CO Puts Premium On Biz Travel

Larry Kellner, president of Continental Airlines, was in New York this month to unveil the carrier's new BusinessFirst seat (see story, page 14), and met with Business Travel News airline editor David Jonas to discuss the price-value proposition of premium class, Internet fares, the trend toward net fares in corporate agreements and other recent developments.

BTN: Please explain the rationale behind spending $15 million on new seats during such lean times.

Larry Kellner: BusinessFirst profitability on a Boeing 777 varies, but I am comfortable saying it is around $100 million a year. While surveys have shown that customers prefer BusinessFirst, even though others may be getting closer, it is our challenge to constantly figure out how to make it better. The reason why you see so many people changing business class products and trying to move up is because of the success we have had with BusinessFirst.

BTN: Because of the economic environment, many corporate travel managers say that price is the bigger driver, beyond product differentiation.

Kellner: Price is always important, but we offer two very different products: a very comfortable coach product and BusinessFirst. If you are going for three weeks and you have two days to recover when you arrive, you may want to go coach to get the savings, but if you are going for a one-day meeting, you want to get there as rested and comfortable as possible. Then, if you are talking about price for a business class product, that means we have to be competitive in the marketplace, and we absolutely are. Our whole mantra is that we will give you first class service at a business class price. We are not trying to give you the three-cabin service. The problem always was that if you have a first class product being sold for a real premium dollar, if your business class product is too good, no one will buy that first class product. That is why we, then Delta, then Northwest altered our first class products. We will always compete on price, but beyond price, you already have people excited. This isn't purely a price decision, otherwise they'd be in the back. It is not a pure price debate; it is service, quality of product and price—a value debate.

BTN: There's been an accelerating trend throughout the industry toward net deals for corporate clients, perhaps more pronounced at certain carriers. What is Continental's philosophy?

Kellner: We want to do whatever is best for the corporation. Most large corporations today pay a fee to the travel agent and have the commission rebated to them. Net deals are a cleaner, simpler way to look at the contract between us and them and really focus on where the dollars are. Everyone has different internal accounting systems, objectives and benefits. I personally like net contracts where the companies get the rebate anyway because it makes it simpler for everyone to see upfront what the deal is, but we will do it however a customer wants.

BTN: Internet fares have been a hot topic for corporate travel managers for some time. What has Continental concluded about accessibility of Web fares (see story, page 1)?

Kellner: Our focus always has been that we want the corporate customer to have a managed relationship better than an overall unmanaged relationship. We want to make sure they also conclude that. There is so much stuff that goes on and gets lumped into Internet fares. The tougher issue is the way systems synch up. When we load a price change, the global distribution systems do not all pick that up at the same time.

We do not have our head in the sand: What we try to do is ask corporations to show us specific examples where there are fares they cannot get their hands on, other than 10 percent-off discount sales on the Web. We also understand that we have GDS costs, commission costs and other costs coming through different channels. Our basic philosophy is to manage the yield net of distribution. The challenge for us on the corporate side is that we can try to do everything the corporation wants us to do and they would still come back with the same concerns, because those concerns are less about Web fares and more about bucket availability, system availability and things other than specific sales off the Web.

The challenge becomes getting to a level playing field. You have to look at it at the same time, the same place and the same location. We know that other than specific percentage-off sales on the Internet, fare differences are driven by the time of day, the channel, the way the program is loaded, etc. We are not trying to use the Web as a price discrimination tool. We are not trying to say that there is this great price on the Web but we won't allow the corporate traveler to get at it. What we are going to say is that we have to be competitive in the marketplace. If somebody launches a 20 percent-off Web sale and we decide we have to match, that is what we are going to do. So, there is this marketplace issue we always have to worry about, which is why it is tough for us to make blindfold promises. Secondly, if you want to come through a higher cost channel, we have to figure out a way to recover those higher costs, but we will continue to work with you to figure out a way for things to count that should count.

What caused me a lot more heartburn six or nine months ago was that people were believing that unmanaged relationships were possible, and they would just buy all their fares on the Internet. But a bunch of studies have concluded that you can't match those restrictions and those terms. It is a big education issue on our part. The second issue that I worry more about is a simple communication issue, which is what to do when you have different bucket classes teed up at different times for travelers—all systems issues—unless you were all coming off the same database.

BTN: Switching gears, I read in your most recent 10-K that the Northwest Airlines partnership generated $140 million in incremental revenue last year. Any projections for 2002?

Kellner: The Northwest alliance has been an absolute homerun. Going forward, we focus on things we can quantify and measure. Based on how unpredictable our business is in general, we would be pulling a number from the sky. If we did $150 million a year forever, I'd be thrilled with that, but if someone said, in two years from now, we would be doing $225 million, I would not be surprised at all. Richard Anderson at Northwest has been working very hard, with Gordon and I, to continue looking at airports where we aren't side by side, to look at systems issues where we can get more benefits.

For instance, such an opportunity exists for our e-service machines. On the systems and airport relationship side, there still is a lot we can do to build that. If we can get KLM up and running effectively, it would help our domestic alliance and give us additional benefit.

BTN: Since it is now March, which is a key month, how is it looking thus far?

Kellner: At the moment, March looks okay. I am less optimistic today than I was in January, mostly because of where fuel prices are. But for 2Q and 3Q, we ought to do okay, though they won't be gangbusters.

BTN: How about the cost side of the equation?

Kellner: We have always managed cost per available seat mile holding fuel rate constant. For the current year, we expect that to be up 5 percent. That is pretty sequential across the quarters. We managed costs very effectively in the fourth quarter. To date, we are doing a little better on the cost side than we had expected, but it is a tough market. What we were seeing in January and February was traffic exceeding forecasts but yield underperforming against forecasts, which was because of general sales pressure from other carriers. We'd rather have lower passenger volumes and higher yields, because the additional passengers drive higher costs. From a budgeting standpoint, I have been very surprised by our cost performance in January and February, especially impressive considering that loads have been higher than planned, while yields have been lower than planned. Revenue has been about on target for the first two months.

BTN: What is the current business mix and how do you measure it?

Kellner: The business mix is in the low-40s, which is down five or six points year over year. Not only is the percentage of business travelers down, but yields from them also are down. We measure the business mix by revenue and consider those using unrestricted fares or those using fares designated with corporate codes.

BTN: Now that it has been reported in the Newark Star Ledger that Gordon Bethune will retire from CEO duties in five years, how does the heir-apparent name tag fit?

Kellner: I spend all of my time, especially since 9/11, figuring out how to get through the next few months. I am thrilled with my current job and am happiest doing what I'm doing today. I have plenty of challenges filling my time.

While we clearly worry about a lot of strategic, long-term stuff, most of what I worry about focuses on what will happen six or nine months from now. You have to also figure out how to get through today and the checklist of things we have to do now.