US low-cost carriers are carving out corporate travel markets for themselves while the legacy carriers simplify their labyrinthine price structures
Good news for the airlines: US business travel is up. The bad news, especially for legacy carriers, is that US business travellers are not spending the money they used to on air travel and that situation is not expected to change.
The National Business Travel Association (NBTA), which represents travel managers at many of the largest US corporations, says 80% of its members expect their travel and entertainment budgets to increase in 2005, with 50% saying they are going to have more business trips than in 2000, a very high-volume year for business travel. Business-trip volume in the USA grew about 4% last year, following several years of decline.
“Our research really has shown us that business travel is on the recovery, to levels just pre-9/11,” says Carol Devine, NBTA’s president and chief executive and the corporate travel director for BNSF Railway Company.
This would be very good news for legacy carriers if they still had a monopoly on this highly prized segment of the travelling public. A study, sponsored by NBTA and the Travel Industry Association of America, showed that while business travellers constituted only 18% of total travel volume, they accounted for $153.2 billion in expenditures, nearly a third of the total domestic travel market.
Not that long ago, the major airlines relied heavily on the premiums they extracted from business travellers by keeping walk-up and short-notice fares high and by placing restrictions on lower fares such as business travel-unfriendly Saturday night stays.
But all this has changed in recent years, in large part because of burgeoning domestic competition from low-cost carriers with amenities and standards of service that sometimes exceed those of their established competitors. Combine that with pressure within companies to cut spending and with increased pricing transparency, courtesy of the internet, and the result is dramatically altered business travel patterns.
Low-cost carriers
“We’re seeing high increases in low-cost carrier usage,” Devine says. She notes that in 2000 about 40% of NBTA’s 1,600-plus travel manager members, who represent a majority of Fortune 500 and Fortune 1000 companies, said they used low-cost carriers. That percentage more than doubled to 83% in the past two years. In its most recent survey, 88% said they were going to use low-cost carriers, she says.
Little wonder then, that at the beginning of the year Delta Air Lines, on the brink of bankruptcy, sought to bring back some of those business flyers with implementation of its nationwide SimpliFares programme after a trial last year at its Cincinnati hub. The new pricing structure, matched quickly and in large part by American Airlines, capped most first-class and economy one-way fares at levels about 40% lower than they were, reduced the number of fares available and eliminated Saturday night stay requirements.
Critics say the new pricing, while widespread, does not apply to all routes, such as those where there is a monopoly, or on well-used and high-priced routes from New York to Washington and Boston. They note that “matching” by others is not across the board, that it may be capacity-restricted and that top fares from low-cost carriers on key routes still remain hundreds of dollars below even the new capped fares offered by the majors.
Legacy option
Nevertheless, large- and medium-sized companies and independent business travellers seeking good value now have the option of booking legacy carrier flights. “Low-cost carriers grabbed and continue to grab market share from legacies,” says Kevin Mitchell, chairman of the Business Travel Coalition, an advocacy organisation representing the interests of corporate travel buyers. “I think that has slowed somewhat with Delta’s initiative but slowing it and reversing it are two different things.”
It has made a difference though. “To one degree or another, other carriers were forced to follow Delta,” he says. “It’s up to the airlines to exploit the simplified airfare structure in terms of marketing to business travellers and capitalising on the efficiencies that can come along.” Mitchell says it is hard to assess from the outside the impact the fare changes are having. “It certainly started out revenue-negative but if they are able to build more traffic with it…and halt the shift of market share to low-cost carriers,” he adds, “it will be a success.”
Devine says NBTA also believes the Delta initiative will have an impact. “That was the intent really – to simplify the fares, remove restrictions and be more competitive with low-cost carriers,” she says.
An NBTA study which followed the changes projected that corporations could see a 17% decline in fares they were paying as a result of the fare reductions and loosening of restrictions, allowing business travellers to move into lower-fare brackets than they were previously purchasing and still get the flexibility they wanted. “Of course, it varies from market to market, carrier to carrier and buyer to buyer,” she adds.
The 17% decline in average business fares for the corporations is before any negotiated discounts are taken into account, Devine notes, and those are changing too.
“The so-called simplified fares are very complicated,” Devine says, and corporations have to evaluate the new fare programmes carefully to determine how best to proceed. Airlines are in the process of altering their agreements with corporate clients, in some cases reducing or eliminating discounts because the fare restructuring has meant tumbling prices for short-notice fares. Some corporations, besides using more low-cost carriers, are starting contract negotiations with carriers other than the ones they previously used and many are moving away from contracts that include volume or market share requirements. A lot of the domestic discounting from airlines in the past was done strictly on volume, Devine notes. Some companies are looking at different types of contracts and models.
Although many of Delta’s competitors criticised the price restructuring, contending that it would lead to reduced revenues and greater losses for an already-battered industry, the jury is still out. A number of US carriers have been buoyed by increased unit revenues over the past few months, indicating that some of the actions they have taken – cost-cutting, capacity reductions, a number of recent domestic fare increases and possibly the implementation of “simplified” fare structures – may actually be having an effect.
“We do think it has had an impact in promoting some additional business travel,” says an American official. He notes that the airline has been experiencing increasing domestic load factors year over year each month in 2005, attributed at least in part to a higher percentage of business travel. “There is definitely increased demand in the market.”
Passenger revenue
Continental Airlines reports that record May loads were accompanied by an overall 8.5-9.5% increase in unit seat revenue and an impressive 9-10% on mainline services. While the principal factor was a substantial rise in load factor – to 81.2% on mainline services – it said the impact of domestic fare increases and actions to “appropriately revenue manage” bookings and traffic mix also contributed. The payoff is a big increase in demand for first class travel, both through its competitive fares and its upgrade programme for “elite” frequent flyers. As a result, the carrier decided to double the number of first-class seats on its Boeing 757-300s from 12 to 24, eliminating 18 in economy, and increase its 757-300 fleet from nine to 17 aircraft.
America West Airlines, which had previously instituted a business-friendly everyday low-fare pricing policy, has a similar story to tell. Scott Kirby, executive vice-president sales and marketing, says the airline experienced a strong revenue performance in May, backed by an 81.7% load factor. “Our record May load factor, combined with a large year-over-year increase in yield, led to a significant improvement in unit revenue during May,” he says.
Fare simplification
Air Canada attributes strong growth – 13 consecutive months of record-breaking load factors – and increasing unit revenues to its fare simplification programme introduced last October. The carrier offers five one-way “fare products” for travel in Canada and the USA, each with a different “bundle” of features – from Tango, its non refundable, no-frills fare with a $15 fee for advance seat selection, to its fully refundable Executive Class, with complimentary and priority everything.
The transparency of each bundle makes it possible to choose a restricted fare in one direction and a more changeable fare in the other, an official says. “We’ve seen 40% of our customers choose to buy up…for the bundle that best meets their need, even when a lower fare is still available,” he adds.
One of the unintended consequences of the recent fare changes may be the increased degradation in the value of frequent flyer programmes. Business Travel Coalition’s Mitchell says business travellers have become less wedded to the programmes because over the past few years adjustments have been made to the them that alienated many business travellers and the new fare programmes also make using points more difficult.
Devine agrees. “For the corporate business traveller, the frequent flyer programmes are important for the amenities offered like upgradability, pre-boarding and streamlined security lines – the amenities that help the business traveller be more productive in the airport or on the airplane.” Upgradability is especially important. “But it’s harder and harder to get them as more people are paying for those first-class seats with the ‘simplified’ fares,” she says. It is probably a problem the airlines welcome.
Source: Airline Business
