Airlines Want Corporate Accounts to Prepay Travel

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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.

This article was previously published by Duane Goucher in Business Travel News on December 1, 2015: