By Andrew Wimpenny, Maria Agudo and Hank Rempelt

Consolidation in air travel has been around for the last two decades. In the past 10 years, megamergers reduced nine large U.S. airlines to four — American, United, Delta and Southwest — which account for 82 percent of miles flown on U.S. carriers (CNN Money, April 11, 2017). Meanwhile, joint ventures, which add pricing power to consolidation, have expanded from the Atlantic to the Pacific and now within regions.

In a consolidated air industry with megamergers and joint ventures, it is becoming more difficult to manage and balance the number of preferred carriers, discount value (savings) and goal commitments.

Because clients now face different scenarios, challenges and opportunities in covering their respective global travel footprints, managing these airline agreements requires more time, cost and effort.

For mature corporate air travel programs, it can be challenging to maintain year-over-year incremental savings with incumbent suppliers, and traditional procurement measurements do not always apply to travel. These savings depend on travel patterns, goal performance, route yields and overall airline profitability, and clients only can influence the first two of these factors.

Also putting a strain on travel budgets is a strong air industry outlook for 2018. According to a forecast released by IATA in December 2017, the global airline industry net profit is expected to rise to $38.4 billion in 2018, an improvement from the $34.5 billion expected net profit in 2017. Passenger yield data indicates that the downward fare trend has bottomed out, and there will be pressure on airlines to raise fares.

Companies in mature markets can strengthen their market position by understanding how external forces affect the air industry and develop a cohesive strategy to obtain the best value from suppliers.

One strategy is spend consolidation to a select number of preferred carriers that offer the greatest return from a discount perspective and add value beyond pricing. There is an opportunity to expand discounted spend coverage through evolving joint ventures and joint contracting, and one joint venture agreement today can cover as many as eight carriers.

For mature clients with high discount levels and goal performance, incremental savings can be driven in a spend consolidation exercise – leveraging higher volumes during negotiations. Incremental savings and cost-reduction levers for these types of programs are low (between 0.5 to 1.5 percent in average discount return). Putting suppliers into a competitive situation by selecting the carriers that are willing to increase discounts can help extract additional savings.

As an example, in competitive volume routes, instead of three preferred carriers, two preferred carriers can be chosen. If a client is highly dependent on the monopoly carrier because of its spend pattern, cross targets and mixed conditions can be investigated in order to define aggressive targets on supplier strategic competitive routes and attach additional discounts on monopolistic routes based on target achievements. In some cases, a monopoly carrier or strong flag carrier may offer limited to no upfront discount, while others may take a back-end rebate approach.

While a two-carrier joint venture program is almost always the best option from a goal performance perspective, it may not be achievable by every company. Consideration of corporate culture and the purpose of travel within the company is key to understand if this more draconian approach can be taken. In order to consolidate spend, the travel department must be able to implement a mandate for preferred carriers with strong teeth in the travel policy. Policy changes, such as refusing reimbursement for nonpreferred bookings, exist but are not feasible for all companies. In addition, groups within a company may have different rules – a mandate may be followed by an audit or accounting group better than a sales or marketing team.

Finally, when consolidating to two carriers, a strong partnership with these airlines is key, particularly for those travelers currently utilizing the nonpreferred joint venture. Change management is a lot more complicated when companies aren’t willing to do everything they can to shift traffic (accept status matches, host airline seminars to key bookers, utilize waivers and favors).

Finding the best airline usage balance through spend, savings, behavior and shift analysis are key to optimizing spend. Point-of-sale control is necessary to shift travelers and buying behavior where limited competition is available.

Some joint ventures offer small business programs or canned contracts with no goals and low upfront discounts (generally 2 percent). These are nonnegotiable but are a good way to achieve savings on a tertiary carrier once two strong joint venture contracts are in place. In other cases, prepurchase programs, in which a company deposits monies toward a prepurchase airline ticket fund, may be beneficial. These programs have no goal targets, thus alleviating efforts to manage contract goals. It is critical for companies to be able to operationalize such programs in return for a more robust discount structure, with an average return of around 7 percent, depending on travel patterns, behavior and air travel policy.

Another strategy of balancing coverage and value is to transition local air sourcing to global air sourcing, leveraging global spend coverage with all airlines invited to bid. Airlines are not rejected and all are loaded in the booking tool. The client ultimately benefits from every savings opportunity. Amenities and soft benefits are quantified to show a total cost view.

Conclusion and recommendations

As we mentioned above, four carriers in the U.S. airline industry account for 80 percent of domestic capacity — American, United, and Delta, which are hub-oriented, and Southwest, which is point to point. These carriers will remain dominant even if there is further consolidation amongst the remaining 20 percent of capacity (Alaska and Virgin America, for example).

Consolidating the number of preferred carriers seems like a natural fit in a consolidated industry so long as there is clear value and return to the air travel program, point-of-sale control and strong travel policy.

Difficulty in successfully managing airline contract goals also presents an opportunity for travel buyers to consider only working with select global suppliers and supplementing the program with local, regional and low-cost carriers. This balance of smaller carriers, which account for small percentages of spend, can peacefully exist with larger joint venture carriers if they don’t siphon too much high-yield traffic. This can apply to both low-cost carriers that fly nonstop routes that the legacy airlines only serve with connections as well as larger international carriers that service a particular region better than the joint ventures (Hong Kong, Singapore, Dubai, Abu Dhabi, etc.)

Today, there is a greater focus on fulfilling contractual targets that are tied to the airline’s financial offer. Airlines are better at managing agreement fulfillment, and punitive measures (reduction in discounts, cancellation of contracts) are seen with unfulfilled goals. Therefore, companies must support preferred carriers and manage traveler behavior to protect supplier relationships and discounts, or run the risk of losing deals altogether.

Advantages of a consolidated program:

  • Fewer resources and less time are needed to successfully manage supplier and expectations; working with a select few frees up valuable resources and time to focus on managing policy, traveler behavior, supplier contents, et al.
  • Allows for balancing and meeting contractual goals
  • Availability of airline soft dollar funds to encourage spend shift
  • Opportunity to negotiate greater discounted spend coverage as goals are met

Disadvantages of a consolidated program:

  • Fewer traveler choices
  • Most airlines do not compensate for over-performance
  • Disparity of product proposition and value
  • Not all spend is covered by discounts

Travel buyers need to assess the value of consolidation to a company’s air program and the ROI surrounding current preferred spend coverage. Companies need to have point-of-sale control as a foundation, a best-in-class policy and compliance to be able to adopt varying preferred air portfolio strategies.

Global Business Consulting from American Express Global Business Travel provides customized solutions and support to help our clients optimize every facet of their travel programs. Please contact us at [email protected] to schedule a complimentary consultation with one of our subject-matter experts.