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Airlines hybridising to capture the corporate dollar

Airline Leader

CAPA's Airlines in Transition events address the various forms that airlines are taking as they adapt away from their previous labels of LCCs and full service airlines. The motivation for undergoing this metamorphosis is apparent in the valuable corporate sector, blurring the earlier distinctions.

Summary
  • Corporate travel buyers are increasingly using low-cost carriers (LCCs) and value airlines within their travel policies, with 90% of corporate clients allowing LCC bookings.
  • LCCs have a 14% market share in the corporate travel market, and this share is growing.
  • The LCC product has evolved to better meet the needs of business travelers, with features such as GDS distribution, flexi fares, and increased use of primary airports.
  • Legacy airlines are adopting features traditionally associated with LCCs, blurring the distinction between the two categories.
  • LCCs are attracting business passengers by offering premium yields and features such as flexi fares and bundled fares.
  • The influence of the traveler is increasing, with technology allowing for more control over travel choices, and open booking becoming a growing trend.

Corporate travel buyers are making increasing use of LCCs and value airlines within their company's travel policy, and airlines are helping them make that choice. According to EMEA at CWT, Director Air Solutions, Maxime Marembaud, 90% of his corporate clients allow LCC bookings and 40% of these list LCCs as preferred airlines.

Speaking at CAPA's Airlines in Transition 2015 conference in Dublin in Mar-2015, Mr Marembaud said that LCCs had a 14% market share in his market in 2014. Although this is less than their share across all markets, it is a significant number and it is growing.

And "open booking" enters the scene, with the prospect of market disruption. The influence of the traveller is growing and technology is helping that process.

The increase in LCC share of corporate travel has been driven by a number of factors. Most importantly, corporate travel buyers face an imperative to reduce costs and this pressure has increased since the global financial crisis. Crucially, however, the LCC product has also evolved to be better adapted to the needs of business travellers, with the addition of new features such as GDS distribution, flexi fares and the increased use of primary airports.

Moreover, moves by the legacy airlines to adopt many of the product features traditionally associated with low fare/value airlines have blurred the distinction between the two airline categories, particularly in short-haul markets. This has been pushed further by the strategies of the Big Three European legacy groups in owning their own LCC subsidiaries (Lufthansa with Germanwings, Air France-KLM with Transavia and IAG with Vueling).

Corporate travel buyers are now including LCCs and value airlines in their RFPs, although, typically, the legacy airlines are still preferred for their range, both in terms of product and network. To some extent, the inclusion of lower fare airlines in RFPs and in corporate policy provides buyers with a lever to negotiate better terms from their traditional airline suppliers, but it also helps them to lower costs.

The narrower geographical footprint occupied by LCCs and value airlines can hold them back from gaining prominence with corporate travel buyers. Some may team up with other airlines in order to widen their appeal, but, where this happens, it is typically just an extension of existing commercial partnerships.

For example, Aer Lingus makes extensive use of partnerships to supplement its long-haul traffic with both behind and beyond traffic (50% of its trans-Atlantic traffic is connecting at one end or the other). Its partners in the US include independent airlines such as JetBlue and more traditional airlines that corporate buyers know and understand, such as United.

Partnerships may be a useful option for some value airlines to increase their appeal to corporates, but easyJet Group Commercial Director Cath Lynn believes that her airline has a more immediate and powerful appeal. "We just save them money," she told Airlines in Transition 2015, "They won't want to link their long-haul purchase with the short-haul purchase when they see the value of short-haul LCCs". She added that easyJet is more than 40% cheaper than legacy airlines on the top business routes in Europe.

Just as LCCs are becoming more important to corporates, business passengers are now also important to LCCs and value carriers. Around 20% of easyJet passengers are travelling for business, although the mix varies by route, while the figure for Aer Lingus is 30% across both its short-haul and its long-haul networks.

The attraction to LCCs of increasing the number of business passengers carried is the premium yield that they bring. Although easyJet does not have a separate premium cabin, it offers flexi fares and an all-inclusive, bundled, fare aimed at business passengers (with features such as seat allocation, speedy boarding, fast track security and bag check all in the single price). Other LCCs, such as Ryanair, now also offer similar fares to business travellers.

These features attract a premium over and above that paid for booking closer to the date of departure (a behaviour more typical of business travellers than leisure travellers). Nevertheless, although business travellers may increase yields for the LCC, they typically make meaningful savings relative to travelling on legacy airlines.

If attractive fares provide LCCs with their main selling point when breaking into corporate accounts, they still face a significant challenge in competing with the incumbent airlines' loyalty programmes and large corporate sales forces. Travellers often display a degree of resistance to taking a value airline if their favourite legacy airline can offer them lounge access and recognition through their FFP on the same route.

However, the impact of loyalty schemes on keeping the value airlines at bay varies according to the corporate policy, the particular journey and both the value airline and the incumbent legacy airline. For easyJet's Cath Lynn, it is again a question of promoting the advantages of low fares, together with a strong airport network and efficient operations. easyJet has also worked at improving the airport experience for its business travellers, with features such as fast track security.

Beyond that, Ms Lynn believes that value airlines do not need a miles-based loyalty scheme, although its easyJet Plus card offers other benefits to frequent travellers. easyJet has invested "modestly, but highly effectively" in customer relationship management systems. "We have more [customer] data than most companies would dream of having", she said at Airlines in Transition 2015. This gives easyJet the opportunity to personalise its offer to its high frequency travellers.

Aer Lingus, Chief Revenue Officer, Mike Rutter believes that it is important to segment the business travel market and to provided a tailored offer to corporates, using a modular approach to sales strategy. "I would challenge the assumption that there is one vision of a business customer," he told Airlines in Transition 2015.

Mr Rutter acknowledged that there are those for whom recognition is important, but said that there were also business travellers with "modular needs" that corporates were prepared to pay for separately. These include lounge access and fast track in addition to onboard features such as a business class meal ordered by a traveller in the economy cabin.

An important issue for airlines operating in the corporate travel segment of the market is the question of who is the customer, the traveller or the corporate travel buyer? To some extent, the two customers have conflicting requirements. The traveller wants to maximise the ease of travel, while the buyer wants to minimise its cost.

However, easyJet's Ms Lynn believes this is a false dichotomy. "Efficiency makes travel easy and also takes cost out," she argued. easyJet deals with both traveller and buyer on a commercial and service basis and both are important, she says.

Mr Rutter agreed that both are customers, but with different needs satisfied in different ways. As he pointed out, travellers' needs are broadly constant, whereas corporates go through economic cycles. The travel budget is often the easiest thing to cut in a downturn. Even in a recovery, elements of travel such as short-haul premium have typically not fully regained their pre-downturn levels.

Although both the traveller and the corporate are customers, the importance and influence of the traveller is increasing. The advent and proliferation of direct distribution channels and associated hardware (desktop, laptop, tablet, smart phone, with both websites and apps) has allowed travellers a higher degree of control, something that they like and want more.

Travel policies have had to adapt to accommodate this, although the level of control given to travellers varies significantly from company to company. One of the keys to success for airlines in this area is to identify which corporate works in which way.

CWT's Mr Marembaud sees the traveller being the decision maker in the future. "The corporate still keeps the ground rules, with a TMC, preferred distribution channel and so on, [while] letting the traveller make the choice of what is most relevant based on their travel needs. The balance of responsibility between travel managers and traveller is changing".

Moves by LCCs to target corporate travellers and the proliferation of channels for corporate travel have brought technological challenges in distribution. Suppliers such as Travelport have adapted the old GDS technology in order to display not only fares, but also ancillaries to travel agents and corporate customers.

Moreover, with the pace of change accelerating and the passenger more and more at the centre of this process, it is important that airlines work with technology suppliers to ensure a consistent brand experience for travellers across the channels. "We work with our airline customers to offer that consistency. That wasn't in the old GDS", said Derek Sharp, SVP and Managing Director at Travelport at Airlines in Transition 2015.

As an example, when Delta recently moved to just five new fare classes, including a basic fare to compete with LCCs, Travelport launched this on the GDS on the same day that the airline launched it on its own website. "Regardless of which channel travellers were going through, they got access to all the best product, all the most recent product exactly in the way Delta wanted to market it".

Open booking is a new and growing trend whereby passengers book outside the TMC, while remaining compliant with the corporate policy, although only a few corporates allow this, according to Mr Marembaud. Research carried out by CWT suggests that the price paid outside the preferred channel is 6% higher than the price within the policy-preferred channel. CWT tries to cope with this trend by offering a dedicated app for mobile bookings and emphasising to travel managers the cost impact of open booking.

Open booking also adds to the technological challenge, particularly with regard to corporates' ability to track travel spend by their employees. "There are a lot of disparate systems out there, there is a lot of data, but there are very few complete views of the data," said Travelport's Mr Sharp at Airlines in Transition 2015. He added that open booking is a trend that is not going away and that Travelport needed to work with airlines to offer travellers a complete service.

Association of Corporate Travel Executives, President, Kurt Knackstedt summed up the current state of the debate on what he called the hottest topic in corporate travel at Airlines in Transition 2015. "There are two sides of the open booking argument. The one side against it saying you don't have visibility and there's another side saying the technology is there, or is getting there. I think the jury is still out".

The real thrust behind moves by LCCs and value airlines into the corporate travel segment has been to seek yield enhancement. However, this does not mean eschewing their low-cost principles. Indeed, the key to making these moves successful in the long term is to achieve this without a significant cost impact.

Increasing the number of channels, while also keeping distribution costs down is a highly skilled balancing act. Those LCCs and value airlines most likely to succeed in corporate travel will be those who retain the principles on which they were founded. As Mr Rutter said of Aer Lingus, "we are neutral in terms of distribution [channels], but zealots in terms of the cost of distribution."

easyJet also looks set to make further inroads. "We try to keep it simple and focus on what people value, we are trying to be quite innovative," said Cath Lynn, "we are trying not to layer in cost or complexity".