UA Prez Paints Painful Picture

New York - In a frank discussion on the state of the airline industry, including the "confusing, unfair and broken" pricing structure, United Airlines president Rono Dutta late last month told Corporate Travel World attendees the industry "is fragmented to the point where I don't think it works" and cited the need for consolidation. "Our U.S. share is 15 percent, but our worldwide share is 2 percent," he said. "We, the airlines, tried desperately to cobble together Star Alliance, Oneworld, etc., but that is not complete, and it shows up in lots of things, including pricing."

Dutta said United "will actively consider federal loan guarantees" and did not rule out a bankruptcy filing.

Dutta also said the industry suffers from too much capacity, a result of airlines increasing frequencies and destinations to win the "CRS share game." He added that the industrywide labor crisis is a productivity issue, not a compensation issue. "I have a hard time saying we overpay people," he said. As far as the recent base commission elimination, Dutta said United, like most others, will pay for performance. "Travel agencies have a legitimate role to play because we sure cannot handle all the tracking, unused tickets, etc."

Reflecting the renewed sense of openness between buyers and airlines that has accompanied the unprecedented challenges of the past half year—highlighted by a very volatile business travel pricing market—one CTW session provided a refreshing look into negotiating with airlines. United Airlines vice president of sales in North America Frank Kent, for example, downplayed the possibility of buyers being "made whole" following the reduction of base commissions to zero earlier last month, responding to a question to that effect by saying, "I would not connect the dots between what happened last week and what will happen."

"We have some enormous challenges we need to work through, and they're not just about deals and discounts," said Dave Hilfman, vice president of multinational sales and revenue programs at Continental Airlines. "When even Southwest Airlines is saying they're having challenges, you know there are fundamental changes coming."

Buyers in the room showed their disapproval of the decision formalized last year by Northwest Airlines to remove business discounts from certain low-fare types, which met with significant resistance from a handful of Northwest customers, including DaimlerChrysler. Continental's Hilfman defended the carriers: "There's an amazing range of fares and, directionally, I think it's not inappropriate that discounts start getting reduced or eliminated on the lowest fare stuff. That shouldn't be unreasonable and it's probably in every airline's economic best interest, but then you have more aggressive discounts on the fuller fare stuff."

"I've always emphasized the airline part of my program because it's the biggest expense," said Kevin Brady, Merrill Lynch vice president of global travel services in New York, one of the largest corporate travel accounts. "Moving one point can mean $2 million in savings." Merrill Lynch's average ticket price, he said, is down more than 10 percent year over year, mainly because of lower published fares. "A couple of our deals are better than before because of performance, and some airlines that were unreasonable before are no longer so," he said. Brady noted that airline contracting is "not always just about price," calling "amazing" the improvements in premium class service.

Consolidation dominated the discussion during a general session with the leaders of three large travel companies—a card company, a mega agency and a global distribution system—on the future of business travel management. Danny Hood, president of Atlanta-based WorldTravel BTI, noting that the mega "has been on the acquisition trail since Sept. 11," said he anticipates travel distribution partnerships that may represent "a convergence of online agencies, traditional agencies, GDSs and others."

Ed Gilligan, group president of global corporate services for American Express, said, "U.S. consolidation is inevitable," now that some players in the industry no longer have sustainable business models. Pointing to successful low-cost airlines in the United States and overseas and the growing trend of private corporate jet travel for business executives, he said, "The major carriers are being picked apart at both ends."

Mark Miller, CEO of Galileo International, reflected his position within the diversified Cendant Corp. by alluding to the synergies of leveraging customer relationships on multiple fronts, such as real estate or relocation with travel. Hood discounted the concept.

Regarding British Airways' recent decision to no longer absorb merchant fees imposed by credit card companies (BTN, March 4), Gilligan said: "It is a clumsy attempt to save money while pushing costs back through travel agents and onto customers. We take that personally at American Express. We lived through that on the travel side and now we're experiencing it on the card side. It's an attempt to move to airline central billing, to give them more access to your information. We'll see what really gets implemented in June."

On the confounding issue of Web fares, Gilligan said American Express' "single biggest investment in travel" has gone to an 18-month development of the infrastructure that will allow travel counselors to look at fares from the GDS and from airline Web sites side by side. "But we need to convince the airlines that they need to provide access to Web fares broadly, through the GDS or through direct connections," he said. Hood added that an Internet booking service could help midsize agencies survive the post-commission environment.

"You'll see us all put in place Web crawlers to meet the need," said Worldspan senior vice president of worldwide product solutions Sue Powers in a separate general session on technology. "We're definitely implementing technology solutions to deal with this problem, but we have to be cognizant that the airlines use it as a tool to direct people to their Web sites."

Web-only fares "clearly have to be incorporated into the self-booking tool," said Jeff Palmer, CEO of Sabre subsidiary GetThere, during the same session, "and the band-aid path is to paste in a robot. But the permanent solution lies in a business problem in that suppliers are making channel-specific offers you can't see. We're looking for the sensible integration of Web fares, not just a band aid." A spokesman for Web search provider FareChase—which works with Outtask's Cliqbook booking tool as well as with Rosenbluth International—said the company's beta test with Sabre just expanded to 150 Sabre agencies.

Joining Palmer and Powers, TRX Inc. CEO Trip Davis mentioned "definite plans" by the industry to develop voice recognition for booking and other self-service applications. Davis added that the telephone "can be our friend if used at the proper times," noting that when agencies or corporations buy travel technology, they also are buying a service.

"When you make something more expensive and more time-consuming, people will do less of it," said Sam Buttrick, analyst at UBS Warburg, during the Corporate Travel 100-only airline benchmarking session. Buttrick was referring to the time-value proposition of air travel, which, in his view, has deteriorated in recent years and been exacerbated by the security requirements enacted after Sept. 11. "The speed of business travel is slower today. It is an inferior product, while bandwidth is getting better and cheaper."

Buttrick also told attendees that airlines "are not going bankrupt any time soon and there is no liquidity crisis." However, he said, there is "a profit crisis and a return on investment crisis" and the industry this year may lose between $3 billion and $3.5 billion, followed by a small loss or break-even performance in 2003.

In the CT 100-only hotel benchmarking session, CIBC World Markets lodging industry analyst Paul Keung provided Corporate Travel 100 participants with a Wall Street perspective of the present hotel market. "Post-Sept. 11 data indicate that the struggling hotel industry continues to be hard hit," Keung said. As evidence, he cited U.S. occupancy rates for January, which were down 6.7 percent over the prior year, with revenue per available room, a key indicator of hotel profitability, down a steep 12.9 percent.

Keung said business hotels in fly-to markets were among the most exposed segments in the current downturn. "As for price point, the deluxe and upper upscale industry segments were most vulnerable. RevPAR for upper upscale hotels, for example, dropped 17 percent compared with January 2001," he said. By contrast, hotel companies with significant penetration in regional markets and drive-in business have fared better. To give a sense of when the industry's fortunes might turn around, Keung noted that during the 1990-91 recession, the industry experienced five consecutive quarters of negative RevPAR growth before conditions improved.

In a session on the midmarket, Charles Roumas, vice president of the eastern region at American Express One, said, "Middle market customers can have complex requirements with longer travel management lists than a $90 million account. Therefore, a spectrum of assistance is required." He highlighted three keys, including leveraging agency clout for better rates and fares, maximizing such agency products as interactive tools and e-fulfillment and establishing a track record of credibility with suppliers.

Roumas noted a 400 percent to 500 percent increase in interactive bookings among the agency's client base. American Express One has 900 clients that spend between $1 million and $10 million in annual air volume.

Larry Austin of Austin Travel and the Travel Management Alliance said companies should have someone focus specifically on travel: "If your travel spend is $1 million or more, you shouldn't do it on a part-time basis. And make sure somebody on top mandates."

Meanwhile, Kevin Maguire, travel manager at Tokyo Electron in Austin, Texas, discussed the possibility of consortia purchasing for midmarket companies and noted the success of the five-company consortium in which Tokyo Electron is involved. "It took three months to work with car rental corporations to show them how to make an agreement that works, but now we have five better contracts with umbrella incentives," he said.

Loretta Larkey, travel manager at TMP Worldwide, weighed in on the issue of Web fares, noting that her policy states travelers are not reimbursed for Internet bookings. "We educate them about our online booking tool," she said, "but if they find something cheaper on the Internet, it is given to travel counselors who shop and then go back to the airline."

"Make sure your agency has installed a search engine for travel counselors," added Roumas, "and use passive bookings in the CRS."

Travel buyers use hotels' weakened market position in the travel slowdown to negotiate better rates, but suppliers indicated that the days of bargain housing deals might soon be over. During the Hotel Market Shift: Negotiating Tactics For a Changed World session, buyers and hoteliers alike remarked that the market would swing back into suppliers' favor and that travel managers should prepare for this eventuality now.

Gail Wargo, director of national accounts for Marriott International, said travel managers that drive too hard a bargain with their occupancy-hungry hotel partners may be setting themselves up for similar treatment when the market turns around.

Buyers agreed. "We have to maintain relationships despite changes in the marketplace," said panelist Beth Caligiuri, travel procurement manager for Atlanta-based Coca-Cola Trading Co. "We're seeing savings and better rates, but we're committed to delivering volume to our preferred properties."

Hotels offer added services to corporations that have been able to deliver volume, said Ruth Philpott, manager of American Express Consulting Services. "Most commonly, bonus offerings include free phone service, free breakfast or free airport shuttle service."

Erin Barth, vice president of global travel at New York-based Credit Suisse First Boston, said the changes in the marketplace have increased the strategy involved in hotel negotiations. "We're getting less questions about volume," she said, "and more questions about market share. Negotiations have taken on a more strategic character."

Marriott's Wargo indicated that strategic pricing does not always lead to cheaper housing. "Some of the hotels made panicked decisions following the crisis of Sept. 11," she said. "Now they are rethinking some of the low rates they offered buyers."

Travel managers whose companies have the appropriate technology already are developing habits that direct travelers toward usage as an alternative to travel, said S. Ann Earon, president of Telemanagement Resources International Inc. and chairperson of the Interactive Multimedia Collaborative Communications Alliance, during the Facing the Face to Face Alternatives session.

While usage and acceptance generally is faster when conferencing suppliers sell to upper management of a corporation, Earon said, some travelers now are reminded upon receiving travel confirmations that they could have used the in-house conferencing equipment to save themselves the trip.

Videoconferencing usage rose again after Sept. 11 as a means of rescuing lost productivity or as a way to host internal and repeat meetings. Internal meetings, for one, make up an estimated 20 percent to 30 percent of business trips, said Steve Reynolds, general manager and executive vice president of TRX Technological Services. "Eight hours per trip is considered unproductive," estimated Earon. Still, the industry's development has suffered from exaggeration of the product, she noted. "They said, 'It's like your television and works like your telephone,' and this is not the case. But it will evolve."

For now, a lack of support and education keeps product usage low. Suppliers agreed that the companies with the most success integrating video- and teleconferencing technologies have a support staff for the products, even if outsourced. Companies must determine what conferencing abilities are important to their long-distance interactions: Would a voice and data share suffice, or does the company value the face-to-face experience of videoconferencing?

Another challenge to adoption is the lack of a standard, noted Ned Semonite, vice president of product management for Milpitas, Calif.-based Polycom Inc. He noted that Cisco and AT&T are two players working on standardization.

One change can be found in the dramatic drop in the cost of implementing a videoconferencing product, Earon said. Installation of a basic system now costs about $1,000, with a corporate video product running closer to $10,000.

Budgetary and legal concerns entered into the discussion of corporate responsibility for traveler security. Moreover, travel security suppliers asked, How do travelers change travel habits just enough to make them less predictable to foreign criminals seeking to profile potential targets, while also keeping within company policy?

"You need to balance your business methodologies with the need for safety and security," said Alexander Tabb, associate managing director of Kroll Associates. "It's often difficult to weigh these things."

While seeking both a travel intelligence service and traveler tracking capability via a more "robust" booking tool, Cindy Shumate, senior director of global travel for Gartner Inc., asked, "But where do I find that money in my budget?" Gartner created Safe Smart Travel, an intranet-based program that links travelers to travel warnings, fact sheets, doctors and hospitals overseas. The company also generally follows the U.S. State Department's travel recommendations.

Tabb stressed that travelers need to maintain "situational awareness" to avoid such situations as the kidnap and ransom crimes occurring in Mexico, Latin America, South America and the Middle East.

Greg Meyer, chief technical officer for iJet Travel Intelligence, said travelers need access to real-time information distributed effectively. Shumate added that companies need to have access to properly stored data to find travelers through PNR searches.

The confluence of changing business patterns, a weakened economy and post-terror pent-up meetings demand have caused corporate meeting lead times, already short, to shrink to previously unseen levels, said a panel of buyers and hoteliers. However, planners can take advantage of those trends by hunting for distressed hotel space even as they streamline internal processes.

PricewaterhouseCoopers director of travel and meetings Gilda Caputo said about half of her company's meetings are scheduled and implemented within 50 days and 38 percent are within 30 days—a fact that caused the company to scrap its procedures under which planners were responsible for a particular aspect of the planning process, be it sourcing, convention services or logistical planning. "There wasn't enough time for the process, and we totally revamped it because of short-term meetings."

Schering Plough Corp. director of travel services Mike Doran said his company's 500 meetings averaged about 54 days of lead time in 2001, a number that drops to 40 or so when internal training meetings are removed from the mix. "We try to leverage properties we've been successful with in the past," he said. "Technology is key. We have Web-based registration. Our internal clients are willing to listen to experts and there's not a lot of pushback."

About 40 percent more meetings were booked with less than 30 days' lead time at The Ritz-Carlton Hotel Co. properties in January and February than in the first two months of 2001, said vice president of sales and business development JoAnn Kurtz-Ahlers. But that type of systemwide demand will soon hurt buyers negotiating in the short term, she said, despite a surfeit of inventory. "Success is short-lived for the short-term planner," she said. "There's so much demand that that opportunity will be taken away. The best opportunities are longer term, because people are not as focused on 2003 or 2004 now and that's where hotels need business on the books."

Moderator Kaye Mulkeen, executive vice president of WorldTravel Meetings & Incentives, noted four drivers of the short-term trend: reluctance of corporate management to commit meeting funds until necessary, the rapid change of corporate business plans due to the economy, slower attendee commitments and the limited need to book in advance.