The complexities of global air contracting in the past few years
have mounted with the rise of international airline joint ventures, the entrenchment
of global alliances and changing carrier perceptions about the true value of marketshare-based
deals. Four Europe-based buyers in October at the Association of Corporate Travel
Executives global conference in Barcelona sat down with Travel Procurement contributing editor Amon Cohen and editorial director
David Meyer to discuss the state of airline contracting. The buyers were: then Siemens
head of global travel management Jens Bäringhausen,
Syngenta head of global travel management Peter
Brodbeck, Coca-Cola Co. European travel manager Michael Hill and Corrado Simontacchi,
Huntsman manager of corporate purchasing, goods and services for Europe, Africa
and the Middle East, and a board member of the Belgian Association of Travel Management.
Edited excerpts follow.
Do you find it easier or harder to negotiate airline contracts than you did two years ago?
Michael Hill: It's getting more challenging. We no longer negotiate with one airline for the most part; it's about dealing with Oneworld or Star Alliance, but then we find we can't have discussions about certain airlines or routes, and then we find certain carriers within those alliances approaching us directly. I don't think some of the airlines are happy with the set-up of the group contracts.
Are you talking mainly with the joint ventures?
Peter Brodbeck: Yes. Alliances are just a marketing exercise now. OK, they do their connecting flights, etc., but for us as a corporate client they are close to useless. So we are not talking to SkyTeam, for example; we are talking to Air France/KLM/Delta. We are talking to American Airlines/British Airways, not to Oneworld.
Are you finding that they sometimes tell you to talk to them as a JV and other times as individual airlines?
Brodbeck: Yes.
Corrado Simontacchi: In my experience it's even worse, because the airlines' own sales forces don't know what to do. Often they ask what option I want, and I say: "Tell me what brings more value to my organization, because I don't understand the relationship among the airline partners." With Star Alliance, it took me more than one year to get a little clarity, which was that it would be better for me to deal with each carrier individually.
Are you still able to deal with them on a carrier-by-carrier basis?
Brodbeck: Yes, you can.
Simontacchi: I had my first truly global airline deal with KLM and Delta five or six years ago, but now instead of moving toward global agreements, I'm mostly moving back toward regional or even local agreements.
Jens Bäringhausen: From a negotiations standpoint, we are focusing on the JVs, but they are very different from each other. For example, we have very good experiences with Air France/KLM/Delta, because someone from one of the airlines takes the lead and you can really rely on them. With the JVs from carriers within Star Alliance, it's more or less the opposite. They cherry-pick instead of being customer-oriented, especially for global contracts. I'll give you an example. In Germany, corporate clients have a contract with Lufthansa called Partner Plus, and we are not allowed to sign a single-airline contract with United, so we don't have the opportunity to talk to United, at least not in negotiations. So I have to have a price level with Lufthansa that is normally higher because it's the home carrier, and I pay a price for United that is far above all the other U.S. competitors.
So when United approaches us and says, "What about countries like China and Brazil? Can we do business there?" it has come to a point where I tell them I'm not really interested. In Star Alliance's second-biggest market, they don't allow me to deal directly with them. In their biggest market, they are also charging me premium prices, especially out of their hubs, which have become even stronger since the merger with Continental Airlines. From the standpoint of short-term profit maximization, it's great what the Star Alliance JVs are doing, but from a long-term loyalty and partnership perspective, it's definitely not the right thing.
Simontacchi: The value of a corporate deal is becoming more and more difficult to justify. It might be there for one country, or one specific route, but when you look on a global scale, whatever you gain on one side, definitely you are going to lose it on the other.
Brodbeck: This was why we didn't contract with Swiss and Lufthansa, even though we're in their home market.
Simontacchi: That's what we did as well.
Brodbeck: We said, "no, we're not doing it." We told our people they had to go via London, Paris and Amsterdam. They have to accept connection times of up to four hours. We even went to our executive committee about it, and they said, "yes, go for it."
How did your travelers receive this news?
Brodbeck: We still have to use Swiss and Lufthansa on short-haul routes, but on long-haul, of course they didn't like it, but then we did some marketing promotions with BA and Air France where they could get matching frequent-flyer status, and that went down very well. We are almost minus 50 percent on Swiss and Lufthansa.
Simontacchi: When it comes to short-haul, what is the value of a contract? Sometimes when you talk individually with a local carrier, or an international carrier for a local market, you might get something, but when you talk to an alliance, forget it. When I start putting down on paper the real hard-dollar savings of a global corporate deal, you're talking about peanuts.
Hill: If you have a business-class policy, you are seen as a golden goose for these carriers. Our policy is that international flights over three hours are in business class. That's where we pay the most per ticket, but our biggest spend is on regional routes, and no one is giving us anything for regional, except for niche carriers like Airberlin and Norwegian. SAS is interesting because it has approached us with discounts on a separate contract, but we say to them: "Aren't you tied in with Star?" That's what has become confusing.
Simontacchi: And if you look at this from a traveler's point of view, it becomes difficult to explain who your preferred carriers are. They might get the benefit when they travel long-haul, but they don't see any benefits when they travel short-haul. They're asking about benefits, and I have to say, "yes, but only in this situation and not in that one." They are getting confused.
Bäringhausen: That is a very interesting point about short-haul and medium-haul flights. A few years ago we did a deep-dive analysis, which we presented to one of the big airlines. About 80 percent [of our volume was composed of] published fares. Only 20 percent was corporate fares. Then I deducted from the 20 percent those tickets in the highest booking class–Y class, for example, or C class, where I don't have any discount and they are basically like published fares. I ended up with 15 percent of the volume. If I deducted from the 15 percent volume things that are not negotiable, like fuel surcharges and security, it ended with 5 percent where I really had an influence on the pricing. The worst thing about it is that it takes us three months to negotiate on so little value. It's a waste of time for both sides.
Simontacchi: That's the situation I'm facing. I'm refusing to meet airlines. I'm saying, "This is what I'm spending with you; if you are prepared to have a conversation about the scope of the commercial negotiation, fine. But if 20 percent is not negotiable because of fees, tax, charges and surcharges, then no way." When you are talking about managing just $10,000 of spend, I don't see the value-add.
Is spot-buying the alternative?
Simontacchi: [For] short-haul.
Bäringhausen: We have to admit spot-buying hasn't been bad for us. If you look at the average price we pay on short- and medium-haul now compared with five or six years ago, it's much lower. It is really hard internally to prove the value of the procurement department, because we get nearly the same savings as a company with much smaller spend. We can't get the benefits of scale on the pricing side. It doesn't necessarily mean we have to find these economies of scale on pricing. We can find value in other ways.
However, although airlines talk about corporate recognition programs, and it's a good idea, I don't trust it. One airline told us it was implementing a priority wait-list program for its top customers. Well, I waited and waited for the wait-list and nothing happened, and at a certain stage I realized that it had been introduced for some companies but not for us. The honest answer I got back was that our yields were not attractive enough to put us on the program. So where's the corporate recognition there?
Simontacchi: This is where I struggle today with airlines. I understand that if you buy a fare for €9.99, you cannot expect a discount, but I would like them to recognize the corporate relationship, as Jens said. What I say to them is: "You can keep telling me these are not business products, but our travelers keep using them, so if you cannot give me discounts but want to be recognized as a preferred partner, give me some other benefit." But again they say this is not a business product, so they are not interested in negotiating with us.
Hill: I am surprised to hear an airline is saying Siemens' yield is not attractive. Where does that leave the rest of us?
Bäringhausen: I don't want to defend the airlines, but we should try to understand the reason behind that, because then maybe we can see how to change it. The airline industry has massive margin pressure. For that reason, there has been a total shift from the sales organization to revenue management. So coming back to the opening question, five years ago sales departments were stronger. Today, if a salesperson wants to offer you a price, they first have to go to revenue management, and even if they do give you that price, you don't believe it will be available. The whole business is more a coincidence than a negotiation.
I'm convinced we are talking to the wrong people today. We should be talking to revenue managers, but they don't want to talk to customers, so the salespeople are in a difficult situation.
Brodbeck: Sales is just a messenger.
Simontacchi: I agree. We have difficulty passing messages through the salespeople we meet. They want to come and see me about the size of the video screens in their new aircraft and what kind of wine is going to be served. Fine, but that's not the point. We need to talk about serious business.
We all understand airlines' profitability issues, and they do whatever they believe will maximize revenue and increase profitability, but they neglect the fact this is creating extra cost on our side. There is a point where this will not be sustainable anymore. We are already seeing companies give up commercial negotiations with airlines, because what's the value?
As travel managers, are you feeling impotent with airlines?
Hill: I wouldn't say that. Our policy is lowest logical fare on the day, so we are spot-buying. If another carrier is cheaper, you take it or you're out of policy. Our deals are mitigating what we pay maximum when a flight is full.
Brodbeck: Most of the savings nowadays come from steering volume away from the more expensive carriers. But you need the tools for that.
What tools?
Brodbeck: Good pre-trip reporting and name-and-shame reporting, and we do that actively. We need the support of top management. If you have that, you can do it.
Bäringhausen: It's not that we aren't able to manage anymore; it's more that the parameters have changed. We have moved from a preferred-partner approach to a lowest-logical-airfare approach. We have also moved from a decentralized approach to a global approach, which has proven very helpful.
There is also the varying development of volume in different parts of the world. Today, Germany and the U.S. have more than 50 percent of our volume, but growth in our European and North American markets is 0 to 2 percent per year. In emerging markets—Brazil, India, China—we have growth of 30 percent per year. So our global cooperation is extending with partners like Emirates, Turkish Airlines and Air China. What the European legacy carriers miss now is that they don't have the ability to grow in older markets, and in the emerging markets they are not anticipating any more from us, because why should I let them participate when I don't get any benefits elsewhere?
Do you find that Turkish and the three Gulf majors are providing alternatives for your travel programs?
Simontacchi: Yes. Turkish Airlines has a great product and it is being aggressive, so it has all the ingredients to win a fair share of our business. When you fly from Europe to Asia, people prefer to do a short hop first in Europe and then an eight-hour flight rather than stop halfway through, but when you get budget pressure and a quality service and very competitive prices, people are prepared to go for it.
Are the airlines losing because of the attitude they have adopted and, if so, how can you persuade them to think again?
Simontacchi: In my organization, we can see this happening. Carriers are losing market share. Airlines are asking us to improve compliance, but compliance is not pushing people to travel with Airline A or B; it pushes them to travel on the lowest logical fare, and that is creating a lot of shift.
Bäringhausen: I feel like we're turning back the clock. Before we started corporate agreements with airlines about 15 years ago, the travel agencies did deals and we used their fares. Then the airlines approached corporate customers directly because they saw the corporation as the decision-maker. Now they are losing direct contact with the corporation and distribution is fragmenting further. Multi-channel is a great opportunity for TMCs to come back to their clients and say they are not only focusing on fulfillment but also would like to bring value by finding the best fares in the best channels.
Brodbeck: In my view, the TMCs are sleeping. They're not taking the opportunity. None of the new technology for corporate travel is coming from TMCs. They have been talking for years about the global platform that will sell everything, but it's not there yet. My fear is that another provider from outside the business will offer a platform with all the content. Today, air tickets still need to be issued by an IATA-accredited agency. If that rule falls away, it will have a big impact.
Simontacchi: I recall a slide from American Express many years ago showing a pie representing a travel budget. Only a tiny slice of the pie was travel management costs, so the message was to focus on the biggest part and not this one. I don't see this chart anymore because the travel management slice of the pie keeps growing and growing. That leads to more scrutiny within your organization of the business case for investing in travel management. When you get to the point where the benefit from an air program doesn't create the return, the question is why does a company like mine, which makes chemicals, need to invest in travel management when it could invest that money in chemicals?
Whether through your TMC or other channels, you have all stressed the importance of lowest logical fares to your sourcing strategies. Are you auditing to make sure the best fares are being offered to your travelers?
Hill: We're doing that on long-haul business class. We challenged one of our major carriers on that last year, especially during the summer when lower fare classes weren't available. We did our own analysis and presented it to the airline. They put their hands up.
We get very little of travelers finding a cheaper fare online, I have to say, but I will investigate it if it happens. Occasionally, Lufthansa especilly will dump a fare on the market—I hate that—and BA also in Germany will dump a low fare.
Simontacchi: When you bring this to the carriers' attention, once again they say, "this is not a business travel product," and you have to tell them it doesn't work that way.
This report originally appeared in the February 2014 edition of Travel Procurement.