As the airline
industry continues to consolidate, it has become apparent that today’s model
for contracting up-front corporate discounts will change. Airlines’ increasing
load factors and companies’ lowest-logical-airfare policies create awkward
conversations during quarterly review sessions. In this model, the airlines
assume all the up-front risks, hoping to grow market share, and they
cannibalize business they likely would have received without a corporate
program. On the back end, airlines have invested heavily in scores of analysts
and IT to administer the programs.
It’s a common
misconception that airlines need higher load factors. In reality, they can’t
carry more people. Using a 100-seat aircraft as an example, the airline wants
the 100 people willing to pay the most for each flight. They can’t carry the
101st person. Meanwhile, a fragmented buying channel could enter the picture as
supplier-direct models mature. If and when corporate travel buyers embrace
those models, they’ll bypass current channels like ARC and Prism, making
today’s model even riskier.
So what will the
future of travel buying look like? Likely, it will apply concepts of early
programs but add components. Here’s what two such programs could look like:
Bulk-Buy
A corporate account
would prepay a guaranteed amount of travel to be used over a specific period of
time. The airline would increase the available credit by the corporate’s cost
of capital in lieu of receiving the bulk payment up front.
Pros: It’s a win-win—for the corporate account and airline partner. Bulk-buy
programs would eliminate marketshare agreements and thus performance
conversations. Resources could be freed up on the airline side, as the need to
manage programs would diminish.
Cons: Funding the program would be a challenge for the corporation, as would
managing the cost center or cost allocations internally, including refunds and
credits. There most likely would be a “use it or lose it” clause, which could
introduce other awkward conversations or stress the partnership.
Revenue Commitment
It’s a no-risk
option that’s based on tiers. The airline would rebate the corporate account
based on spend, making it a pay-for-performance model. It would compensate for
high-load factor issues, whereas today’s model expects corporates to deliver
the same market share even if no seats are available.
Pros: All revenue could be accounted for with the improved data from card
issuers. As Level 3 data becomes more prevalent, airlines and corporate
accounts would have visibility into line-item detail like checked bags and
purchases of on-board meals, premium seats, club passes and other ancillary
revenue. High-yield corporate customers would benefit by design, as the payout tiers
would be richer as the revenue increased.
Cons: Corporates would lose the ability to compare fares at the point of sale
and would have to allocate or distribute the rebate check.
Variations of these
basic models could arise, too. Soft-dollar tools, waivers or other “rule
breaker” options could provide incentives for “focus markets.” Underperforming
accounts would receive no payout and the airlines would capture 100 percent of
the fare, which could fund a richer program for corporates without incremental
cost or dilution for the airlines. The perfect framework may not be clear, but
the current model is not sustainable, especially as richer data and new
technologies converge. Models like these are portable and apply to small,
medium and large corporations, which creates efficiency in program management
and produces a winning outcome for all stakeholders.
Duane Goucher is
director of enterprise travel, entertainment and expense for Allstate Insurance
Co. and participated in The Future of Business Travel Buying think tank at The
BTN Group’s recent Innovate conference. This column is based on the task
force’s work.