals with the AirTrans of the world because they are out there anyway with the low-fares," said one travel manager. "We can push traffic to them without committing to anything."
"We don't do deals, and sometimes that is difficult to explain to corporate travel managers," added JetBlue's Claydon.
Despite increasingly visible handicaps, the majors still have plenty of leverage when dealing with the business community, including powerful loyalty programs, global reach, well-established relationships, business traveler conveniences and other corporate travel management benefits.
"We look at it from a network, total corporate solution and we don't want to jeopardize our agreements with the majors," said Paul Tomaszeski, executive director at Novartis in East Hanover, N.J. He added, however, that people have become more flexible and aware, and that alternate airports are becoming more palatable. "These airlines are becoming major players and a power to be reckoned with."