Where Carriers Dare

<B>Where Carriers Dare</B>
<I>Second In A Three-Part Series On Hub Negotiating</I>

By David Jonas

Competitive hubs with a dominant carrier and one or more sizable alternatives, while not as difficult to negotiate within as the well-protected fortresses, offer their own challenges and pitfalls. However, as competition among the majors continues to heat up in an ongoing buyer's market, travel managers have more options than in recent years and, for the most part, dominant carriers are more aggressively courting them.

"While there is more balance in competitive hubs than fortresses, I have seen contracts with a 15 to 20 percent discount up front, and another 15 to 20 percent discount on the back end," said Terry Trippler, airline expert at Onetravel.com. "It's getting really competitive out there and nonhub carriers are battling like never before."

While Chicago is the classic hub example of fierce competition between majors as American and United battle it out, several other cities fall into the competitive hub category: Cleveland and Newark, where Continental is emerging as dominant; Los Angeles and Washington Dulles, where United holds the top spot; and American-controlled Dallas/Ft. Worth, bordering on fortress hub status, but somewhat competitive as Delta holds nearly one-fifth of all scheduled seats (see chart).

Of course, each market presents its own negotiating dynamic, depending on the strength of the dominant carrier and the philosophies of competitors, and buyers many times will face similar difficulties to those associated with fortress hubs (<I>BTN,</I> April 3). But a few rules of thumb and possible strategies apply in most competitive hubs.

"In these markets, where there is still a lot of room for negotiation, you will find the dominant carrier doing maintenance, baseline deals," said John Schuler, director of consulting services at American Express One. "They know there is enough of a threat, so they need to keep their relationships going. As a result, the number-two carrier has to exceed that with a deeper discount and an enhanced arrangement because they have less coverage from that market."

Furthermore, should a corporation's travel patterns mesh well with a secondary carrier's network, that carrier may offer to waive advanced purchase and minimum stay requirements on many routes. Schuler added that those carriers also may agree to multicorporation discounts offered through the agency to a variety of customers or even match the frequent flyer mileage built up by a client's travelers with the hub airline.

"Our travelers' affiliations with frequent flyer programs tend to make competing programs difficult to encourage," noted Dan Baillie, travel manager with the Block Drug Co. of Jersey City, N.J. "But carriers generally are aggressive in matching levels, which really doesn't cost them in the long run because they're getting the business." Upgrades and other perks also are used to tempt the buyers.

Meanwhile, the current aviation environment--characterized by weaker than average financial performance--combined with savings on distribution costs, gives airlines more incentive to offer corporate buyers better deals.

In fact, one travel manager in a competitive hub who asked to remain anonymous, said he was able to negotiate a better deal this year with Delta than last year while reducing share by 10 points. "We were ready for a fight and told them that if they couldn't keep a sweet deal in place, we would have to move to a new primary because we have choices in the market," he said. "But this comes at a time when the airlines in general, and Delta in particular, are not as cocky as they have been in the past. Just look at profits."

Midmarket companies that effectively can demonstrate the ability to move share may have the most to gain in certain competitive hubs compared with larger, multinational firms that have traffic spread out in many regions and from multiple domestic hubs. At American Express One--where small and midsize companies are the focus--Schuler said exploiting all leverage factors during negotiations, including traveler behavior, is essential. "These companies have a certain advantage in hubs because of that control," he said. "They do a better job of instilling a feeling of accountability with travelers."

From the airline perspective, clients or potential clients based in competitive hubs, in general, must have traffic in some of a competing carrier's top markets to warrant any sort of discount. "It's the 80 to 20 concept, where 80 percent of business from a corporation is to major markets. If you don't lock up at least a few of the top 25 city pairs, it's a stretch," said Phil Stumpf, national and corporate sales manager for Northwest Airlines. "Every carrier wants to be the preferred in connecting markets, but travel managers must determine how their deal with their primary carrier will be affected."

Indeed, Craig Anderson, director of travel for Universal Music Group, a unit of the Seagram family, said the key to managing multiple carriers is understanding what each carrier needs. "In one case, a carrier is interested in total volume while another carrier is focused on filling seats out of their primary hub," he said. "And I work with a third carrier that is not interested in total volume unless it is going into specific markets."

Examining particular competitive hubs, at least one travel manager is perplexed by Delta's approach in Dallas/Ft. Worth where it is a distant but appreciable number two to American.

Ross McBride, director of corporate administrative services at Ft. Worth-based Alcon Laboratories, said the situation at DFW is the opposite of what would be expected. "American has been more aggressive and more friendly, while Delta has been less aggressive and less friendly," McBride said, adding that his company terminated its relationship with Delta Dec. 31. "We actually had increased our traffic from the year before, but they really wanted to play hardball." McBride added that Delta made it difficult to process waivers and favors and in general, was "borderline impossible to deal with."

However, the reason behind that experience simply may be that Delta no longer can focus on corporate discounting at DFW. "Having decreased operations at the airport, Delta has pulled back to only those routes where they are really strong, like Dallas-LAX, and where two-carrier competition is sustainable," remarked one industry insider.

In fact, the recent 2000 Hub Fact Book, published by Salomon Smith Barney, found that American Airlines increased seat share more than 10 percent last decade while Delta lost more than 14 percent. Such a development is commonplace in hubs as competitors trim less profitable routes. An inevitable result is travel manager dissatisfaction and the need to either seek out other alternatives for network coverage or deal with the dominant player.

Moving forward, buyers may see even more aggressive DFW deals from American as several carriers begin service at recently energized Love Field, an airport much closer to downtown Dallas than DFW that already services a large Southwest Airlines operation. However, Delta, for one, could lose even more ground to American as the latter continues to refit its economy cabins with more spacious seating, subsequently driving higher compliance at companies that use American as their preferred.

Despite a number of secondary and tertiary airports and carriers in and around the Los Angeles area, United has been able to build its presence at LAX. Almost one year ago to the day, it dubbed the airport its newest hub, citing a 30 percent share in traffic, and has since added several international destinations, now totaling 11, and several domestic routes. "For United, claiming LAX as a hub has given it an excuse to enter other hub city pairs like Los Angeles-Houston and Los Angeles-Atlanta," Trippler said. "I would expect United to start service into Northwest's hubs soon."

R.M. Carlson, travel manager at Unocal in Brea, Calif., said United's LAX expansion partially is attributable to its embracing of the corporate market. "It is interesting to watch United as it looks at its corporate base in Los Angeles and proactively adds service as asked by those corporations," he said. "They really have been pounding the pavement and been relentless in obtaining corporate accounts."

However, American, the number-two carrier at LAX, isn't sitting on its hands. Looking for more high-yield market share, it applied for twice-daily service to Washington National, and recently announced another service expansion of 22 daily flights on five new and five existing routes, including Denver. "It's tit for tat following United's move into the Los Angeles-Dallas market," said Rolfe Shellenberger, senior consultant at Runzheimer International. "The landscape is changing and there is competition that has not generally existed in the past."

Carlson added that a few other factors have made for "wonderful buying opportunities" in Los Angeles, including aggressive Asian carriers looking for international business, the heralded Southwest factor and the consolidator option used as leverage by many area corporations. "There is not much new in Los Angeles that you don't see in other cities in varying degrees," he said, "but what we are seeing increasingly from the airlines here, including Asian carriers, is the attempt to structure deals based on corporate needs instead of cookie cutter programs."

United also has the largest share at Washington Dulles, though its dominance has diminished largely due to US Airways' rapid expansion.

Caro Cook, senior transportation officer at the International Monetary Fund, said both United and US Airways--not traditionally known as heavy discounters for travel out of Dulles--have been more aggressive in the Washington corporate travel market, particularly in seeking international business. "There's still an overcapacity on the Atlantic and the airlines need to fill those seats. It's a prime opportunity for them to go after corporate business," she noted. "However, you can offer the corporation all you like, but its much easier if you can offer a good product." To that point, Cook added that US Airways has made great strides in enhancing its inflight product as well as improving customer service from inflight and ground staff.

Farther north, Newark presents its own opportunities for buyers. Though Continental is by far the dominant carrier with more than 55 percent of scheduled seats, and therefore the only hub carrier in the New York area, both American and United compete on transcontinental and overseas service.

"When you are negotiating with three carriers, it becomes a lot trickier. Companies have to make difficult decisions because there is nowhere near the chance to create compromises," said Tom Wilkinson, president of The Travel Management Group, an Alexandria, Va.-based consulting firm. "But the good news is that once you realize you need to align with one and exclude two, you have significant opportunity because you can let the carriers know they need to come in with the strongest deal to become the sole preferred supplier for long haul."

And since Continental and other ancillary carriers are growing at multiple New York-area airports, there is much opportunity to shift around traffic via a strong policy and get a carrier's attention.

Even so, Continental is widening the gap in terms of nonstop availability. "There now is so much nonstop service out of Newark that if there are no connection clauses in your policy, your folks are flying out of there," said Shaun Malay, director of corporate travel at New York Life Insurance Co. "And as the incumbent grows, the other carriers are getting more wary and you can leverage them against the other."

<I>The third and final installment of the hub negotiating series will focus on Chicago and appear in next week's issue of</I> Business Travel News.