AS 2012 BEGAN, two major surveys of buyers named cost as the biggest thing they would need to tackle this year, putting the writing clearly on the wall for any negotiations to come.
A poll by the organisers of February’s Business Travel Show found that 73 per cent of buyers thought cost would be the biggest issue. This finding was later duplicated by Carlson Wagonlit Travel, which found that cost had overtaken compliance worries among the buyers it surveyed.
It’s not an encouraging backdrop against which to carry out negotiations if you are an airline, particularly as the early part of 2012 saw carriers renegotiate contracts that had been drawn up in 2010, in the teeth of the recession.
Striking a deal
As always, there are two sides to this story. According to British Airways’ sales boss Richard Tams, 2012 appears to have bought an element of realism to the market on the buying side. “Buyers are always coming to us with demands for better rates, but I have to say in spite of the general context we are having sensible conversations with our corporate clients. We are agreeing pricing that suits both parties,” he says.
“A lot of deals we renegotiated were struck at the lowest point of the downturn, so we are trying to get the pricing into a more realistic place. I wouldn’t say the ball is ever in our court, but generally buyers understand that pricing negotiated one or two years ago is unsustainable.”
However, one travel buyer from a large multinational indicates that the ball is back in the buyers’ court, and disagrees with the airline perspective: “That’s their view and of course they will put that about, but if people start to leave business class cabins, we will be going back to airlines and saying: ‘Are you sure?’
“We’re aware from various sources that airlines are beginning to suffer again in the premium cabins. They don’t like to admit it, but bankers are starting to disappear down the back of the cabin again. The economy is starting to kick in.”
Bernadette Basterfield, Credit Suisse’s global head of travel and events, puts it bluntly: “There is not a recovery from two years ago as far as I am concerned, and we will continue to be bumping along the road for the foreseeable future. We still very much see a real pressure on costs.”
Tams, however, says there is very little change in corporate travel policies as a whole, but “invisible” changes are apparent within companies. “You may see individual budget holders within a corporate try to save money by buying cheapest on the day or stipulating travel in different cabins, but we don’t know that.”
Another big-spending travel buyer, General Electric’s EMEA travel manager Keith Mullineux, says recessions are “a good time to get policy to bite and ratchet things down”.
“I wouldn’t say they are coming to us with better deals, but clearly we continue to negotiate,” he says. “We’re certainly not going to be any more generous. We’ve made good use of the last two or three years to get compliance and maybe push the threshold [for business class travel] from six to seven hours to 10 hours – we’re not going to suddenly let that go.”
Consolidation
Key events this year that will affect negotiations are consolidation in various forms, more growth in the Middle East and, of course, the Olympics.
As carriers consolidate, alliances are becoming more important in negotiations. This year should see Star Alliance swell its membership to 30 carriers, while Skyteam will reach 20 and Oneworld 15.
“A lot of corporates are starting to get more interested in alliance dealing, particularly those with joint ventures,” says Tams. “When we go to a corporate now we offer American Airlines and Iberia, plus the existing relationship with Qantas. It’s a Oneworld story more and more, but, in particular, a joint venture one.”
From GE’s Mullineux’s viewpoint, consolidation like this could be a problem. “It’s not impossible to see the day when there are just three alliances. I expect to see more negotiation by alliance, so as competition reduces, people will find things get tougher.”
Basterfield, however, sees advantages. “We find there is one point of contact and that’s the lead carrier in terms of volume. That model works for us.”
Competition will decrease further later in 2012 once BA absorbs Bmi. BA’s owner IAG remains tight-lipped, but it is safe to assume some new route launches, bilateral agreements permitting, to places like India and China, and some Bmi short-haul routes will disappear.
Eastern influences
The Middle East carriers may counter these new long-haul services, as there is no doubt that Emirates, Qatar Airways and Etihad are having a profound effect on eastward travel patterns. This year will see the New Doha International Airport open.
“Middle East carriers are very much in touch – they are very flexible and quite aggressive in how they pitch for business. We look at them collectively for the Middle East and into Asia,” says Credit Suisse’s Basterfield. “Travellers now see the bigger picture – if you are going to Hong Kong, you might consider going this way if the price is attractive.”
Price differentials on indirect routes can mean the opportunity to upgrade the class of travel. “It’s these ‘value adds’ that have gone out of the market in the last two years,” says Basterfield. “They can have a big impact on where you put your share of business, but the focus has been on the price of the ticket.”
Surprisingly given the concern about cost, neither airline nor buyers expressed concerns about air passenger duty (APD) or other add-ons. BA says it has had no effect on premium economy sales, the cabin most vulnerable, as it is in the same band as business and first.
“We don’t look at how the fare is composed,” says Mullineux. “I don’t get hot under the collar about it, but I do get concerned about avoidable costs. It’s not starting to have a great impact.”
One thing no one can agree on is the effect the Olympics will have. The Business Travel Show survey showed the Olympics as the second-biggest worry for buyers this year. They are a concern for many airlines, too, but BA, being the flag carrier, is naturally less worried. Tams says: “We are not sending a message to our corporate customers not to travel to London during the Olympics, but we are advising them to book in advance.
“We will be putting extra resources in place to make sure the movement of the Olympic traffic does not disrupt the normal travelling experience.”
For all concerned, this is uncharted territory, but another buyer, unwilling to put his neck on the line publicly, gave an honest appraisal: “Nobody really knows – it will depend a lot on the weather. But in every Olympic Games, more people left the city than came in.We’re not saying ‘don’t book meetings’,we’re saying, ‘just be sensible’.”
All-business comeback
As buyers ponder ways to save money, they are presented with a lot more options among carriers in 2012. This year will see the return of all-premium class flights to the UK and possibly also the death of the budget airline foray into the long-haul sector.
March sees Hong Kong Airlines launch its all-premium class flights from Gatwick, while Air Asia X abandons its budget service from Kuala Lumpur on March 31 after three years of losses.
It might be every buyer’s wish to get a “budget” business service with good connections in the Asia Pacific region but, as Air Asia X found, the sums do not add up, particularly with fuel prices 30 per cent higher than when it began UK operations. It is relatively easy to get in-house costs down, but add in oil price hikes and the punitive rate of APD, and the product is no longer competitive against full-service carriers.
“There’s a lot of arguments to say that no-frills does not necessarily adapt to long-haul,” says BA’s Tams. “Air Asia X probably confirms that.” There are no others on the horizon, but Tams adds: “I am sure others will try.”
The flip-side is Hong Kong Airlines, which hopes to grab some of the bankers from BA and others. It has set up camp in Tower 42, in the heart of the City of London, to chase them.
Gerard Clarke, Hong Kong Airlines’ UK general manager, believes the use of Gatwick at its quietest times will attract business travellers, particularly with a limo service for those in its Club Premier class. The carrier’s owner, Chinese conglomerate HNA, is serious about the route, ordering three purpose-built Airbus A330s and banking on the connections it can offer at Hong Kong.
HNA may well have reason to be confident – it owns six other airlines and 12 regional airports in China among assets estimated at £30-35 billion. Investing large sums in a recession is not a concern and Clarke dismisses comparisons with failed one-off all-premium carriers like Maxjet. “We offer 30 destinations across Asia and have a very heavy presence in mainland China. The financial strength of the ownership is very deep.”
He says large corporates are already expressing interest in the new flights and that existing sales are “very brisk”. These should be bolstered by the introduction of a China air pass offering regional connections, making it particularly attractive to small- and medium-sized enterprises.
New products
Hong Kong Airlines’ main rival, Cathay Pacific, will offer its new business product on London flights from the end of the year. Before then, it joins BA, Virgin and Air New Zealand in offering a premium economy product on the London-Hong Kong route. Cathay’s cabin of between 26 and 34 seats will appear on select Boeing 747 flights from May and on all flights from Heathrow from autumn. It will offer mobile connectivity and the standard 38-inch pitch found in other airlines’ premium economy cabins. Seats in the separate cabin feature a large table and multiport connector to enable a productive time in the air – potentially meaning a hard job for some to convince purchasing departments that they really do need to fly business class. Cathay plans to have 87 aircraft fitted with the cabin by the end of 2013.
This summer will also see BA deploy six new Boeing 777-300ER aircraft on more key routes. The type, fitted with new premium economy and first class cabins, is already found on services to Mumbai, Delhi, Boston, Washington, Toronto, JFK, Philadelphia, Dubai, Chicago, Tokyo Narita and Hong Kong. From summer, it will also be on Los Angeles and Shanghai routes. March will see BA upgrade its Moscow flights with two 777s and a 747 brought in to replace 767s.
Investment like this comes with a long lead-in time, and BA and can answer any criticism that it is the wrong time to pour money into new aircraft and cabin upgrades by pointing to its London City-JFK flights, launched in the depth of the recession two years ago and, so far, a resounding success.
This year will also see American Airlines revamp its business class product to complement that of its joint venture partner BA. The two have coordinated transatlantic schedules for a year, but American has until now offered an inclined flatbed product, far inferior to BA’s. This will gradually change in 2012, when 10 new Boeing 777-300ERs are brought on to the route – a bold but necessary investment for an airline that has sought bankruptcy protection.
American’s rival, Delta, is midway through a $2 billion investment in its premium cabins. Having kitted out the bulk of its Boeing fleet with new business cabins, it will spend 2012 and 2013 fitting the herringbone design to its Airbus A330s, meaning that by next year, all long-haul international Delta flights will offer the flatbed Business Elite product.
Delta and American Airlines have also entered the premium economy market, although in a spartan manner via a standard economy seat with four inches more legroom.
United is putting its investment in business travel in a different manner. On May 2 it will launch a daily Manchester-Washington route, reviving a service dropped by Bmi in 2005. United’s has a better chance of success however, as it will use a narrow-body Boeing 757, so has fewer seats to fill. Among them are 16 Business class lie-flat seats on each of the daily flights.
Emirates is also putting its faith in premium travel. From March it will add a fourth Airbus A380 on its London route, meaning that four of the five daily flights will be on the double decker. Each has 76 business class seats.
More telling is Emirates’ investment in the regions, where it adds a second daily Glasgow flight from June 1 and switches to three-class aircraft. It also debuted in Dublin in January, underlining the fact that in some parts of the world, investment during a recession is not an issue.
This article was first published in ABTN's sister title Buying Business Travel, the award-winning magazine for company travel & meetings buyers and arrangers.
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