Deal or no deal?

Securing a corporate air deal has been a part of the job description for corporate travel managers since time immemorial, but is it time to say RIP to the RFP?

Earlier this year BTN Europe reported on American Airlines’ apparent “lessening emphasis” on contracted corporate travel, with one TMC leader citing reduced incentives and smaller corporate discounts. "They are essentially saying, 'We don’t want to have a business travel focus'," said that CEO.

Evidence to support the theory was delivered in an earnings call at the end of January in which the airline’s chief commercial officer, Vasu Raja, pointed to the carrier’s declining reliance on contracted corporate travel. Another article, in the Company Dime, suggested that corporates spending less than $1.5 million annually with the airline would no longer get discounted fares.

Is this a sign that the corporate air deal is on its last legs or is it just a hangover from Covid? TClara’s Scott Gillespie believes that American Airlines is “walking away” from corporate deals and that other airlines will be looking to see how that affects margins.

“If margins don't shrink then I think other airlines may take some lessons from that and conclude – which I suspect has been true for a long time – that very few companies can move market share significantly and that minimises the business case for an airline to offer a discount,” says Gillespie.

He adds: “I'm convinced that the importance of discounting has become kind of a rearview mirror thing – it's shrinking. What is increasing in importance is the supplier’s ability to help buyers and travellers achieve successful trips and maintain, if not improve, their wellbeing.”

A STABILISING INDUSTRY
But has the pandemic really brought forward the end of the negotiated corporate deal? Covid’s decimation of business travel meant that most airlines simply extended their existing contracts with corporates despite the collapse in volumes.

Benjamin Park, executive director, travel and sustainability for Parexel International, says a lot of existing air contracts are “out of sync”.

“A lot has changed for airlines since Covid in terms of who has a contract and where they are flying. For some city pairs, travel programmes are 50 to 60 per cent of the volumes they were at in 2019, while others are at 120 to 130 per cent due to the industry sector they are in and if there was a big pent-up demand, as various surveys reported.”

"For airlines, corporate deals are not just about minimum spend but also about opportunities to gain volume from other airlines" - Florian Mueller

Olivier Benoit, Advito’s vice president for global practices and sales, says: “Until last summer, airlines were in wait-and-see mode. Their starting position was that they did not change their corporate segmentation but have now started to do so at the end of last year and the start of this. Airlines will now go to a corporate and will most probably change their tier in their corporate segmentation.”

FCM Consulting’s air practice lead, Florian Mueller, adds: “Those days are mostly over now that most corporations have 12 months of solid domestic and international data. While some airlines have made strategic changes to minimum spend, for the most part, we are still at pre-Covid levels. It’s not just about minimum spend but also opportunities to gain volumes from other airlines.”

The challenge ahead for corporates is that fares are still increasing due to heightened demand, lower supply and inflation, although some markets have returned to ‘normal’ faster than others.

“This is very much market dependent and always contingent on the level of competition and demand. It’s tricky to put a timeframe on this while the global economy remains under pressure,” says Mueller.

With high fares looking set to continue for at least the next year – and perhaps longer if sustainability concerns start to see carbon-related demand suppression priced into fares – there may be a smaller appetite from airlines to offer discounts. So what are the alternatives to the traditional annual deal?

ALTERNATIVE APPROACHES
Advito’s Benoit says a dynamic air programme with continuously monitored KPIs and which is constantly adjusted for the changing needs of the corporate is the order of the day.

“Covid has proven that managing static through heavy RFP cycles when you source on historical data rather than future price points doesn’t work. The trend is clear – we call it dynamic performance management,” he says. “Covid meant people had to adjust their programme overnight. The ones who were managing dynamically did it extremely well but the ones who were in more traditional one-shot sourcing cycles had many more challenges.”

Moving to a dynamic air programme does not change the fundamentals of negotiation. If there is a gap in the programme, you close the gap and move to the next one in the following month.

“The logic is the same as before,” says Benoit. “Airlines are expecting you to deliver something, usually volume or market share, in exchange for benefits: a discount or a flat fare or a back-end rebate, and more value-add items – for example, frequent flyer matching or upgrades, lounge access, free WiFi or flexibility. If you don’t deliver, you are downgraded in the value of the contract and you will have the same type of discussion with suppliers as previously.”

"We have seen negotiations where some clients, even with a significant drop in volume, have kept strong benefits" - Olivier Benoit

DEALS TO BE HAD
One airline that is not dispensing with negotiated corporate fares is easyJet. The carrier’s head of business development, James Marchant, says the carrier’s negotiated corporate fares “have increased in popularity as buyers seek greater value from their travel programme and maximisation of travel budgets.”

He continues: “We like to allow our corporate customers to set their objectives. By providing great fares and value for money, it often makes sense for the customer to set their own goals so that they can maximise the benefit.

“A flexible approach is needed. Some customers like short-term tactical offers whereas others enjoy a more strategic approach. By utilising our whole product offering and setting clear goals, our corporate customers utilise the benefit of dynamic pricing alongside specific term-based marketing offers,” says Marchant.

All is not lost for corporates who cannot deliver on pre-Covid volumes. Advito’s Benoit believes buyers still have some leverage with suppliers.

QUALITY NOT QUANTITY
“It is not only about the volume of spend, but also about the quality of spend,” he says. “We can see negotiations where some clients, even with some significant drop in volume, keep strong benefits. Some airlines have decided to keep on investing in corporate segments. They want to protect their market share. You might think that because flights are full they do not need it [contracted business] and should not discount, but they have a mid to long-term vision and say ‘let us secure the relationship and then the loyalty will be there and be a return on investment’.”

Corporates with a high quality of seats – business or first class and fully flexible fares, for example – on competitive routes can also use this as a lever. Where an airline is operating a highly profitable route – across the Atlantic, for example – a corporate with a high quality of seats can keep good discounts on these routes in exchange for higher pricing on non-competitive markets.

Mueller recommends corporates talk to their TMC or consulting company to discuss possible strategies such as consolidating spend to a few airlines or even one airline per market. If a bespoke deal is not possible, some airlines may also have non-negotiable off-the-shelf corporate programmes they can offer.

Benoit says some corporates are now looking at what he calls a holistic air programme that goes beyond lowest logical fare. “Previously selecting and assessing suppliers for a corporation was very much focused on savings but we have two new dimensions: traveller satisfaction and wellbeing, and building a sustainable business travel programme. Wellbeing and carbon emissions are now a higher priority, although savings is still the key driver.”

Sustainability is also coming into negotiations in another way. Airlines are keen to get large corporates to invest in SAF production and this can be used as a lever on discounts too.

It is still too early to say goodbye to the air deal. Some carriers are likely to wait and see what the response to American’s moves are. Others will argue they will move to another carrier if they’re not getting what they want – but that’s not always possible in a supply-constrained market. There are also signs that not every airline is following American’s lead and that corporate business, even if diminished, remains highly valuable business.

BOOKING BEHAVIOUR
Travel management company CWT reports that the average ticket price has dropped 1.42 per cent in Q1 2023 from the previous quarter and is now at its lowest since Q1 2022 when the ATP was $610 globally.

Meanwhile, seven-day advance purchase levels have been ‘steadily climbing’ over the last 24 months, as have 14-day advance purchases. And domestic flights accounted for 66 per cent of tickets issued by the TMC in Q1 2023, down from 82 per cent in Q1 2022.

Multi-stop trips grew in popularity in 2021, accounting for 68 per cent of bookings, and although that figure dropped to 56 per cent in 2022 it remained above pre-pandemic levels. Meanwhile, one-day trips have recovered less relative to other trip types post-pandemic.

“With sustainability now at the top of the agenda for many travel programmes we can expect to see the trend in favour of ‘trip-batching’ and multi-destination trips continue,” says Nick Vournakis, CWT’s chief customer officer. “The idea of carbon budgets, similar to spend budgets, is gaining traction. So, a traveller based in New York who is planning meetings in London, Paris, and Amsterdam, and now has to be very judicious with their carbon emissions, may look to combine those meetings into a single trip and do some of that travel by train or car, instead of flying back and forth.”