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Article Excerpt
The commercial airline industry is undergoing a momentous restructuring already impacting preferred corporate travel relationships. Brought on by economic decline beginning in 2Q00 and accelerated first by the 2001 terrorist attacks and more recently the war in Iraq and the outbreak of Severe Acute Respiratory Syndrome, this period of uncertainty is forcing both buyer and seller to rethink contracting strategies and carefully examine the parties with which they should partner.
On the seller side, airlines are seeking help wherever they can find it. Yet, with the revenue environment the worst in years and widespread cost cutting the solution du jour, they are unable to provide to corporate customers the level of service and attractive contract terms expected in the more profitable past.
Either in bankruptcy, in the process of restructuring or desperately trying to survive in their current form, carriers have cut capacity, slashed sales personnel and redesigned much of their fare structures. Specifically, they have eliminated corporate discounts from lower-fare buckets, made nonrefundable ticket policies more restrictive and slashed corporate waiver and favor programs. They also have employed, if not mandated, data-aggregation and other analytical technologies to scrutinize more closely corporate contract terms and account performance.
Yet, carriers also have lowered walk-up and other business-type fares, become more aggressive in competing against low-cost competition and continued aligning with other airlines in sales and marketing pacts.
On the buyer side, the current environment presents much turbulence. More than ever, clients must bring credibility to the table, but the airlines' plight has prompted a "take it or leave it" mentality forcing corporations to seek alternatives. Moreover, buyers are grappling with the new fare schemes that do not include discounts on lower buckets, but they must recognize that the ultimate goal is not necessarily to secure the best discount but to realize the deepest cost savings.
As always, buyers must walk the fine line between driving marketshare to preferred network carriers in order to extract discounts and supporting low-cost competition that can keep fares down only if they maintain market presence. Travel managers also must understand and convey to travelers service and rule changes, while determining which carriers are set for long-term survival.
Though market conditions always vary and the very structure of the industry is in flux, the following provides a guide to establishing a preferred relationship with an airline:
I. GAUGE THE COMPANY MINOSET
Not all corporations have enough traffic--either overall or on particular routes--or can move enough marketshare to attract airlines interested in negotiating. Even those that do have the volume may not have a culture that lends itself to airline deals. In recent years, low-cost carriers have grown in popularity without offering traditional corporate programs. There are disadvantages of seeking lower-cost options, namely sacrificing leverage in negotiations with full-service carriers. Assess the true value of your program.
A. Understand how senior management values preferred airline relationships in order to formulate a dedicated course of action.
1. Determine if the cost of implementing a preferred airline agreement--in terms of human resources, conflicting frequent flyer loyalties and other operational concerns--is worth the benefit.
2. Communicate the types of cost savings and added services available, and, more importantly, the commitment necessary to achieve them.
3. Get feedback on the extent of their support for a preferred air program. If top executives' highest priority is their own frequent flyer miles, designating preferred airlines may be fruitless. However, true senior management buy-in, including mandating use of preferred airlines, can allay both anticipated and unanticipated difficulties down the road, and is becoming more important in building and maintaining an effective airline program.
B. Understand and communicate the corporation's current and future needs.
1. Establish a cross-functional sourcing team comprised of the CFO, travel manager, purchasing/procurement representatives, leaders of divisions with higher than average air spends, a representative from the travel management company, frequent travelers and others.
2. Determine the projected air volume, domestic and international, for the corporation for the next year based on last year's numbers--keeping in mind that 2001 and 2002 were anomalies--and important elements of the business plan for the coming year, such as M&A activity, new corporate locations, etc.
C. Understand travelers' air preferences.
1. Identify the most frequent travelers and ask which carriers they use.
2. Ask which carriers travelers like best and why. Record specific examples of both good and poor airline service from your company's past experiences. Corporate card and travel agency reports can provide background.
3. Determine frequent flyer program memberships and the importance placed on them.
4. Determine travelers' willingness to go along with a preferred airline program.
D. Ensure that all programs are in keeping with corporate goals by working with airlines that understand your needs and can customize a relationship. Schedules, airport convenience, club memberships, elite status and upgrades all can contribute to a successful trip, indirectly supporting the ultimate corporate goal of increasing shareholder equity.
E. Be realistic when evaluating your ability to enforce policy. For example, can you really mandate your travelers to use connecting flights? A company's track record in meeting goals and shifting share can be beneficial or detrimental during negotiations. From the carrier perspective, credibility is key.
II. GATHER INFORMATION
An airline generally will not even consider negotiating discounts without seeing evidence of how you can direct incremental business its way. On the other hand, that evidence also can show how a corporation can divert business away and is one of very few bargaining chips on the buyer's side. Though some deals focus on specific city pairs, with proper data a corporation should win discounts for multiple destinations from one originating city, regional discounts or even a systemwide discount. Data showing international volume can be used to extract domestic discounts--in some cases, even on monopoly routes.
In all initial data shared with airlines, provide the aggregate for each data set requested and, if requested, the airline with which you are negotiating. Do not provide a breakout of each airline's performance. Note that all data needs to be separated into domestic and international groupings and ideally subgroupings, such as Asia/Pacific, Europe, etc.
A. From your agency databases, online booking system, credit card reports, third-party data consolidators and internal expense reports, obtain detailed analyses of:
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