Transportation: Airline Mergers, Rising Costs and Extra FeesJune 1, 2013

What Does It All Mean? By
June 1, 2013

Transportation: Airline Mergers, Rising Costs and Extra Fees

What Does It All Mean?

CIT-2013-06Jun-AirlineMergers-430pxAs the meeting industry continues its return to the robust glory days of early 2008, a new challenge looms — rising airfare costs and ongoing mergers that stifle competition and potentially limit practical options for planners. And those factors have been further exacerbated by the pending marriage of American Airlines and US Airways. The nearly $11 billion deal, which is expected to occur in the third quarter of 2013 if it is approved by the Justice Department’s antitrust division, will produce the world’s largest airline.

The ongoing changes in the airline industry over the last several years have dramatically impacted the meeting industry, says Caren Bigelow, CRP, director of travel at USMotivation in Atlanta, an independent planner of meetings, conventions and incentive programs.

“Number one is the reduction in the availability of seats,” Bigelow says. “That has been the biggest factor, along with cost. The consolidation of hubs as a result of the various mergers in recent years means there aren’t as many flights from secondary or rural destinations. And all of that is based on the fact that the airlines have basically changed how they operate based on the economics of that industry.”

The net result has been a more complicated and less enjoyable experience for both planners and attendees. Virtually every flight goes out full now, with a standby list, and that often makes flying merely tolerable at best.
As a result, Bigelow says, the meeting planning process has been changed, too. “When you start talking today about having a meeting or incentive program and you’re discussing destinations, airlift is now your No. 1 consideration or question,” she says. “So, as a matter of basic practice, what we do now with a client is that we will offer a list of potential destinations and then clearly define whether you can get your entire group in by your welcome reception, or if you want to have a meeting start at noon, whether that is even possible.”

A Relationship Gap

Gregorio Palomino, CBMP, CEP, CWP, creative executive officer at San Antonio-based meeting and incentive planning company CRE8AD8, cites a related issue that is contributing to the increasing difficulty of managing airlift and costs. Many companies and meeting planners, he points out, now have preferred vendor pacts with hotel vendors. But nowhere near as many have preferred vendor pacts with airlines, which creates a “relationship gap” between the two key supplier categories.

“The hotels have really worked to make things easy for meeting planners and vice versa,” Palomino says. “But airlines have not really done the same thing. It’s generally much more complicated to do business with the airlines. And some airlines, to this day, do not have a real program specifically designed for meeting planners who are putting events together. So for a lot of large companies that do a lot of meetings, that means they are looking more to third-party service providers like us that have the expertise and experience in dealing with the airlines. As the airline industry has continued to consolidate and cut capacity since 2008, we’ve seen a sharp increase in our corporate business. And our new clients typically say, ‘We don’t really understand the airline side of the business, so we want you to take care of it for now. Now it’s your problem to deal with, not ours.’ ”

Part of the problem, Palomino says, is that airlines could have — and should have — done a better job of communicating directly and clearly with meeting planners in the run-up to each of the major mergers, such as United and Continental. “There was very little information that went out,” he says. “And that just led to a lot of the confusion and concern about what was happening.”

Among the kinds of information that would have been helpful, Palomino says, would have been clear guidance on how to consolidate and manage frequent flier miles and various kinds of rewards points. “United and Continental could have been more helpful in telling us how to protect our miles or points or whatever it was,” he says. “But they didn’t do that. And that lack of communication from the various airlines caused a lot of confusion. And it worried a lot of planners.”

Now the same concerns are surfacing again with the American-US Airways merger. And, Palomino says, it remains to be seen how those concerns will play out.

Spiking Airfares and Fees

Of even more concern to most planners is the sharply rising cost of airfares — a trend that is likely to become even more pronounced with the American-US Airways merger.

“Costs are going to go up,” Palomino says. “I think we’ll see additional fare increases of 10 to 15 percent. And now that the remaining major airlines have even more of a monopoly, it’s going to be even easier for them to control pricing and drive up fares. And the reality is that they have to do that to cover their increasing operating costs like fuel, which is going to continue to go up.”

Michael Patton, CMM, president and CEO of San Diego-based POTHOS, a meeting planning company that has the additional distinction of being a full-service corporate travel management provider, agrees that further fare increases are inevitable.

“Without having done a more detailed analysis,” Patton says, “I would say in general that we have seen very significant price increases lately on behalf of our clients. And those increases have been across the board, not just for the most in-demand destinations. Europe, for instance, has been very expensive for the last couple of years, not so much because of fare increases, but because of the taxes.”

Now, in the wake of the American-US Airways merger and the resulting further airline industry consolidation, fares will continue to rise. “And that’s because the costs of fuel and labor will continue to go up,” Patton says. “It’s as simple as that.”

At the same time, Patton, Palomino and Bigelow concur, it’s also likely that the trend toward new fees will continue to drive up the total cost of air travel.

Because the airline industry is so brutally competitive, Bigelow says, it’s hard to unilaterally raise fares. The clever trick a number of airlines have now mastered is to create a new fee, which essentially represents pure profit, then watch happily as other airlines follow.
United Airlines recently upped its change fee to $200, and some airlines may follow. It also has been widely reported that the airlines most likely collected more than $6 billion in baggage, cancellation and change fees in 2012.

“There was a recent article in the Los Angeles Times about how the airlines are working to come up with ideas on how they can charge even more new fees,” Bigelow says. “And one example was that if you want, United Airlines will deliver your luggage to your home for a fee. Another example is the idea that you can get preferential boarding with first class passengers if you pay a fee. So it looks like when it comes to fees, there is no end in sight.”

Spirit Airlines last year went so far as to charge a fee for carry-on bags, Patton notes. “And what business traveler doesn’t have carry-on bags?” he says, adding that fortunately, no other airline has followed suit, primarily as a result of the PR backlash suffered by Spirit.
On the other hand, Patton says, at least one of the newest fees is even more outrageous than charging for carry-on bags. “Ryanair is now charging for access to the rest rooms on the plane,” he says. “I think that is ridiculous. And you have other airlines that are not charging onboard, but they have hostesses in the gate area who go around inviting customers to go to the rest room before they board. I also think that is ridiculous.”
The good news, Patton says, is that he thinks the addition of new fees might have reached its end. “I don’t really see at this point,” he says, “how they can come up with any more fees than the ones they’re already charging.”

Budget Impact

The practical question raised for many planners by rising air travel costs is how those increases will be absorbed into budgets. The basic issue is whether they will be addressed with incremental budget increases that cover them, or will be subtracted from what’s left of the budget, such as F&B expenditures.

“Based on what I’m hearing, I think most companies will cut back somewhere else to deal with increased air fares,” Palomino says. “I’d guess that less than 20 percent of companies are going to increase their budgets because airfares are going up. But it also depends on the kind of program, or the destination selection. For example, we just had a client that was planning to go to New York for a meeting. But when they saw the cost of getting there and the impact that would have on their planned budget, they decided to go to Destin, Florida, which saved them a lot of money.”
Patton does not believe most clients will cut back on things such as F&B to accommodate higher air costs. “But what I do see in some cases,” he says, “is that clients are cutting back on hosted air for the meeting. They are capping the amount and saying attendees can’t just run wild in booking their flights. And that is particularly true for people such as speakers or other presenters.”

Bigelow has seen both approaches recently. “And it depends on the type of meeting or event,” she says. “For example, there might be a difference, even within the same company, between a typical business meeting and an incentive program, particularly if it is a high-end program.”
The underlying factor, Bigelow says, is that budgets remain tight and nowhere near 2008 peak levels before the recession. And based on that reality, she says, when push comes to shove she thinks companies will cut back elsewhere to accommodate increased airfares rather than increase budgets. “But one thing I do see companies doing to deal with those issues is that they are now planning meetings further in advance to lock in the lowest possible airfares,” she says.

Getting From Point A to Point B

The final piece of the puzzle, especially in light of the American-US Airways merger, is the changes in hub systems, routing and the number of flights available to a particular destination as airline industry consolidation continues unabated.

“Changes in hubs and the routing of certain flights is an ongoing concern,” Bigelow says. “And that concern is increased by the merger of American and US Air.”

Palomino expects that one result of the latest merger will be that more and more flights originating from southern states such as Texas, Arizona, New Mexico and Oklahoma will be routed through Dallas-Fort Worth, Houston and Charlotte, NC. And those routing changes could wreak havoc with some itineraries, he says. The net result is that it will likely become more difficult to get some large groups from point A to point B.

“And for most of us who do business in those parts of the country, you can’t really determine yet what the impact is going to be,” he says. “But there are going to be hassles and some confusion. I just hope it will be temporary and that within a year or year and a half, the airlines will have it figured out.”

Of particular concern, Palomino says, will be getting large groups from the West Coast to the East Coast. “There just aren’t going to be as many flights,” Palomino says. “And if you’re used to flying on US Airways, but now you’re on an American flight, you might find you have to make a stopover to get where you’re going.”

The net result of those kinds of issues for planners, Bigelow predicts, will be more work, including more time-consuming research, unless they have a full-service travel management department or outside travel management company. “More and more planners are now having to rely on their travel management departments or travel management companies to deal with these issues,” she says. “But I also think most planners are very aware of these issues now, too, so I think they understand the risks of presenting a destination that they can’t deliver.”

And it’s possible, Bigelow says, that the Caribbean — a perennially popular choice for incentive programs and some meetings — could be negatively impacted by the American-US Airways merger.

“American Airlines basically owns the Caribbean,” she says. “So that is a major concern of ours and also of a lot of other planners. We’re waiting to see what is actually going to happen. I have heard that when it’s all said and done and all figured out, that Delta is trying to take over some of American’s Caribbean routes because they are not very strong down there. And we don’t really care who ultimately owns those routes. We just want to make sure that the lift to the most popular destinations doesn’t go away. The concern is based on the fact that lift to the Caribbean was significantly reduced during the recession, and it hasn’t really come back yet.”

Planners concerned about lift to a particular destination should take advantage of tools such as, Bigelow says. “It performs live air searches against real-time airline inventory,” she says. “It’s similar to Kayak, but it’s built to help you get 300 people to a particular place on a particular date.”

Patton goes further and recommends that planners consider the option of a third-party vendor, particularly one that has extensive travel management experience in addition to its meeting planning credentials.

“In the current climate, planners need to use professional buyers and not just rely on the Internet for what they consider a commodity service,” he says. “Corporate travel agents who have the resources to do the job are still the best resource for moving people. But many planners continue to go to the Internet and treat air travel like a commodity. I don’t think you can do that effectively any more. You can go into court and represent yourself as your attorney. But the judge will tell you that’s not a very smart thing to do. And the same is true today when it comes to booking your air. The typical corporate meeting planner just doesn’t have the same experience and resources, so it’s not a smart thing to do.”

There also are simple, practical considerations, given the increasing complexity of booking air for a meeting. For example, Patton says, researching the availability and cost of flights for a major meeting to a high-demand destination could take a typical planner three hours. “We can do the same thing in 15 minutes,” he says. “So it also comes down to a question of the value of your time.”

Despite all of the new challenges presented by the rapid and ongoing changes in the airline industry, planners will prevail in the end, Bigelow says. “No matter what ever happens with airlines,” she says, “we’ll always figure out a way to get the job done, because meetings and incentive programs are just too important. So that means we have to.” C&IT

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