Last fall, when Michael Key, CMP, canceled a meeting in Cancun at the last minute (it was scheduled for the week after September 11) American Airlines refunded his company's money. Another carrier didn't. “American was very good to us,” says Key, director, meetings and incentives, Monumental Life Insurance Co., Durham, N.C. “I appreciated what they did, and I've instructed our travel department to use American for my meetings whenever their fares are competitive.”
That's the way it's supposed to work. You build relationships with suppliers and when the unexpected happens, they help you out. You return the favor by giving them more business.
But this idea seems almost quaint in the new order of the airline industry. “We used to count on longtime business relationships,” Key says. “Now the airlines are just trying to survive. We're at their mercy.”
The Old Rules Don't Apply
In the nitty-gritty of everyday travel planning, companies are feeling squeezed by changes announced by the major carriers over the past few months — changes designed to stem what analysts expect will be $8 billion in losses this year.
“Airlines are responding to their financial crisis on the backs of their best customers as opposed to stepping up to the really tough cost and productivity problems they have ignored for decades,” says Kevin Mitchell, chairman of the Business Travel Coalition, a Radnor, Pa.-based advocacy organization representing the interests business travel industry customers.
“There never will be a day when everyone will be satisfied completely, but we've tried to strike a balance,” says David Castelveter, spokesman for US Airways in Arlington, Va. US Airways was the first to announce several changes in fees and restrictions, most of which were quickly matched by the other majors. The changes, Castelveter notes, will represent “tens of millions of dollars in new revenue streams annually.”
The bottom line is a major motivation for Northwest Airlines as well. “With 2002 expenses and 1996-level revenue, we are examining every area of our business,” says Kurt Ebenhoch, spokesman for the Minneapolis-based carrier.
Here is a look at some recent changes and how they are affecting insurance companies' meeting and travel planning.
You can't reuse nonrefundable tickets if you fail to travel on your original travel date.
The exceptions: You can rebook before your original travel date for a $100 fee, and you can travel standby on your original travel date for a $100 fee. (Northwest charges no standby fee.) “The vast majority of our corporate customers are not affected because they buy less-restrictive fares,” says US Airways' Castelveter.
Not so, say many insurance conference planners.
“The only thing we use is nonrefundables,” says Ken Juel, manager, sales incentives and recognition programs, Mutual of Omaha. “You always have last-minute cancellations, but you could ‘bank’ the nonrefundable tickets with the airline. We have some out there all the time. Now, that's in jeopardy. I'm hoping that because we use an agency we can leverage that and maybe still have a little flexibility. But in the short term, it's gone.”
“We are big users of nonrefundable tickets,” says Brett Barrowman, director, conference and travel management, American Fidelity Group, Oklahoma City, OK. “With a conference, there are usually not a whole lot of changes. It impacts us more with day-to-day travel: Now you can't hold your ticket for future use.”
Leanne Acton, director, conference planning and travel services, Penn Mutual Life Insurance Co., Horsham, Pa., notes that most of her conferences include a Saturday-night stay so that her travel agency can book the lowest fares available — nonrefundables. “It is a difficult balancing act because you want your travelers to book early to get the reduced rate, yet you don't want any changes,” Acton says. “In a perfect world, this would be possible. In today's business world, it is difficult.”
If you rely on nonrefundable tickets to keep your budget in line, you face a decision: Should you continue to buy the cheaper nonrefundables and risk losing all of their value (or paying $100 to salvage them), or spend more at the outset and buy tickets in less-restrictive fare categories? After looking at numbers from a data aggregator that analyzed the travel patterns of Chicago-based Aon, Harriet Washburn, the company's vice president, travel, says, “We shall continue to recommend use of nonrefundable fares to our travelers as they still represent significant savings over unrestricted full-fare tickets.” Traditionally nonrefundable tickets make up 40 percent to 50 percent of Aon's air bookings.
The major airlines have eliminated the lowest-fare options from their corporate discount programs.
Companies that book enough air travel can negotiatewith the major airlines based on that volume. Those contracts get them discounts off published fares, which until recently included the lowest fares available. These “corporate fares” are used for individual business travel and for group travel.
Companies without enough volume to negotiate corporate contracts commonly use group contracts based on the number of people traveling to the meeting destination. Group contracts also provide discounts off published fares (the discount varies depending on the fare class) or are drawn up using zone fares, which offer savings off full coach fares but have none of the restrictions of the cheaper non-refundable fares. Companies with corporate contracts may still use group contracts with carriers that don't normally get the bulk of their volume, or they may use group contracts with zone fares for meetings that don't take place over a Saturday night.
Figuring out what fares are lowest for any one meeting by taking into consideration dates, restrictions, corporate travel policies, and contracts is so complicated that corporate travel agencies have computer programs to do the work for them. “We look at everything” when booking group air, says Leslie Herald, meeting and events manager, AEGON USA Travel and Conference Services, the in-house travel department that books air for companies under the AEGON umbrella. Herald, who is based in Louisville, Ky., uses a product from Sabre to do the comparisons. “Our main purpose is to save the company money,” she says.
With the lowest fares eliminated from corporate contracts, that will become harder to do. “It will have an impact,” says Aon's Washburn. “There is still a spread between refundables and nonrefundables, but that spread is narrowing. It's enormously complicated.”
Group contracts, Herald notes, “for the most part were not affected by these changes and will still permit some kind of discount off of the lowest fares.” However, that discount may be smaller than what companies were accustomed to getting from their corporate contracts.
When there is no Saturday-night stay, zone fares may emerge as the way to go. “Our group product is becoming more important now that corporate discounts are not available on the cheapest fares and nonrefundables are really nonrefundable,” says Alynne Hanford, national sales manager, group and meeting travel, American Airlines. “The zone fare is going to be very important to a lot of corporate customers. Zone fares represent 60 percent off full coach fares.” American's group contracts using zone fares also have a “bonus feature,” Hanford points out, which gives companies an additional 5 percent off the zone fares when the tickets are booked at least 30 days out.
The airlines have outlawed “waivers and favors.”
“One of the things we battle is the way airlines have the capability to change fares so quickly,” Herald says. “It's a guessing game.”
Brett Barrowman agrees. “Airfares can change thousands of times a day,” he laments. “You could book two people within two minutes of each other and get different fares. That makes it difficult to budget for air.”
Up to now, the airlines had tried to smooth out the fare fluctuations for their corporate customers. Say, for example, your travel agent found a low fare in the morning for one of your attendees, went back to book the ticket after lunch, and discovered that the fare had gone up. It used to be that the agent could call the local airline rep, get a waiver code, and pay the morning's lower fare. No more, say the airlines.
Or is there still some wiggle room? Probably. Northwest's spokesman put it this way: “Since our fare restructuring in November 2001, we have been more closely adhering to our guidelines in this area [waivers and favors]. Beyond that, it is not something we discuss publicly.”
One meeting planner believes that while waivers will be less common and a travel agent might have to go “two or three layers up” to get one, they will still be available for key corporate clients.
Hanford of American Airlines says, “Our sales reps are still empowered to make good business decisions based on the value we're getting from our customers. We look at the whole picture.”
Site Selection: The Air Factor
“The bottom line is the airline industry has forced us to rethink the way we do business,” says Barrowman of American Fidelity Group. Air is always an integral part of site selection, he says, but with less flexibility, increasing costs, lack of enough lift, and declining service, it has become a bigger piece of the puzzle. One planner he knows recently changed a meeting destination after checking on airfares.
At AEGON, different considerations come to the fore depending on the group, says Leslie Herald. For example, schedules are critical for companies with travel policies that limit the number of employees that can be on any one flight. Cost is weighted more heavily for large incentive meetings planned years in advance than for small business meetings.
And Then There's Service
Accepting the airlines' fee increases and tougher enforcement of restrictions is all that much harder for planners and travelers who see a decline in customer service industrywide — and we're not just talking about the elimination of meals.
“I think all domestic carriers have service issues at the moment,” says Mutual of Omaha's Juel. “I try to smile and say, ‘Hi’ every time I board a plane. More times than not, the greeting is not acknowledged. The culture the carriers have created for the flight attendants has taken all of the fun out of their jobs, and it shows in their performance.”
Says Herald of AEGON, “The service isn't there anymore, although Southwest is one of the best. Their service is very consistent and they make flying light and fun. Travel is not easy. You need to try to make it as easy as possible for travelers. Some of the airlines have forgotten that.”
“Personally, I like US Airways,” says Leanne Acton of Penn Mutual. “They are large enough to offer competitive service, especially along the East Coast, yet they are small enough that you feel each employee has some personal pride about the company for which they work.”
Barrowman, like most planners, wants to do business with suppliers who value him as a customer. “I will look at an airline that has asked for our business,” he says. “Relationships will continue. They need to earn my business.”
Likewise Juel calls on the airlines to remain flexible with their corporate customers. “The majority of airlines' business is the business traveler,” he says. “I'm hoping airlines recognize that and favor the business side rather than the vacationer. It's so complex. They've got to come back and dismantle the pricing process. People are very creative. Every time they use a patch to fix a loophole in the pricing policy they're just encouraging people to find another way to get around it.”
More Turbulence Ahead?
In late September, Hal Rosenbluth, chairman and CEO of corporate travel management company Rosenbluth International, submitted a White Paper detailing a “Fair Fare Plan” as part of his testimony before the U.S. Senate Committee on Commerce, Science, and Transportation. “The corporate pricing structure of the airlines is broken,” he wrote. “Airlines won't publicly state that they are in a mess they can't get out of, yet privately, they are quick to agree that lemming pricing has ruled the day for the past two years.”
Rosenbluth calls on airlines and corporations to take a number of steps, including reducing walk-up fares while simultaneously reducing corporate discount programs. He notes that airlines often maintain corporate discount programs even when a corporation fails to meet its volume or market share goals and calls for closer monitoring of customers so that those who do perform aren't subsidizing those who don't. Rosenbluth recognizes the hurdles to implementing these and other suggestions and acknowledges that no one knows what the perfect fix is; however, he writes, “what we know for sure is that right now all we see is a recipe for disaster.”
While airline stocks continue to fall and predictions of huge financial losses promise to come true, BTC's Kevin Mitchell offers an equally dire view. “There are no surprises here,” he says. “It's just that these new onerous policies will backfire. In my view, it's game over, lights out for the major network carriers.”
How Bad Is It for the Airlines?
At press time:
- US Airways was operating under Chapter 11 bankruptcy protection.
- United was on the brink of declaring bankruptcy.
- Airline stocks had plummeted so far that the major carriers had lost a third of their market value.
- Analysts were predicting 2002 losses of $8 billion, more than last year's record losses of $7.7 billion.
- Fares were so low, said Alynne Hanford of American Airlines, that “right now we need an 87 percent load factor to break even.” The Wall Street Journal reported in October that American's year-to-date load factor was 72 percent.
- The one bright spot was Southwest: With the lowest labor costs in the industry, it was the only major carrier not losing money.
- Educate your attendees
“We are hopeful that by educating our travelers, emphasizing the penalties at the time of booking, and confirming reservations at the end of the call that we can minimize the number of cancellations and hence the number of unused nonrefundable tickets,” says Leslie Herald, meeting and events manager, AEGON USA Travel and Conference Services, LLC, Louisville, Ky.
- Fly where Southwest flies
“As a meeting planner, it almost always helps to look at sites where Southwest flies,” says Michael Key, CMP, director, meetings and incentives, Monumental Life Insurance Co., Durham, N.C. “When they fly into a city, they bring all the fares down.” Case in point: Key just returned from a meeting in San Diego where the average airfare for his attendees was $282. He had budgeted $410. “My CEO and president were very happy about that,” he notes.
- Think twice about accepting “1 for 40.”
Group contracts allow you Earned Free Tickets (EFTs), usually one free ticket for every 40 you buy. But watch out: You may never find seats with those freebies. “We have been successful with some airlines in negotiating deeper discounts by waiving the EFTs,” says AEGON's Herald. “In most cases the airlines allow very few seats for what we call ‘non-revenue passengers.’ We prefer to have a greater discount on the front end so that the company realizes the group savings immediately.”
- Take the EFTs, but make sure they're full-coach tickets
“It's,” says Brett Barrowman, director, conference and travel management, American Fidelity Group, Oklahoma City. “Don't take anything for granted.”
Outside or In-House: Who Books Your Travel?
RECENT CHANGES announced by the major airlines come on the heels of the elimination of commissions to travel agents, a move that affects companies differently, depending upon whether their air is booked internally or by an outside agency.
Ken Juel, manager, sales incentives and recognition programs, Mutual of Omaha, uses Creative Group, an outside travel agency, and is still in the process of negotiating a per-ticket fee in lieu of commissions. “In the old days there was no charge to us and we split the commissions,” he explains. “It was win/win.” Now, Mutual of Omaha often books smaller meetings in-house to save money.
The subsidiaries of AEGON book all of their travel through AEGON USA Travel and Conference Services, LLC, the in-house travel department. Before airline commissions were eliminated, the department was able to pass those profits back to the company, says Leslie Herald, meeting and events manager. Now, she explains, “we're not making the commission, but we are saving the company money since we are not charging the service fees that other travel companies are charging.”
On the other hand, Harriet Washburn, vice president, travel, for Aon, prefers letting an outside agency worry about “reducing and expanding head count” as needed and about keeping up with technological changes in booking travel. Aon worked with its agency on a “net/net” basis before commissions were eliminated, Washburn says, and the company can't reveal its current fee arrangements other than to say “we pay for our transaction process.”