19 June 2008 - Consultants and travel management companies are urging multinational buyers to boost compliance to air travel policies as big U.S. airlines take a closer look at negotiated agreements and further winnow to only the best-performing clients. Liberal discounts for companies that fail to deliver as promised, experts said, simply do not fit within the airlines' altered universe in which published fares are leaving no room for profitability and planned
capacity reductions designed partly to boost fares will leave fewer seats to fill.
The situation presents management challenges as travel avoidance or low-fare, class-of-service and advance-purchase policies do not always jibe with preferred airline support. Different buyers will take different policy approaches depending on their travel patterns and company cultures, sources said.
Added contract scrutiny is underway primarily for U.S.-based firms and travel within the United States, consultants said, but international premium class volume is as coveted as ever and could offer negotiating opportunities. Trading down on international class of service policies, however, is perceived as a particularly controllable area for multinational travel buyers.
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Procurement.travel poll of 155 travel buyers last month found that just within the prior 12 months, more than one-third of organizations had tightened travel policies regarding international air travel class of service in order to cut expenses.
This may have helped drive the largest year-over-year decline in international business and first class tickets since 2003, as reported by the International Air Transport Association for the month of March. [IATA said premium international tickets rebounded in April with 6.4 percent growth.]
American Express Advisory Services is advising clients to consider mandating the use of preferred airlines on international routes. But the group's vice president, Frank Schnur, said even aggressive preferred supplier support is "far" less effective than controlling "traveler behavior and compliance, and
managing demand.
"If you're willing to make the tradeoff, and it works in your corporate culture, the savings you can drive by moving away from premium first and business class travel dramatically outweighs the benefit from the savings on the discount" in a preferred relationship, said Schnur.
On the other hand, the Carlson Wagonlit Travel Solutions Group has found that supporting preferred vendors is the more effective route. "In the short term, you can always save a buck here and there" by adjusting class-of-service policies, said Solutions Group director of airline consulting Dale Eastlund. "But in the long term, the more you can support your preferreds and demonstrate it, the better off you're going to be next time you have those discussions. It's dangling that carrot out there for the airlines to say, 'There are reasons why we should continue working with this buyer and improve the offering we had before, because they continue to deliver.' Being multinational with a business class travel policy always helps."
A recent report by the CWT Travel Management Institute, based on case studies of 87 clients and surveys of 57 travel managers and more than 6,000 travelers, found that the savings afforded by greater support for preferred vendors exceed those generated by class-of-service restrictions. Effective class-of-service policies can save corporations 4.3 percent off their total travel expenditures, CWT found, but improving compliance to preferred supplier guidelines can save 5.4 percent.
Preferred carrier support and effective class-of-service policies are not mutually exclusive, but even minor divergence in these generalizations points to the need for each buyer to closely examine his or her own firm's profile.
Advito vice president Bob Brindley was reluctant to promote one approach over the other. "I would shy away from it because in certain cases, changing policy to a lower class of service could offer huge potential savings, but can also lead to a number of unintended consequences," he said. "There may be valid business reasons, and clients should analyze that. It definitely does impact your negotiating leverage if you move from business to economy. We have seen clients make a wholesale change to an economy policy, and overnight go from being a highly valued customer over which competitors are jockeying to just not that important."
Agreeing with all three of the TMC consultants, TRX vice president for sales and client partnerships Dan Pirnat said, "The greatest overall savings potential is demand management."
"Second to that," Pirnat continued, "would be shifting down a level in terms of class of service. Third would be negotiating stronger discounts based on existing patterns."
Even with seemingly simple low-fare policies, some see tension between cost savings and supplier support. "With capacity reductions, fewer cheap seats will be available and therefore people will have to book earlier to get them," said TCG Consulting's Barry Rogers. "If you wait until the last minute, there may be nothing but full fares. So policy will be important and I think a lot of companies will have to scrutinize the tradeoff between supporting preferred carriers and taking the lowest fare in every case. They may not necessarily take the $1,400 fare over the $200, but there is a balance between."
Tightening Deals
That airlines are tightening up contract terms and pruning out weaker-performing accounts has been apparent for several years, but
The Beat today cited American Express, CWT and others offering information about a recently accelerating trend. Airlines are canceling deals with "many corporate buyers ... even before the actual contract expiration date," according to a CWT client publication issued this month.
Advito's Brindley differed slightly, saying he did "not necessarily see a reduction in the number of agreements per se ... but we are seeing that with the fuel price challenges U.S. carriers specifically are going through, some have signaled to a number of clients that they will more strictly enforce the [contractual] targets--which is not necessarily a problem unless they try to push things too far."
"In the last six to eight weeks, we have seen a significant shift in the restructuring of discounts," Pirnat told
The Transnational. "This may prove to be the final chapter in the book of performance-driven airline contracting. We have been saying for ten years that while relationships matter, the industry is trending toward commodity-type behavior."
U.S. flag carriers, Pirnat said, are now less generous in markets they dominate and more likely to restrict discounts to only the highest fares.
On intercontinental, intra-Europe and intra-Asia routes, meanwhile, Advito's Brindley said he has observed a reduction in the number of fixed fares available to clients. Amex's Schnur also cited a reduction in fixed fares.
TCG's Rogers said he has observed a sort of paralysis among airline salespeople who are uttering "business as usual" lines, but he expects carriers to "have an increasing problem with non-performing contracts. We're telling clients that going forward, managing to contract will become increasingly important. Policy really matters."
