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:
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 mar-ketshare 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.
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
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.
How Corporates Will Buy
Airfare In The Future