The travel industry during the past decade has been working hard to reposition its products and pricing. While that may sound like marketing hype, the reality has begun to impact corporations, travelers and budgets. Airlines, in particular, have quickly gotten their act together. Travel managers must carefully watch such changes and consider whether travel budgets reflect the latest airline pricing actions and overall market positioning.
In the last few years, airline repositioning has included:
- Elimination of seven major hubs, including Dallas for Delta and St. Louis for American;
- Reduction of 23 million seats, according to Hudson Securities;
- Fuel surcharges and fare increases to offset the 200-plus percent increase in fuel costs since 2000, also according to Hudson Securities.
In the past few months:
- Airlines introduced several fare increases since mid-December, including at least two already in 2011;
- Ancillary fees continued to increase at a rapid clip.
Airlines are, and have been, positioning themselves to be profitable and to maximize their revenues against costs. Increases at the gas pumps mean fuel increases for the airlines and your airfares. Every $1 increase in the price of a barrel of oil means an increase of $450 million per year, according to the Air Transport Association. Said another way, a $20 increase in crude oil means a $9 billion annual cost increase to airlines. Airlines will continue to pass such increases on to customers. Most experts expect to see at least an additional increase in crude prices of $10 per barrel in 2011. Travel managers: are your budgets, executives and travelers prepared for such increases?[PULL_1]Ancillary fees threaten an even bigger impact on travel budgets. We read every day in the news about the airlines and the online travel agencies fighting each other for access and display of airfares and ancillary fees. The airlines are also pushing their own websites so they can display themselves to their best advantage. According to PhoCusWright, 32 percent of all airline bookings in 2010 were made on the airlines' own websites, 45 percent were booked through travel management companies and 16 percent were booked through online travel agencies. When, not if, the airlines pass through ancillary fees to you and your travelers through these channels (and they already do to some degree) the fiscal impact to you and your company will be dramatic. Last year the airlines realized about $8 billion (yes, that is a "b") in ancillary fees, which already represent 6 percent of revenues, according to the Wall Street Journal. This statistic is even more relevant when we realize that many ancillary fees were nonexistent a year or two ago. Today, travelers can purchase on Delta's website a paragliding lesson in Malibu for $119.99 along with a ticket purchase. On United's site, travelers can send golf clubs for about $79. More commonly, travelers purchase window seats, front-of-the-plane seats, food, checked baggage, Wi-Fi and more. Ancillary fees will increase at an alarming rate for several years. Travel budgets at most corporations were drafted months ago, long before the latest fare increases and latest ancillary pricing schemes. Do your budgets reflect the latest airline pricing realities? Airline contracts might protect your base fares, but it's clear from recent trends that a larger impact for many corporate travel budgets can be found in the fuel and other surcharges and other add-ons. Will your customers--whether travelers, financial planning folks or executives--soon come to ask why travel expense forecasting numbers were too low? Will they ask why you have not addressed such expense hikes and perhaps changed corporate travel policies? If your policy doesn't detail which ancillary fees are expensable and when, update the policy. If your travelers need some guidance on packing, checking bags or using loyalty program status to gain complimentary bag checking, communicate such information. Analyze the impact the latest fare increases, surcharges and ancillary fees have had on your travel budgets this month and quarter. Communicate the variances to travelers, finance and your executives, along with ways that they can better plan travel to extend budgets. The sooner the impact of such "market repositioning" is reflected in your own travel budgets and spend expectations, the better. Robert Langsfeld is a partner in The Corporate Solutions Group consulting practice.