Back at the Controls

Even when the economy rebounds and air travel returns to full throttle, one thing is certain: The nation’s major airlines will have a hard time persuading business travelers to buy tickets without shopping around.

During the last two years, business travelers’ need to economize has helped erode the long- sacrosanct distinction in pricing of business and leisure fares. Competition among Internet sites and the growth of low-fare carriers have given road warriors cheaper options for booking their travel.

Yet the largest carriers have been reluctant to commit to serious fare reform at a time when the industry is racking up billions in losses. Business travelers still bankroll the biggest chunk of its revenue, and the industry is holding out hope that the economy will return to the high-rolling years of the late 1990s. To be blunt: The carriers can’t afford to let business fliers act too much like leisure travelers.

Business travelers are well aware of the wide disparity in fares. According to the American Express Business Travel Monitor, typical business fares in the second quarter were six times higher than typical discount fares offered to leisure travelers.

So it’s not surprising that business travelers are becoming more like leisure travelers, buying more low-fare, nonrefundable coach tickets compared with typical full-price, unrestricted business fares.

“Our problem with revenue from business travelers is not that they’re not flying, it’s that they’re paying less,” said John Heimlich of the Air Transport Assn., the Washington-based airline trade organization. “They’ve gotten much better about searching for prices and booking farther ahead.”

Corporate travelers say shopping for the best fares just makes good business sense.

“When an advance-purchase fare between New York and Atlanta averages $211 and I can get a last-minute fare at either $98 or $2,000, something’s wrong,” said Bob McGurk, chairman of the Assn. of Corporate Travel Executives’ air fare reform initiative.

“The logic used to be that airlines would use a high price tag to hold a seat open until the last minute,” McGurk said. That pricing model assumed that a last-minute seat would be worth the premium to whoever needed it on short notice, presumably business travelers with deep pockets.

“But now with the Internet,” he said, “if you wait till the last minute, you might get a fare that is even lower than if you bought it in advance.”

American Express Co. said low-fare and nonrefundable coach tickets represented 88% of flights booked by its corporate travel customers. Only 9% of flights were booked on full-fare, refundable coach tickets.

Suzi LeVine, director of product marketing at online travel agent Expedia.com, said the trend of business travelers buying leisure fares online is only about a year and a half old. “Before that,” she said, “there was much more of a distinction between traditional business travelers and leisure travelers.”

To combat this trend, the six largest airlines have begun implementing changes that will tighten the system and make leisure fares far less attractive to business travelers.

Each airline--American, United, Delta, Northwest, Continental and US Airways--has its variations. But, in general, passengers who have purchased or will purchase nonrefundable tickets after Aug. 30 for travel on or after Oct. 1 can change a ticket before the departure date, subject to a change fee and unspecified restrictions. The ticket has no value once the flight has departed. Passengers who purchase nonrefundable tickets for travel on or after Jan. 1 can stand by for alternative flights on their ticketed day of departure, subject to a $100 fee.

Kevin Iwamoto, president of the National Business Travel Assn., said in a statement after the airlines announced their policy changes that such moves “are going to increase corporations’ travel costs dramatically.”

By further polarizing business and leisure fares, the airlines that have adopted the restrictions could force business travelers to choose between flexibility and affordability, but not without reason.

According to the Airfare Reform White Paper, issued by the Assn. of Corporate Travel Executives, some airline executives believe that when the economy strengthens, business travelers will return to the freer spending of the late ‘90s and that dramatic fare reform might leave them with a less loyal clientele and thus open to sabotage by competitors.

“The conventional wisdom of airlines is that you cannot cultivate business travel,” said Michael Hall, global travel manager for Milwaukee-based Johnson Controls Inc. The belief is that there is only a finite number of business travelers and that “all you can do is take passengers away from someone else.”

But Hall sees Web fares as a way the airlines could encourage more business travel with prices that would make it attractive to send more employees to conventions and seminars, for example.

Web fares save the airlines money, Hall said, because they have almost none of the built-in distribution costs associated with conventional agency booking systems.

And because many business travelers have found that Web fares save their companies money, the online industry is expected to grow. According to projections by PhoCusWright Inc., a Sherman, Conn.-based consultant to the online travel industry, 1 in 5 corporate travel transactions will be booked online by 2003.

“The online [companies] see their corporate travel sales growing, and they want to manage it because the business traveler spends more,” said Lorrain Sileo of PhoCusWright. “It’s an attractive demographic.”

Orbitz.com, which was developed by the five biggest airlines, already has created and launched two business travel programs, one for small to mid-size companies and another for large corporations. Dave Cerino, general manager of Orbitz’s corporate travel department, said the programs provide analytical data for travel managers and also integrate the client’s corporate travel agreements with an airline, so that when the traveler logs on, he or she sees both the company’s corporate rate and all the other fares for the same route.

Expedia.com plans to launch its program for business travel by the end of the year.

In the meantime, airlines have begun strictly enforcing their fare rules and collecting fees they once let slide, a move that is being called “no waivers, no favors.”

The major airlines are reducing operating costs and hoping to boost passenger load factors by taking inventory out of the system. They will be flying larger planes less frequently on less popular routes and handing over some routes to regional commuter affiliates. And, subject to review by the Transportation Department, they are forming alliances. Delta, Continental and Northwest have created a code-share agreement that will allow them to sell seats on one another’s routes, coordinate connecting service and honor one another’s frequent-flier points. United and US Airways have a similar agreement.

“Convenience and choice are going down,” Cerino said. “So the fact that I hate the 6 a.m. flight because I have to get up too early and prefer to take the 7:30 flight because I can sleep a little later, well, I may not have a choice.”

Johnson Controls’ Hall said he considered the alliances “a virtual consolidation” that could result in business and leisure travelers competing for the same seat.

But that may not necessarily mean either traveler will pay more for it.

“Over the long term, low fares are here to stay, even if capacity is taken out of the marketplace,” said Al Comeaux, vice president of public relations at online agency Travelocity.com. “As long as low-cost carriers are in the marketplace, there will be pressure on the majors to keep prices low.”

In the last few weeks, Hall said, some of the majors have eroded passenger loyalty with unpublished discounts on business fares. Hall said the discounts sound good on the surface but in fact devalue whatever prior discount a company may have had.

The low-fare carriers feel no shame in exploiting the situation. In March, low-fare airline America West introduced “3-Day Business Fares” that cost $59 each way between Los Angeles and either Phoenix or Las Vegas. The fares require a three-day advance purchase, no Saturday-night stay, impose no change fee and are fully refundable.

Last month, low-fare leader Southwest Airlines dropped its highest, last-minute fare of $399 each way by $100. At low-fare upstart JetBlue Airways, which made its inaugural flight in February 2000, the top fare is $299 each way, even on transcontinental routes between Long Beach or John Wayne airports and New York.

Clare Morgan, director of corporate communications at investment bank Blackstone Group, said she hadn’t heard of JetBlue until an associate recommended it.

“Now, we use it as much as we can between New York and Fort Lauderdale,” she said. “It goes back to the basics: a quality product, a good price and strong customer service.”

JetBlue has proved that if the airlines simplify their fare structure and reduce or eliminate restrictions, “people will pay more, and pay it more often,” said consumer advocate Joe Brancatelli. “JetBlue’s fares only look lower because they can be understood.”

Brancatelli said that although US Airways had fares ranging from two to four figures, most of the tickets it sells are in the same range as JetBlue’s. “But now,” he said, “JetBlue has driven US Airways out of the New York-Florida market.”

That leaves the Big Six with another problem.

Kevin Mitchell, chairman of the Business Travel Coalition, said recently at a business travel forum that “the conundrum major airlines face is that if they lower business air fares right now, without addressing structural cost and productivity problems, their losses will deepen.”

The low-fare carriers make up about 20% of the market and might not increase substantially. But the ATA’s Heimlich said business travelers won’t be satisfied with a system that has only low-cost carriers.

“They do not serve certain markets--international, smaller communities--so people will always need the network that the majors supply,” he said.

And though many business travelers seem convinced that the majors’ current fare structure is depressing legitimate business travel demand, those airlines seem to think dramatic reform is risky.

“What if we go to a simpler fare structure and still lose money?” Heimlich asked. “Everyone likes simple things in life, but does that necessarily mean you will buy more?”

McGurk of the Assn. of Corporate Travel Executives suggested that too much emphasis is placed on labeling some fares for business travelers and others for leisure.

“As long as I meet the purchase requirements, what difference does it make to the airlines whether I’m going to New York on business or to visit my kids?”