Who's
Zoomin Who?
Why the business fare structure of the airlines is broken
and one person's suggestion on how to fix it.
Michael
Boult, COO,
eCLIPSE Advisors,
a division of Rosenbluth International
I
had an enlightening experience at 4am, November 18, 2001. My wife
and I went outside our home to view the Leonid's Comet extravaganza.
Much to our chagrin, a row of tall trees partially blocked our
view to the south, and a neighbors home completed blocked the
view of the eastern heavens. Inevitably when you have an obscured
or one-sided view of anything, it is difficult to know how great
it could have been with a clearer view.
The
interesting aspect of being an intermediary is that you get a
360- degree perspective on issues surrounding airline pricing,
customer usage, and the validation, or lack thereof, of the business
premise it is based on. Let's take corporate pricing and the discounting
policies of the carriers. When you speak to airline executives
individually, they will wring their hands and tell you how unhappy
they are about the current situation, yet none are stepping forward
to articulate or advance potential solutions. They'll tell you
that the "system is broken"; that the discounts are "out of hand",
and that there is no rational basis for this "irresponsible discounting"
other than the fact that they "have to be competitive".
Well
folks, "having to be competitive" has resulted in the elimination
of billions of dollars of revenue from the business travel market
for the carriers. Yes that's right billions with a B. What the
government hast given, the carriers are busy giving back. The
biggest beneficiaries are of course the couple of thousand, or
so, large multinational clients who spend $5m-$500m a year in
higher yielding business airfares. They happen to be our customers
too, and I am sure that in the next few paragraphs I may not enamor
myself to some of them, although they know as well as I that the
system is broken and needs fixing. The ramifications for them
of not doing so would be calamitous and not in their best interest.
The risk in telling the truth is that truth is an opinion, but
the risk in not stating this opinion is far more detrimental.
It would be a greater disservice to promote the idea that this
reverse "aid" has done much of anything for their bottom lines,
and that all is well in the current environment.
Prior
to April 2001, airlines had been raising published business fares
in what had become the world's longest running game of Cat and
Mouse. Just when a corporation thought they had structured a deal
to really lower their business travel expenses, carriers would
raise the base of those fares thus eliminating the benefit of
the discount. The most interesting part of the story was that
they nearly got away with it. Companies had become drunk with
discounts and less focused on the fact that their overall business
expenses had not decreased due to price; indeed many had seen
an increase. Between 1990 and 2000, the average price paid by
the American Traveler to travel one mile rose from 13.43 cents
to 14.56 cents. That is of course a big blend of everyone, but
demonstrates that despite more and higher corporate discounts,
the average business traveler was paying more. In the immortal
words of Aretha Franklin, "Who's Zoomin Who?"
Then
April 26th happened. Surely you mean Sept 11th? No, I mean April
26th. Let me refresh your memories. April 26th was a Thursday.
Much like any Thursday for the past seven years, only on this
Thursday something inexplicable happened. Something that no airline,
travel manager or agency had ever seen before. Business travelers
from around the country got together and decided as a group that
they would cut their travel by 15-20% all at once commencing the
next Monday. Of course this didn't actually happen, the meeting
that is, but somehow, someday, someone will write a book about
the phenomena that occurred. Almost overnight, the bottom dropped
out of the market.
Large
business travelers, yes those "enjoying" discounts of up to 75%
simply decided that they would limit, delay, reduce and generally
curtail the number of trips. The theory that a discount given
was an incentive to eventually spend more through increased market-share
has flown out of the window. Belt tightening is the now prevailing
theme, and carriers are stuck with deals created during the good
old late nineties and the ability to increase fares at a faster
pace than the discounts has now run dry. We're talking elasticity
here folks.
Airlines
won't publicly state that they are in a mess they can't get out
of, yet privately they are quick to point out that the pricing
equations are now broken. Unwilling, or scared to lose market-share,
carriers have thus far matched discount deals on programs that
are mathematically impossible for corporations to deliver on.
Many upstanding corporations feel uncomfortable being a party
to this but feel they have no other choice but to participate
if carriers want to give away dollars for nothing in return and
we don't blame them for a minute. Travel management companies
such as ours that provide the technology to companies to negotiate
and then manage the programs for optimal return are having a field
day but know we are violating a core value by knowingly participating
in a broken business model that needs repair before it collapses
leaving everyone reeling. Short term thinking equals short-term
gain and in a short time there will be a shorter list of carriers
available to fly. That is a long-term bad thing for buyers.
During
the weeks following the tragic events of September 11, 2001, we
participated in many conference calls between agencies, corporations,
and airlines in which everyone recognized the plight of the airlines
and pledged to do whatever they could to help stabilize an industry
in despair. Each recognized that without a healthy airline system
commerce would be negatively affected, as business travelers would
ultimately have less choice and therefore would inevitably face
higher fares. Months later, nothing has changed other than further
losses reported by the carriers both here and abroad. Many are
calling for further consolidation; while others sadly joke that
all the majors should simultaneously announce bankruptcy and return
in phoenix-like fashion as Southwest Airlines.
Whether
you consider the above to be far-fetched, or not, there is another
way that works for everyone. For simplicity lets call it The Step
Program:
Step
1: Reduce all published business airfares by 30% and thus
bring back the small business travelers that are price sensitive
and cannot afford the current walk-up fares and are not privy
to corporate discount programs reserved for larger corporations.
If you believe in fare elasticity, this should increase demand.
Step 2: Concurrently reduce all corporate discount programs
by 30% thus almost completely canceling out the impact of the
walk-up fare reduction for airlines, while keeping corporations
whole.
Step 3: Evaluate every corporate incentive program and
if the deal cannot be justified in reasonable ROI terms, send
a notice of cancellation. Rationalize the deals, but do not
penalize those who earn and perform. They should not pay a nickel
more as a result of their loyalty and performance. In fact,
since corporations that are currently performing are artificially
subsidizing those that don't, they should be rewarded for doing
so. Those corporations should not have to shoulder the load
for those that don't perform. After all, that is one of the
major reasons that airlines constantly find themselves having
to raise walk-up fares in order to try and recoup lost revenue.
Step 4: Be forthcoming with corporations when you are
knowledgeable about upcoming schedule changes that will make
it mathematically impossible for corporations to perform on
negotiated performance hurdles.
Step 5: The myth that is the Web Airfare. They drive
Corporate Travel Buyers, Travel Agents and Travelers crazy.
Is it better to save $30 in distribution costs and lose $300
in revenue? Take a hard look at the web only discounts and ask
the following question. Are business travelers able to buy airfares
for less than they would via the company-preferred program?
If the answer is yes; then remove that inventory from the web
because either by design, or default, this only de-leverages
corporations' ability to perform on the discount programs that
have been negotiated. In the end this is a lose-win situation.
Airlines win when companies come close to hurdles but don't
hit them. Companies lose since fifty dollars saved "here or
there," over the web only serves to cannibalize their discount
programs and risk hundreds of thousands of dollars in savings.
Step
1: Only corporations that negotiate in good faith deserve
to earn a discount program. Being big helps, but it is not the
only criterion. Getting a fair, responsible incentive contract
in return for being a responsible, fair buyer, should not sound
like an idea that just arrived from Mars. Have responsible data,
don't commit to what you can't deliver, and make certain you
have the technological wherewithal to move share and deliver
volume.
Step 2: Monitor your deals so that you can make periodic
adjustments in order to guarantee achievements of commitments
made. Insure that you have the point of sale technology in place
to quickly adjust share and deliver volume. Utilize a sophisticated
travel management company that can apply the software necessary
to communicate to you shifts in airline available seat miles,
schedule changes, etc. that can affect your ability to perform.
Once again, avail yourselves of a sophisticated travel management
company if you're not sure of how to establish a process that
insures results.
Step 3: Don't accept short-term handouts, however great
the temptation, your own and your company's reputation is worth
more than that.
Step 4: Take the time to understand that a 30% discount
with Brand X is sometimes worth more than a 40% discount from
Brand Y.
Travel Management
Companies
Step 1:
Create value for your customers by sharing your knowledge and
expertise on negotiating fair and reasonable airline deals with
or on behalf of your corporate clientele.
Step 2: Bury the hatchet between yourselves and airlines,
don't think that pushing carriers to raise their discounts out
of revenge for lowering commission or other perceived bad deeds
of the past, will ultimately be of benefit.
Step 3: Work with the airlines to help foster an environment
that is win-win-win. Corporations need it, airlines need it, you
need it, and the world needs it. Anything short of a win, win,
win, is just that, short.
The solution,
which we feel is the best, fairest, and most sound approach, is
one that promotes a greater degree of shared risk and is composed
of variability in share and discount. Utilizing available technology,
a discount rate would be agreed upon between an airline and a corporation
in return for a projected share of a company's business for ninety
days. At the end of that period, the deal would be measured to test
assumptions and review ROI for both the buyer and supplier. The
discount and share is then adjusted for the next ninety days and
continues as long as both parties continue to see value. The days
of evergreen discounting without sufficient post due diligence are
coming to an end. Whether it is abrupt, or gradual, the marketplace
will decide.
If we change
course now we can build a healthier industry with vibrant competition
that will result in reasonable incentives offered to reasonable
buyers in return for reasonable support. Or we can stay the course
and continue with Junk Bond Airline Valuations, a future of fewer
carriers with less reason to discount and more reason to introduce
oligopolistic pricing, unhappy buyers and unhappy travel agents.
Technology
exists today that is available to corporations, travel management
companies, and airlines that will pinpoint the exact discount level
that will reward corporations for moving share and hitting volume
hurdles, while creating incremental revenue for carriers, therefore
making the discounts meaningful and long-lasting.
This plan alone
does not address many of the other serious woes facing the industry
including, cost of labor, unpredictable fuel pricing, safety, and
customer service, but seeks to initiate a dialogue amongst industry
leaders to address the, no less important, revenue side of the equation.
It will take time and considerable understanding from all, but most
importantly the dialogue needed to start somewhere soon. We decided
it should start now. Buyers, travel agents, travelers, and suppliers
would do well not to discount what needs to be done.
This is
the second in a series of white papers from Rosenbluth International
designed to create discussion around facets of the travel industry
considered by most to be broken, and in dire need of a fix. We don't
claim to have all the answers, we may not even have any, but it
is high time that suggestions be proffered rather than the whining
taking place behind closed doors that "nothing can be done." Feel
free to visit Rosenbluth.com
to view this white paper, along with the first one that dealt with
the structure of airline commissions paid agencies.
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