Biting the hand that feeds you?

American Airlines seem to be leading a charge to reinvent the way that airlines sell in the managed corporate travel market. It has long been the case that large legacy carriers have chased prized corporate clients with weighty discounts and an array of added value benefits to woo them into their business class cabins and make sure they stay there. The largest of these corporate customers are often given discounts of more than 50% while enjoying all the flexibility and frills of a full fare alongside enhanced frequent flier status and regular upgrades. All of this is based on the premise that these companies deliver a certain volume of business to the airline measured in terms of market share. The airlines employ an army of ‘key’ account managers to cater to their every need and make sure that the promised revenue materialises.

Well, all of this may just be about to change. American Airlines have supposedly stopped providing discounts to companies with less than $1.5 million in annual spend and pulled soft-dollar funds for seat purchases or upgrades. AA has also reduced corporate discounts and agency incentives, and plans to terminate their AirPass bulk purchase program. On the distribution front, it has also removed 40 percent of content from the GDS channels most used by corporate travellers. At the beginning of the year, AA chief commercial officer Vasu Raja said that the airline was not planning for corporate travel recovery to pre-pandemic levels and that upwards of 75 percent of contracted corporate clients were underperforming their deals. “For so many companies struggling to bring people back to the office, it’s hard to compel them to do a day trip,” he said. Business day trips have reduced by over two thirds and AA expect it to stay that way.?

American Airlines are not unique in their view of the corporate market. It has long been an irony that the accounts pursued most by airlines were in fact the least profitable for them on a per passenger basis. Airline corporate sales teams justify this by pointing to the volume of business they represent. However, the reality is that, in most cases, discounts are upfront and any sector expectations in deals are rarely enforceable with the carriers taking all the risk. If companies fail to deliver what they anticipate in a given year, there is little comeback, especially if an airline wants to re-sign a deal for the following year. The days of ‘backend’ deals where companies are rewarded retrospectively for volumes already flown are, sadly for airlines, long gone.

So, is American Airlines right to pull back their dealing in this way or are they playing with fire by jeopardising their core business? They obviously believe that they are coming from a position of product and schedule strength and are driven by a need to cut costs and grow yield in the corporate market. They have a strong position on many of the most lucrative US domestic and international routes and have a product they believe to be comparable to their competitors. However, there will be a sizeable number within the corporate travel buying community who believe that they should be entitled to a hefty ‘multibuy’ discount and, if they can’t get it from AA, they will go elsewhere. In addition, the travel trade is also on the warpath bemoaning its reduced access to many of AA’s fares.?

American may be one of the pioneers in this move away from the corporate ‘dealt’ market, but they are not alone and many within the industry expect more to follow. One immediate anomaly is the position in which this leaves partners within the numerous joint businesses that have grown up to help airlines compete more effectively on certain routes. With common revenue management and pricing a fundamental feature of the airline joint business model, other participants in any such agreement will come under pressure to fall into line with another partner’s sales strategy. Any attempt by American to drive up ticket prices across the North Atlantic, for example, could easily be undermined by BA continuing to offer generous volume-based discounts to large corporates when the revenue is eventually shared out.

It's unclear exactly how this story will play out but it’s very clear that, while demand continues to outweigh supply on key business travel air routes, increasingly airlines are feeling bolder in their efforts to reduce costs and drive-up prices. The big question is whether, amidst a global cost of living crisis, these market conditions will continue to prevail. A reduction in demand for travel could well pull the figurative runway from under their landing gear.

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