With few signs of any upturn in the US business travel market, corporate buyers warn that the major carriers will have to learn to live in a world with lower fares
As the US airline industry heads towards the low season, at least one thing seems assured in an otherwise uncertain world - business travel revenues are still down and unlikely to return anytime soon, if ever, to their peak back in 2000.
What is equally certain for the network majors is that the low-cost carriers have made significant inroads into their traditional business markets At the same time, corporate travellers have become increasingly willing to buy restricted and in some cases non-refundable advance purchase fares to limit their air-travel expenditures.
Heightened competition in distribution too is likely to crimp air carrier margins on once lucrative corporate accounts. The trend is set to grow as companies enforce travel management policies more stringently than before.
The market uncertainties shine through in a survey taken in June by the National Business Travel Association (NBTA), a US trade group of large corporate travel managers. For example, although 58% of respondents reported some decrease in their overall travel spend against a year ago, another 31% report an increase. While a majority 53% said demand for travel had not changed since the ending of the war with Iraq and the SARS epidemic, a sizeable 39% noted a rise.
However, there was more consensus on the fact that business travel cannot turn up until there had been an upturn in their company's financial well-being, with agreement from 74% of the survey. Nearly 40% also agreed that lower fares would boost business travel.
From an air transport perspective, the report's most interesting findings come from what travel managers say their companies are doing to address changes in the airline industry:
60% are using alternative, if inconvenient, airports to get cheap fares; 73% are using discount airlines, up from 43% in 2000; 44% require senior executives to fly in the economy cabin;However, more than 81% said that their drive to cut costs had not yet included establishing a direction connection to an airline website.
Some remain sceptical about any immediate uplift in the market. Kevin Iwamoto, a corporate travel manager with Hewlett-Packard and recent president of the NBTA, says that business travel is "pretty flat because the economy is still languishing".
Short-term uptick
However, going into the summer some of the major US travel management companies have detected a small flicker of improvement.
Ed Adams, chairman of Navigant points to signs of an "uptick" in transactions in June and believes that the third and fourth quarters of this year will "more closely mirror" 2002 levels. "I get the sense there's tremendous pent-up demand for business travel," he says
Similarly, Pam Arway, executive vice-president of corporate travel, North America, reports that going into July, American Express had seen demand "pick up ever so slightly since mid-May". Alex Wasilov president of Rosenbluth International also says that his company has seen "a measurable increase" in corporate client air bookings since the start of the year, although the value of tickets "has continued to decline".
American Express announced in July it would buy Rosenbluth, combining the largest and fifth largest US corporate agencies. Although authorities have not yet approved the purchase, other corporate travel agencies have begun wooing Rosenbluth clients, promising even more competitive rates and fees. The transaction, which would combine annual bookings of more than $20 billion, is widely expected to set off consolidation among the agencies, further sharpening competition as each vows to supply lower fares.
There is agreement among those interviewed on what the established carriers in particular need to do to win back business travellers, many of whom have abandoned them for low-cost airlines such as Frontier, JetBlue and Southwest. Today these carriers account for almost 20% of domestic US traffic, more than twice the figure of the early 1990s.And their names are also better established than they were at the time of the last recession.
Kevin Mitchell of the Business Travel Coalition, which represents major US corporate buyers, says that a decade ago low-cost airlines were "poorly run, had old aircraft and not very extensive route structures". Today, he adds, that has all changed, with low-cost no longer meaning second class. "What you don't have today is the sense that business travellers are trading down to these airlines in difficult times. It's not likely they'll go back to established carriers the way they did 10 years ago," says Mitchell.
Buttrick says these low-cost carriers are gaining market share at two to three percentage points per year. "I expect the dramatic share gains to continue for the next several years," he says. "And as smaller discounters grow, we expect corporate accounts to embrace them."
Airline response
To combat these gains, say corporate-travel managers, the established airlines need to continue putting pressure on their operating costs and streamlining their fare structures. Examples already include programmes like America West's everyday-low-fare pricing policy or the cuts being made by American and United Airlines among others for business fares being flown from or over their hubs. American has also moved to ease limits on changing non-refundable business-class fares.
Another way to compete against the low-cost carriers, according to Adams at Navigant, is through the incentive payments some majors have already instituted for their volume corporate clients. Once a client hits a certain quota, they will receive a rebate which effectively represents the same discount that they would have received had they flown with a low-cost carrier.
The travel executives are not certain the established legacy airlines can effect these changes. "It's going to be hard to put the genie back in the bottle," says Adams. Iwamoto is hopeful of change but adds:" They can't change overnight. It's like turning around the Titanic."
Mitchell is confident that the the established airlines will "get there" albeit late. "They've begun to do the right things, but two years too late. If they don't listen, they'll give up another 10 or 20 points of market share," he says.
There is also debate over the effectiveness of the frequent-flyer programmes (FFP) in today's environment. Sam Buttrick argues that they continue to be "exceptionally strong loyalty devices" while others agree that benefits such as upgrades and pre-boarding are valued by business travellers.
However, Mitchell says that FFPs are less important because certain carriers are making it "more difficult to participate", for example by requiring the purchase of more expensive tickets for elite-status eligibility. He adds that with business travel down by so much and fewer tickets being issued "travellers are less vested in the programmes".
Restrictions apply
The executives agree, however, that business travellers will continue buying restricted, non-refundable tickets. According to American Express these climbed to 54% in the first quarter of this year, up from only 25% in 2000.
Most also expect corporate travel managers to continue to exert the degree of control over business travel spending that many assumed in the wake of the 11 September terrorist attacks. Adams says that their ultimate sanction is to tell travellers that if they do not adhere to the corporate travel policy then they will simply not be reimbursed. "This brings people back to compliance," he adds.
Wasilov also points to a fully automated booking tool being developed by Rosenbluth that will take travel buying decisions out of the hands of either the employee or corporate travel manager. "It will allow costs to be managed at the lowest possible level and in keeping with corporate compliance," he says.
Further pressure comes from an emerging trend by airlines and online agencies alike to target the corporate market through web-based initiatives. Previously, online fares had been aimed squarely at individual buyers, but are now being opened to corporates. For instance, Northwest has launched Corpnet Direct, giving medium-sized clients direct access to all its web fares, while Travelocity has begun a corporate online offering to catch up with rivals Orbitz and Expedia.
REPORTED BY JANE LEVERE IN NEW YORK
Source: Airline Business
