Here’s another box to tick on the business travel recovery check-list: the return of the corporate air deal. “We had almost no RFP [request for proposal] activity for 12 months but now it’s picking up again. There really is a reactivation of air sourcing negotiations,” says Olivier Benoit, global air practice leader for Advito, the consulting wing of BCD Travel.
“It is a good time to create fresh agreements,” he continues. “Travel buyers are beginning to build a programme that will meet their requirements for ramp-up time. It’s not only anticipation, it’s also observation. Since February 2021 there has been a pick-up in domestic travel in countries including the US, China, Australia, Russia and Japan; and in inter-continental travel since April.”
Until now it has suited airlines and their clients alike to roll over deals struck pre-coronavirus with, generally, only minor tweaks. A typical case is Sodexo, which had an annual pre-Covid air spend of $40 million and global, regional or local contracts with 30 carriers.
“I haven’t been able to do a normal tender since then because you need to supply data for the previous 12 months, and what we have done in the past is not representative of what we will do in the future,” says senior global indirect buyer Gavin Harvey. “No airline has taken away the terms we had before. They haven’t talked about volume commitments. They don’t want to tear up existing contracts while we wait for volumes to pick up.”
Some buyers believe continuing uncertainty about their own demand on one hand and the routes and frequencies suppliers can offer on the other means the moment has still not arrived to negotiate new agreements.
“The best way is to extend what you currently have with the same conditions,” says Esther van der Aa, global travel manager for Vanderlande Industries. Another travel manager, speaking on condition of anonymity, is awaiting more consistent data before undertaking a full tender. “I hope to have meaningful data by 2023,” he says.
But perhaps there is a compromise between these two positions. Advito advocates what it labels dynamic sourcing: instead of hammering out a deal and then seeing whether targets for triggering discounts were hit by the end of the agreement period, performance is managed much more actively throughout the contract.
Benoit believes there is no realistic alternative when border closures could wreck travel strategies for supplier and client alike. “We will focus more on top routes and factor in the level of uncertainty for part of the programme, so running an RFP still makes sense but with some adjustments built in,” he says.
“Today we are not really talking about targets and volume or share commitments. They are pretty irrelevant. How can you commit to deliver to an airline based on volume or value when you have such a high level of uncertainty, not only on your side but on the airline’s future schedule? Airlines do know that, so in current negotiations less time is being spent on requiring the corporate to commit to very strict goals. You can work on soft goals. If they are not met, it doesn’t impact the discount.”
Jeopardy-free discounts sound wonderful for the buyer, but why should sellers agree to something so one-sided? Two reasons, says Benoit. One is that the deal gives them data to position themselves for when demand does finally become more stable. The other, he says, is “a kind of leap of faith. It’s a bet. They know the potential value their large clients will bring when activity levels ramp up. The corporate segment used to be the highest value segment for airlines and it will remain like this post-pandemic.”
Harvey also believes airlines will show flexibility to keep their best customers. “They know there will be a recovery and they want to make sure they will still have a partnership with us,” he says. “They also know that if we have a lowest fare on the day policy they won’t get the volume otherwise.”
But the anonymous travel manager is much less sure carriers will be so obliging. “Airlines are being flexible on deals you negotiated with them two years ago but will not be flexible on targets you commit to now, so only go to market if you are sure you can deliver,” he says. “I wouldn’t enter into revenue- or segment-based targets but into market-share targets. It’s the share that matters to airlines.”
Van der Aa believes proof of intent will also play a key role. “You will need to show you can steer your employees’ travel behaviour and are able to mandate,” she says.
Yet however disciplined travellers are the paradox is that swingeing capacity cuts may mean there are no seats for them to book on preferred carriers. “Some routes really have reduced availability and we have noticed that often only business class is available,” van der Aa says.
Harvey is experiencing the same problem. “There may have been four flights per day and now there is only one, so tickets are going quite quickly,” he says. “It’s a challenge for buyers. Even if you have discounts, companies will see their fares going up on some routes.”
Advito forecasts that even for companies which routinely fly in business class, limited capacity means lower booking classes will fill up early, thus pushing up average fares. Buyers can counteract some of the pain, says Benoit, by pressing suppliers to include discounts on J and other higher fare classes as well as Z and other classes at the bottom of the ladder. “There are far fewer business class seats, so just a small pick-up in transactions will very quickly close all the lowest classes,” he says.
The good news is that some carriers recognise an implicit contradiction between their commercial strategy of courting corporate clients and their revenue management strategy of shutting the lower fare classes those same clients rely upon to keep down average ticket price.
They are responding, says the anonymous travel manager, by introducing new fares, most notably on long-haul business class. “Previously, only the J fare was available one-way at 70 per cent of the price of a return J fare,” he says. However, since reduced schedules are making it difficult for customers to fly in both directions with the same carrier, they are offering discounted one-way fares in lower fare classes for the first time.