As travel buyers prepare for airline negotiations in 2011,
they need to understand the impact airline consolidation, rebounding demand and
increasing fares have already had on their travel programs in 2010, and the
continued impact they can expect in 2011. Travel buyers need to remember that,
during the negotiation process, they are selling their air programs as much as
they are buying one. Airlines have regained pricing power and, more than ever,
will require buyers to demonstrate control over their programs and the ability
to influence traveler behavior.
Complex analysis was the name of the game in 2010. Mergers
and acquisitions, realignment of strategic airline partnerships and changes in
contracting and pricing practices required extensive analytical effort on the
part of buyers in order to understand the value each airline was proposing, and
to align historical data with future spend expectations. This process was
crucial to understanding the significance of each airline in the new landscape
and, ultimately, to the success of any negotiation.
Historical contract performance was a key discussion topic
in most 2010 renegotiations. While performance was generally put on the back
burner in 2009 given the shrinking economy, in 2010 it came back to the forefront
as a sticking point in negotiations. Clients were required to have a strong
case for why performance was not met and demonstrate share-shift potential to
maintain or increase discounts. Organizations unable to do this were penalized
for underperformance in the form of less valuable discounts.
More discounts were offered on restricted inventory than in
recent history, due to a shift toward economy-class travel policies. Although
the overall availability of these low-inventory classes has been reduced, travelers
booking in advance still were able to take advantage of restricted-class
discounts as carriers tried to stimulate demand with aggressive pricing.
To ensure effective air contract negotiations in 2011:
Know The Impact Of
Consolidation
Airline consolidation is a significant driver of change in
the industry, and buyers need to keep a close eye on the opportunities and
challenges these moves present to their travel programs. Given the
post-consolidation shuffling of network coverage and airline partnerships, the
preferred partners that were optimal for an organization before may not remain
the best options. For example, a newly merged airline now may provide
a better fit based on route coverage, or perhaps the importance of preferred
airlines within the program has changed and a secondary airline may now shift
to become the dominant provider. Conversely, a carrier's new joint-venture
agreement may adversely affect existing carrier relationships by introducing
new suppliers into a program outside of the control of the corporation. Buyers
must be acutely aware of how these shifting dynamics impact their program in
preparation for negotiations. Assumptions that were true in the past may not
necessarily remain true going forward.
Take A Strategic
Focus
Buyers must invest the time and effort required to best
position the strategic strengths of their airline program and build a
compelling case prior to negotiations. They need to be prepared to address what
makes their airline program unique, as well as whether any changes in travel
volumes, patterns or booking behaviors could equate to added benefits to an
airline. While historical data may paint one picture, buyers should focus on
where their program is headed in the future to secure discounts and coverage that
will best meet their needs in 2011.
Be Present At The
Negotiating Table
Airlines want to hear from the buyer directly during
negotiations. After all, it is the buyer making the commitment to institute
organizational change and move marketshare, so airlines are more receptive to
this message when it comes directly from the buyer. A consultant or third party
can deliver analytical background, help strategize for negotiation discussions
and validate the buyer at the negotiation table, but if a buyer is not willing
to engage in discussions, why should the airline believe that the organization
will be willing to institute change or shift share? A buyer who is front and
center in negotiations is a buyer more likely to succeed.
Communicate, But
Avoid Overload
Communicate with your airline partners throughout the
process. Don't wait until after you receive a disappointing proposal to
scramble to reposition your program. Carrier representatives are motivated to
find a satisfactory agreement for both parties, and failing to clearly
communicate goals and objectives will only hinder this process. Insufficient
communication can cause both parties to invest time and effort in areas that
will not significantly impact the final decision, causing frustration on both
sides.
That said, beware of information overload in negotiations.
Assume both parties have done their homework and know top routes and key
markets. Digressing into too much detail may serve as a distraction from the
program's true objectives. Focus discussions on what really matters and on the
conversations that will lead to the desired outcome. Keep it strategic and tell
a compelling story.
Get Creative
If savings are not where they need to be or if poor
performance is hindering discussions, get creative. If the majority of the
program's spend is concentrated in a few top markets, it may be more beneficial
to request high discounts there, rather than requesting a small increase in a
systemic discount. Work to identify key markets and related opportunities, and
ensure the airline understands the organization's commitment to meeting share
goal requirements. For programs with broadly distributed travel patterns,
systemic increases will be more meaningful.
Programs with high overlap among preferred carriers may benefit
from using a key market strategy. It can be as simple as identifying the
largest overlapping markets and choosing one airline to lead the share, based
on which provides the most competitive negotiated rates, or as intricate as
developing a route chart that highlights the carriers and trip routing
travelers should use.
Maybe the air program has been static for years and could
benefit from a new strategy with new preferred partners, yet changing
travelers' habitual booking behaviors seems daunting. Don't underestimate the
power of frequent flyer miles and the other perks employees have accumulated
with preferred airlines. If shifting share from another airline is key,
travelers' willingness to change could be enticed with status matching.
Perhaps the program's poor historical performance has
resulted in decreased discounts, increased fares and a diminished incentive to
shift share. In this case, explore the possibility of a back-end rebate to be
awarded if share is met. Both parties benefit from this strategy: The buyer has
a savings incentive to shift share, and the airline benefits from the
incremental revenue. Need another share-shift idea? Go back to the basics by
revisiting how preferred airlines are preferenced in the online booking tool.
Nonpreferred airlines can be hidden and preferred suppliers showcased to
encourage compliance.
Set Ongoing
Performance Reviews
Waiting until the next negotiation period to review contract
compliance with preferred partners is a key roadblock to successful sourcing.
Ongoing performance reviews throughout the life of the agreement enhance the
buyer's position in negotiations. First, the buyer already would have shown
engagement and commitment to the program and to the partnership. Establishing
trust and rapport will ease negotiation tensions. Second, regular reviews will
give the buyer an opportunity to discuss what is and is not working with the
agreement. This will allow the buyer to bring up issues and discuss why targets
are not being met, whether due to scheduling challenges, cost competitiveness
or simply that the share goal was set too high. This also allows for
discussions on how to continue to encourage positive behavior from both
parties. With this kind of communication, tangible changes can be made, and these
discussions may offer incremental savings, enhance the relationship or just
provide better overall results.
Implementing these practices in today's complex negotiation
landscape has indeed proven to net incremental savings for clients of my
organization, and surely for many others throughout the industry. The coming
year certainly will present more changes and challenges for buyers, but
opportunities truly do abound. I'm confident the tactics above will go a long
way toward buyers being able to effectively navigate the airline landscape in
2011.
This report appears in
the Dec. 20, 2010, issue of Business Travel News.