Up, Up and Away: The Impact of Rising Air Costs
by Fred Gebhart /Part one in a Travel Market Report enterprise special report.
It’s no surprise to anyone managing business travel that air costs are up in 2010. The first glimmerings of the recovery in business travel were clear by the summer of 2009. What wasn’t clear was how quickly business travel was going to bounce back — or how quickly costs were going to rise.
The National Business Travel Association Foundation projects a 5.5% jump in domestic air fares for 2010. That comes atop a 12.2% decline in domestic air for 2009, based on American Express data. The turnaround began in the summer of 2009, according to passenger ticket data reported by Amadeus. By May, 2010, economy travel volume had returned to 95% of pre-recession levels and premium travel had bounced back to 90% of pre-recession levels.
“Travel managers have not been surprised that travel has come back,” said Dale Eastlund, senior director, CWT Solutions Group, the consulting arm of Carlson Wagonlit Travel. “They were surprised by just how quickly it came back. At the same time, airlines have been very cautious about adding capacity. That, too, has had an impact.”
There are really two forces at work driving air costs higher, said aviation consultant Bob Mann, president of R.W. Mann & Company. One is increasing air demand combined with limited capacity. It’s not so much that carriers are boosting ticket prices across the board, although that is happening, too, but that capacity restrictions mean fewer seats overall for business travelers and fewer seats at the lower end of the price spectrum.
“You have to move up to the next fare bucket just to get a seat,” Mann said. “That raises your average ticket price and total costs even if your travel volume holds steady.”
We Are Not Happy
Rising costs are only half of the picture. Rising traveler discontent is another issue that is starting to emerge. Business travelers like upgrades but road warriors have come to expect them, explained corporate travel specialist Al Gilbert, Christopherson Business Travel Management. And upgrades aren’t happening as often as they used to.
Consolidation in the airline industry means fewer airlines flying fewer seats. That’s one of the operating efficiencies that carriers tout in support of mergers, acquisitions, joint ventures and alliances. What carriers don’t mention is that consolidation also means fewer frequent flyer programs, fewer frequent flyer seats, and fewer frequent flyer upgrades.
“There are now more fliers competing for fewer upgrades,” Gilbert told TMR. “Trying to get an upgrade, either domestic or international, is like playing musical chairs. Travelers are getting disappointed.”
The Ancillary Impact
The other force driving air costs is ancillary fees. The good news is that business travelers generally don’t care that they are shelling out extra dollars for baggage, meals, in-flight WiFi, itinerary changes, and other services. All those extra costs get charged back to the company one way or another.
“The traveler doesn’t care about ancillary fees but the travel manager sure cares,” said Debbie DeGrendele, global travel manager, Aviat Networks. “It can be a legitimate cost for travelers but the airlines have no tracking mechanism in place. If you can’t track it, you can’t manage it very effectively.”
Carriers claim to be working on systems to track and report ancillary fees, DeGrendele said, but they seem to be in no hurry to complete the job. That’s not surprising since ancillary fees are generating about a third of airline revenue and are largely responsible for the profits that carriers have been reporting the past few quarters.
“Tracking ancillary fees is still a challenge and there is no selfish need on the part of carriers to change that,” Eastlund agreed. “Reporting will come, but not immediately. Because corporate travel represents such a high portion of airline revenues, they are being pushed to cooperate.”
Airlines and travel managers both see ancillary fees as new points for negotiation, he continued. That’s why carriers are less than eager to build reporting systems and travel managers are equally anxious to track expenditures.
“Once buyers begin to get insight into what they really spend, they will be in a good position to start talking terms with sellers and adapting travel policy,” Eastlund explained. “Look at in-flight WiFi. Paying for Internet in the air hasn’t gotten much traction with leisure travelers, but business travelers love it. For the first time, you can actually get work done while you’re in the air. Once you can track that kind of expenditure, you can manage it. It will be a point for negotiation once tracking is in place.”
Next week: How to better manage your air spend