Oil tumbled below $30 per barrel for the first time in 12 years
last month, after airlines already had been raking in record profits thanks to
plummeting fuel expenses.
Meanwhile, in the United States, American Airlines began
2016 fully merged with US Airways, at least on the passenger-facing side,
meaning all three legacy U.S. carriers now are free of integration distractions
and are in full competition mode. They're also investing those record profits
back into their product: new planes, new amenities and better food-and-beverage
offerings.
All this means airfares won't be rising this year, according
to industry forecasts. In its 2016 forecast, BCD Travel consultancy Advito said
airfare would be "essentially flat" globally, barring a sudden
increase in oil prices: "Lower costs are feeding through to increased
profits and have given airlines the confidence to expand capacity. This
increase in supply ensures fares won't rise in most markets and drives them
down in regions where competition is most intense."
It's a good climate for travel buyers, according to
GoldSpring Consulting partner Mark Williams. "This level of profitability
won't last forever, so airlines are ... making a grab for market share, and
there's a big fight for it."
Buyers Have To Earn It
Still, successful negotiations will depend on the controls
the buyer sets up around the travel program. "In terms of negotiating, it
is a pretty good time, if you've got a managed program," Williams said. "You
still must demonstrate that you have a policy where you can move business.
Airlines will continue to be reluctant to make investments in corporate
discount programs for those who let everything be a free-for-all."
The ability to capitalize on the negotiating environment
also depends on the routes and classes of service buyers are using. Despite
their profit windfalls, the legacy U.S. carriers are demonstrating discipline
in growing capacity, which increases the difficulty of negotiations.
"Over the course of the last two years, we've seen a
majority of carriers become much more diligent in their management of fleet and
other related costs, which has resulted in the high load factors and more
stable financial positions that we see today,' American Express Global Business
Travel director of consulting Jim Ranney said. "Bottom line: Full planes
equals stable fares."
Routes With Opportunity
Demand on international routes has softened of late,
Williams said, so a large percentage of international travel makes for
especially good leverage. Low pricing on transatlantic markets—roundtrip
business-class fares on the New York City-to-London route are running as low as
$3,000, for example—indicates negotiating power for buyers that have a high
volume on those routes, according to Advito. However, airline joint ventures
are producing larger networks, and that's increasing pressure on buyers to
dedicate all their business to one group, Advito cautioned.
On U.S. domestic routes, negotiating success will depend
largely on how competitive the particular markets are. Delta and American are "at
war," Williams said, so if you can pit those two against each other, it
can prove helpful." Other competitive routes include transcontinental
routes between key cities, as well as routes that connect secondary cities and
for which there's a choice of connecting hubs, according to Advito.
Unfortunately, those conditions don't apply to 70 percent of
the U.S. domestic network, as competition is declining rapidly on routes from
hub airports to smaller cities. In fact, quadruple-digit coach fares from a hub
like Atlanta to, say, St. Louis or Austin, are not out of the ordinary,
according to Advito.
Williams urged buyers not to overlook "niche players"
like JetBlue, Virgin America and Southwest Airlines as negotiating levers. Like
legacy carriers, ultra-low-cost carriers are boosting capacity, particularly
Frontier Airlines, which has announced 56 domestic routes to be rolled out
through June. Such carriers may not be an option for a large, managed travel
program, but the competition does tend to bring down pricing nonetheless. For
now, at least.
Buyers likely will find it increasingly
difficult to benefit from the so-called "Spirit effect," a reference
to Spirit Airlines' nothing-but-a-seat, industry-low fares, as legacy carriers
put up their own similar offerings. Delta has expanded its Basic Economy
fare—in which travelers face heavy restrictions, including no changes and no
seat selection—and both United and American have indicated they plan to launch
similar fares this year.