Fare deal

Corporate travel buyers are finding that securing a decent discount contract with legacy airlines is becoming ever more challenging and complex. Jonathan Hart reports

ROLL UP, ROLL UP to the airline market stall. Get your succulent net fares and juicy volume rebates here. Check out the frequent flyer benefits and grab yourself a slice of the privileged discount action. There’s a deal for everyone.

Or is there? Look closer and it should come as no surprise to discover that things ain’t exactly what they used to be in the contracts bazaar. Easy-to-apply deals are few and far between on the legacy carrier shelf, according to company procurement officers and travel management companies (TMCs) on the frontline of purchase and air account management.

There’s plenty going begging if you’re looking for no-frills products or pondering additional distribution channels, but significantly less in the way of traditionally fluid, open-ended agreements, they say.

You need to double-check your forecasts and think twice about commitments because contracting with legacy carriers today can be heavily clause-restrictive and give you a nasty headache in the planning and budgetary departments.

In short, the airline stall is neither piled as high nor selling with such abandon as it was before recession – or more recently, prior to a volcano, oil prices and air passenger departure taxes collectively skyrocketing.

Along with staff disputes, these factors have taken an unsettling toll on a key segment that has been reviving of late but is still struggling to balance capacity with income through, potentially, further recessionary times. Carriers are not only cutting capacity: they are also on a mission to claw back revenues wherever they can and, in one isolated case to date, from buyers who don’t meet their commitments.

Expanding market share is now their chief sales priority, to the exclusion of most other tactics.

The result is that, far from casually promising volume as previously, buyers face a frisking at the request for proposal (RFP) stage to ensure they are reading from the same page. Their credentials and proposition need to be sound to be fit for contributory partner purpose. In addition, buyers need to do their sums right and bring new disciplines to the table if they want a share of a diminished discount pie (see ‘Playing the contract game’).

“I suppose you could say the boot is on the other foot,” says Adam Knights, group sales director for TMC ATPI. “It’s a question of supply and demand.” Consolidation and streamlining by airlines have tightened the screw in contract negotiations, he says. “Airlines cut back on key routes and, hey presto, there’s more demand than supply.”

Key routes, such as transatlantic, are now a contracts battleground, Knights adds, with buyers needing to play off one carrier against another for the best contracts: “It’s not going to get any better for buyers when carrier mergers are completed,” he says. “In the meantime, airlines are contracting net fares with only the biggest and most reliable spenders, perhaps a minimum of more than £2 million annually on the New York route, for instance.”

He says airlines are also setting the minimum financial bar higher on corporate mileage programmes, and the company earn-as-you go discount schemes usually contracted by small and medium-size enterprises (SMEs).

Even low-volume agreements are reputedly tricky to attain and sustain. “The chances of us getting any deal today are nil,” says Peter Macey, facilities and central purchasing officer for the Medical and Dental Defence Union of Scotland (MDDUS).

“We’ve tried before but because we’re a small producer and our flight needs are mostly domestic, airlines don’t want to know us. We’ve been given very short shrift and shown the door.”

Working within the parameters of contracts that don’t match up to or fulfill client needs can be a strain, adds Adrian Woodward, group supplies and industry director at HRG. It’s not so much about dealing with steeper prices as the restrictions and lack of manoeuvrability provided.

“We understand where airlines are coming from with their consolidation programmes but some contracts can be difficult to convert in a meaningful way,” says Woodward. Added to widespread capacity constraints and a paucity of net fares availability on first-choice carriers, formerly gratis ancillary benefits now form part and parcel of the contract trading currency.

“There’s a lot we can do building on ancillaries, such as upgrades and waived baggage allowances. We can extemporise to a degree but there are a lot of gaps that need filling in.”

Woodward says the biggest source of difficulty is contracts being offered in joint venture format, with mutual pricing policies and revenue management, without the accompanying clarity as to how different elements can be implemented.

He says it is rare to have a client wanting volume travel with each of the carriers in a joint venture, which leads to confusion as to which carrier can be booked at the appropriate fare and when. This, in turn, can lead to difficulties with individual client channeling and compatibility issues, including loyalties, choice, compliance, booking data and expense controls.

“Basically, if a joint venture is cutting capacity and can’t provide the volume required on a first-choice carrier, then it can upset the client, as well as leading to account management and booking difficulties,” says Woodward.

Alternatives are not always made immediately clear. Woodward cites the British Airways/Iberia/American Airlines transatlantic and onward scheduling as an example of joint venture contracts causing availability concerns for forward bookings. This is meant to provide an hourly shuttle service from Heathrow but it has not yet been made clear how it will operate, he says.

Meanwhile, HRG has struck a deal with American Airlines to explore a new Direct Connect distribution agreement (see ‘Channel Hopping’)

It appears that buyers and TMCs are caught between a rock and a hard place over contracts; needing volume discounts, but often being saddled with take-it-or-leave-it contents can be complicated to apply and manage. In addition, they face an element of being put on probation by airlines in a market where client performance targets are critical and every transaction is automatically tracked and scrutinised.

The received wisdom is that, though historically not the most harmonious of bedfellows, air sector suppliers and buyers have been working in tandem to re-grow the market. For the most part, they appear to have been doing just that in the spirit of facing the common task of balancing the bottom line and teasing up profits in straitened economic circumstances.

Apart from ongoing expansion, convergence or legal issues with online distribution channels or global distribution systems (GDSs) (see ‘Channel Hopping’, right), all appears to have been going relatively smoothly in relations between legacy carriers and their core business customer providers.

All, that is, but for contracting concerns and discernible niggles over who is supporting who in the communal battle to source and secure more front-end business.

Although as yet confined to Germany, these concerns have been highlighted by Lufthansa’s decision to re-write its annual contracts with stringent new pre-conditions from this year.

The carrier has been insisting on immediate financial claw-backs from corporate customers receiving upfront discounts, but failing to meet agreed volume or market share commitments.

In parallel to customers pre-lodging instantly cashable paybacks for underperformance, Lufthansa has been demanding, as a pre-condition to signing contracts, that clients authorise its use of potentially sensitive management information data, bought from GDSs, as well as details of their individual corporate card spending.

The contentious nature of these blanket demands caused a furore among corporate buyers at annual contracting time in Germany earlier this year, with many refusing to sign without the carrier backing down and permitting amendments, including a recommended instigation of a tiered system of discounts corresponding to volume or market share with quarterly or monthly adjustments.

A major bone of contention among German buyers was that, with or without new clauses, Lufthansa’s revenue management system frequently prevents them from booking seats at a negotiated discount on a flight, even when there is availability.

Buyers argued that without last-seat availability they couldn’t be expected to meet their targets. Lufthansa has since remained tight-lipped over the issue. Despite requests, a spokesperson was unavailable to update Buying Business Travel on whether amendments have been permitted or whether its rigid ‘no signature, no corporate rates’ policy would be extended beyond Germany.

“I would imagine that’s unlikely,” says John Fitz-Gerald, business development manager for Cathay Pacific Airways. “This sort of policy could only be imposed by a carrier that is totally dominant in its own home market. Elsewhere, such as in the UK, where market share is more fragmented, it probably wouldn’t work.”

Fitz-Gerald says the contracting process is fraught with complications for both airlines and buyers in forecasting market share, volumes and availability in separate domestic, regional and global markets: “Everyone wants to button down specific revenue streams, but projections, by their very nature, can never be an exact science, whether you’re contracting a megabucks global deal, or local deals with high, medium or low spend.”

In common with many other airlines, Cathay monitors its annual contracts on a monthly basis. “If a client produces less volume than contracted, then the contract is re-negotiated downwards and the fares upwards,” Fitz-Gerald says. “It’s a mutually agreed process – it’s not something we need to go to war about.”

Although annual contracts are required for agreeing the varying thresholds for different markets, and loading and coding the fares in GDSs, the process still needs to have flexibility on both sides, he adds.

“Contracting is a moveable feast and there will always be shortcomings in practice on either side,” says Fitz-Gerald. “I feel sorry for TMCs because they work hard with the contracts they’re given for clients, but sometimes they find them difficult to adhere to or can be let down.”

While carriers can predict to some degree what they can offer capacity wise on given routes, they need also to guarantee that the seat they are contracting is available on the day.

“For whatever reason, that doesn’t always happen,” says Fitz-Gerald. “It’s always going to be swings and roundabouts. So there has to be give and take between all parties after the contract is signed.”

Managing director UK & Ireland for United Airlines, Bob Schumacher, adds: “The German situation smells of market strength and is not a route we would want to go down, although, clearly, we are all involved in the courtship of corporate customers and continue to monitor the market daily.

“What we don’t want to do is get into any adversarial kind of relationship with our corporate customers. Sales is a relationship business and, ultimately, if you talk about claw-backs it sounds offensive and shows, to me, a breakdown in that relationship.”

Schumacher says United puts its faith in ongoing dialogue with customers, and examines the reasons for their underperformance before re-negotiating the contract next time round.

“If a client’s lack of performance was so egregious to us, we could simply cancel the contract. But we don’t want to do that. We want to sit down and talk about the shifts in their traveller patterns and what we can do to find a solution.”