In the last half of the 1990s, it was business travelers who bankrolled airline profits. A strong economy let the good times–and hefty business fares–roll.
Now, with company travel budgets slashed, every travel purchase gets greater scrutiny; and corporate travel managers are crying for air fare reform.
Air fares have scarcely been higher, or lower. And therein lies the rub for many business travelers. According to the second quarter American Express Business Travel Monitor, typical business fares are six times higher than typical discount fares usually offered to leisure travelers.
Because of the Internet, air fares are more “transparent;” the disparity between high and low fares on any given route are there for all to see, and to shop. Also more transparent are the differences, or lack thereof, between the financially beleaguered major carriers and the no-frills airlines, which are gaining in market share and operating in the black.
What business travelers want from the major airlines sounds simple: a sane price structure that is fair to business travelers and that allows the airline the opportunity to make a profit.
Getting what they want will be anything but simple.
The Big Six are in big trouble. American, Continental, Delta, Northwest, United and US Airways, the so-called major carriers that transported 75 percent of the nation’s 44.38 million passengers in July, are at the flash point of an industry that lost $7.7 billion in 2001–though that would have been $12 billion without a taxpayer bailout–and another $3.9 billion the first half of this year. They’re facing labor-management disputes, astronomical insurance rates, rising fuel costs, poor productivity, security hurdles, angry customers, massive debt and no easy way out.
“Our problems with revenue from business travelers is not that they’re not flying, it’s that they’re paying less,” said John Heimlich, director of Economic & Market Research for the Air Transport Association (ATA), the Washington-based airline trade organization. “They’ve gotten much better about searching for prices and booking farther ahead,” he said.
Corporate travelers say that shopping for the best fares just makes good business sense.
“When an advance-purchase fare between New York and Atlanta averages $211, and I can get a last-minute fare at either $98 or $2,000, something’s wrong,” said Atlanta-based Bob McGurk, chairman of the Association of Corporate Travel Executives’ (ACTE) air fare reform initiative.
“The logic used to be that airlines would use a high price tag to hold a seat open until the last minute,” McGurk said. That pricing model assumed that a last-minute seat would be worth the premium to whoever needed it on short notice, presumably business travelers with deep pockets. “But now with the Internet, if you wait till the last minute, you might get a fare that is even lower than if you bought it in advance.”
According to the second quarter American Express Business Travel Monitor, low-fare and non-refundable coach tickets represented 88 percent of flights booked by American Express Corporate Travel customers. Only 9 percent of flights were booked on full-fare refundable coach tickets, according to the same report.
In effect, business travelers have been saving their companies money by flying on what the airlines intended as leisure fares. To combat that trend, the Big Six have begun implementing changes that will tighten the system and make leisure fares far less attractive to business travelers.
On Aug. 27, US Airways announced, and made effective immediately, a “use it or lose it” policy change: Non-refundable tickets would be good only for the specifically ticketed flight. Passengers with non-refundable tickets would be permitted to make changes only before the scheduled departure and at the expense of a change fee. Otherwise, the ticket would have no value once the flight departed. Stand-bys would not be permitted.
But by Sept. 6, US Airways had heard from enough unhappy customers to revise its policy. Now, its amended policy is more in keeping with new rules at American, announced Aug. 30; and at Continental, Delta, Northwest and United, announced the first week of September.
Each airline has its own variations. But, in general, passengers who have purchased or will purchase non-refundable tickets on or after the above-mentioned dates, for travel on or after Oct. 1, can change the tickets before the departure date, subject to a change fee and unspecified restrictions. The ticket has no value once the flight has departed. Passengers who purchase non-refundable tickets for travel on or after Jan. 1 can stand-by for alternate flights on their ticketed day of departure, subject to a $100 fee.
“The first thing I saw with US Air was that if I’m stuck in traffic and miss the flight, my ticket is no good,” McGurk said. “So does that mean I can’t take another one? And yet they’ve had my money for how long? At least American gave people time to adjust to the new rules,” McGurk said. “US Air just changed things in mid-stream.”
What many are wondering is how those airlines plan to accommodate their low-fare passengers, if at all, when the appointed flight is oversold or gets canceled.
“I have to buy it and use it or lose it, but they still oversell the flight,” McGurk said. “How can they do that?”
Joe Brancatelli, who covers airline-industry issues as editor and publisher of New York-based JoeSentMe.com, raised a different point: “How ’bout when the first snowstorm hits O’Hare? They haven’t fully thought this out.”
By further polarizing business and leisure fares, the airlines that have adopted the new restrictions could force business travelers to choose between flexibility and affordability, but not without reason.
According to the “Airfare Reform White Paper,” authored in April by the Association of Corporate Travel Executives (ACTE), some airline executives believe that when the economy strengthens, business travelers will return to the high-rolling years of the late ’90s, and that risking a new approach might leave them with less corporate loyalty and thus open to sabotage by competitors.
“The conventional wisdom of airlines is that you cannot cultivate business travel,” said Michael Hall, global travel manager for Milwaukee-based Johnson Controls Inc. The belief is that there is only a finite number of business travelers and that “all you can do is take passengers away from someone else.”
But Hall sees Web fares as a way the airlines could encourage more business travel with fares that would make it attractive to send more employees to conventions and seminars, for example. “In fact,” he said, “I think they’ll have to.”
And because many business travelers have found that Web fares save their companies money–Web-fare sites Travelocity.com, Expedia.com and Orbitz.com all estimate that 20 percent to 30 percent of their bookings are for business travel–the online industry is expected to grow. According to projections by PhoCusWright Inc., a Sherman, Conn.-based consultant to the online travel industry, one in five corporate travel transactions will be booked online by 2003.
Orbitz.com, which was developed by American, Continental, Delta, Northwest and United, has already created and launched two business-travel programs, one for small to mid-sized companies and another for large corporations. Dave Cerino, general manager of Orbitz’s Corporate Travel department, said the new programs provide analytical data for travel managers and also integrate the client’s corporate travel agreements with an airline so that when the traveler logs on he sees both his company’s corporate rate and all the other fares for his route.
Expedia.com plans to launch its own program for business travel by the end of the year.
In the meantime, airlines have begun strictly enforcing their fare rules and collecting fees they once let slide, a move that is being called “no waivers, no favors.” They are reducing operating costs and hoping to boost passenger load factors, by taking inventory out of the system. They will be flying larger planes less frequently on thinner routes and handing over some routes to the regional aircraft of commuter affiliates. And, subject to review by the Transportation Department, they are forming alliances. Delta, Continental and Northwest have created a new code-share agreement that will allow them to sell seats on one another’s routes, coordinate connecting service and honor one another’s frequent-flier points. United and US Air have a similar agreement.
Hall said he considered the alliances “a virtual consolidation” that could result in business and leisure travelers competing for the same seat.
Fueling competition among the airlines is the pressure put on by low-cost carriers. Southwest Airlines’ passenger count should place it among the Big Six. With almost 6.87 million enplanements in July, it ranked third, after Delta and American–hardly the little guy. But its no-frills service, single-class cabins and simple fare structure place it among the low-cost carriers.
Back in March, America West introduced “3-Day Business Fares” that cost $59 each way between Los Angeles and either Phoenix or Las Vegas. The fares require a three-day advance purchase, no Saturday-night stay, impose no change fee and are fully refundable. And though the airline initially faced what Brancatelli described as tough competition from the bigger carriers, he said, “America West looks like it’s doing better now.”
Then, on Aug. 22, Southwest dropped its highest, last-minute fare of $399 each way by $100.
At JetBlue, which made its inaugural flight in February 2000, the top fare is $299 each way, even on transcontinental routes between Southern California’s Long Beach or Orange County airports and New York.
Clare Morgan, director of corporate communications at Miami-based Blackstone, said she hadn’t heard of JetBlue until an associate recommended it. “Now, we use it as much as we can between New York and Ft. Lauderdale,” she said. “It goes back to the basics: a quality product, a good price and strong customer service.”
JetBlue has proven that if the airlines simplify their fare structure and reduce or eliminate restrictions, “people will pay more, and pay it more often,” Brancatelli said. “JetBlue’s fares only look lower because they can be understood.” Brancatelli said that although US Air had air fares ranging from two to four figures, the tickets it actually sold were selling in the same range as JetBlue’s. “But now,” he said, “JetBlue has driven US Air out of the New York-Florida market.”
That leaves the Big Six with another problem.
Kevin Mitchell, chairman of the Business Travel Coalition, stated in a recent Web-cast hosted by USAToday.com: “The conundrum major airlines face is that if they lower business airfares right now, without addressing structural cost and productivity problems, their losses will deepen.”
According to Mitchell, the market share of the low-fare carriers has grown from about 11 percent in the early ’90s to close to 20 percent today. But the ATA’s Heimlich said business travelers won’t be satisfied with a system that has only low-cost carriers. “They do not serve certain markets–international, smaller communities–so people will always need the network that the majors supply,” he said.
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E-mail: tstroud@tribune.com
