It was a harbinger of things to come when most domestic airlines could not profit even in the robust economy of mid-2004 to mid-2007. At that time, the price of oil, which dictates jet-fuel prices, held steady between $55 and $60 per barrel. Planes were fairly full, thanks to plenty of leisure travelers sharing armrests with stalwart business travelers. What's more, discount carriers such as Southwest, Frontier, Midway, AirTran, and Alaska Airlines were keeping the big carriers in check by competing aggressively in cities large and small.
Then the bottom fell out. The economic bubble deflated, and the cost of oil spiked. By November 2007, oil was above $90 per barrel, briefly shooting to $148 per barrel in mid-2008. The price has fallen dramatically since then, although no one can say how long that will last.
Airline Survival Strategies
With oil prices spiking more than 70 percent since early 2007 and jet fuel representing up to 40 percent of airlines' total expenditures, airlines are doing what they must to survive. Most carriers have imposed increases in their fuel surcharges, which recently averaged $302 for roundtrip flights between Chicago and London, on top of fare hikes. They are adjusting plane sizes to the demands of individual routes and making fewer trips to and from fewer cities, resulting in a significant loss of seat inventory in many markets across the country. (See chart, page 13.)
Most airlines have imposed $25 fees for the first checked bag, plus fees for pre-assigned seats and other small conveniences. To compound the problem, several smaller carriers, including Aloha, ATA, and Skybus, could not stay in business, further narrowing flight choices. In just over three months in mid-2008, ticket prices paid by business travelers went up 12 percent, according to the American Express Business Travel Monitor, a service that tracks travel expenses, including published and purchased airfares.
The good news is that the still-escalating economic crisis may force airlines to adjust their survival strategies. Kevin Mitchell, chairman of the Business Travel Coalition in Radnor, Pa., notes that the mushrooming credit crisis and resulting travel cutbacks at most organizations have killed airlines' ability to push up prices. “In 2008, they hoped to cut capacity 10 percent while raising prices 20 percent,” he says. “The problem is, very few people are buying at those prices. This means that the recent fare hikes are coming off the table. It also should mean that airlines will chase any business they can, and will be more aggressive in going after group business.”
United Airlines, for example, whose meetings desk, staffed with dedicated account managers, is open seven days a week, “will continue to be extremely active and competitive in [the group] segment,” says United spokeswoman Robin Urbanski Janikowski.
Nonetheless, the travel landscape for meetings may never be what it was even just a few months ago. As of early October, airlines showed no signs of ending the a la carte menu of ancillary fees for things such as checked luggage.“Fees for special services enable us to keep fares competitive for everyone, which is what everyone wants,” says Urbanski Janikowski.
Speaking at the National Business Travel Association annual conference in July in Los Angeles, Montie Brewer, CEO of Air Canada, an early adopter of unbundling ancillary-service costs from base fares, said, “People who incur costs should pay them, and the people who don't incur costs should benefit. The frequent flyers who come through with a briefcase, check in through the kiosk, get onto the plane, and get off — and we don't have to do anything for them — should benefit because they're very low-cost customers for us. If someone comes on with two or three heavy bags and a complicated itinerary, why is the guy who isn't generating any expense funding the checked baggage of the other person?”
In addition, airlines have declared they intend to cut seat inventories by another 10 percent in 2009. Even profitable Southwest has said it will cut 196 flights, a 6 percent reduction. Some destinations will be more hard-hit than others. “With the route decisions I've seen lately, there is a disproportionate amount of capacity coming out of destinations where the major airlines compete with the low-fare carriers,” Mitchell says.
What's the result of all this for airlift? “It's going to be a whole different game, one we have not seen before,” says Wayne Wallgren, president of Dallas-based WorldWide Incentives Inc. He predicts “a paradigm shift in how we planners make destination decisions.”
Planner Survival Strategies
Planners are using various strategies to prepare for the bumpy ride ahead. Many meetings already start with an evening reception so that people have a full day to travel and the worst-case scenario for delayed attendees is that they miss one evening event.
As airlines revive three-night minimums and Saturday-night stays for the lowest fares (research firm Harrell Associates recently found an 87 percent rise in minimum stays across 280 routes served by six large airlines), meetings that now last three days and two nights might extend for the third night rather than pay much higher airfares.
If this happens, an imbalance of Thursday to Sunday meetings could develop, skewing negotiability for the extra hotel night as well as for air. A less costly — but for most business travelers, less desirable — alternative: a Saturday to Tuesday schedule.
One trend that might help: While air costs are going up, some hotel costs are starting to go down. A veteran planner, who asked for anonymity, says that she has landed good hotel deals recently, but that it's critical for her to first strategize with her travel department about the air situation in potential destinations. “Travel managers help me analyze the lift needs of all our attendees to determine whether a second- or third-tier city could be considered, and then we see how much the hotels there are willing to work with us to keep within budget.”
Planners say that understanding the downsides of destinations in terms of connecting flights is essential. “We scour the attendee list to see who might have trouble coming to or from smaller airports and thus might miss part of the event,” says Wallgren. “With less money available to bring in some people a day early, the choice is to route them through a different hub city or not use that destination. You can't just assume or hope that the tight connections will be made, because the next connection might be much later or not until the next day.”
Ira Almeas, president of Impact Incentives and Meetings in East Hanover, N.J., observes that groups using Europe or the Caribbean may need to create an “overnighters” budget that allows West Coast attendees to fly into East Coast hub cities and travel the following day to the final destination. “There are now fewer red-eye flights,” he says.”
An often overlooked source of help to planners is the convention and visitors bureau, particularly in cities outside the top tier of convention destinations. These CVBs will jump at the chance to help planners with an analysis of their cities' feasibility for meetings. Not only are CVB personnel increasingly able to document how well their cities' lift capacity and choices can fulfill the needs of meetings, but they are also quick to tout whichever alternate transportation possibilities would make their cities viable and cost-effective for a particular group.
It is also possible that the recession will bring planners more negotiating clout — but only to a point. “I have not seen anyone successfully negotiating out the baggage fee,” said Mitch Cwanger, American Express Advisory Services senior practice leader for air. He is, though, advising clients to ask for a first-bag fee waiver.
In the end, many planners simply might resort to using the same cities as often as possible as they find the ones that offer the best transportation options, scheduling flexibility, and cost controls.