Business travel conundrums April 2002

Traffic overall continues to recover from the September 11 atrocity. Business traffic, however, remains in the doldrums. Is this cyclical or has there been some sort of structural change in demand? According to the ATA, full fare tickets for US domestic travel were down 20% on an annual basis in February while overall traffic was just 11% lower than in 2001. British Airways' traffic statistics for March show premium traffic down 9.2% while non–premium traffic fell by only 2.1%.

Although general economic indicators do not show a recession, the parts of the economy responsible for generating the boom business travel conditions of the late 90s have drooped. The cavalierly price–insensitive e–commerce sector has all but disappeared, while a dearth of M&A activity has grounded many of the investment bankers. The low–cost carriers in Europe have not only managed to capture a substantial share of business travellers, they are also waging a psychological battle — to persuade business people that it’s OK, even cool, to be seen on a low–cost carrier.

Two fundamental questions are being asked about business–class strategies. First, are the global alliances delivering the benefits of seamless service that they promised? The alliances were able to offer the prospect of connecting globally on a collection of carriers sharing the same standards of service on the ground and in the air, a product which, it was thought, would be able to command some premium pricing. But so far the alliances have not been able to offer an alliance–wide FFP, which is the perk that is probably most prized by a regular business traveller.

Nor is it clear that the alliances have been able to exploit their economies of scope. The alliances are matched with very powerful buyers — the travel purchasing departments of major corporations and financial institutions, which have no interest nor incentive in committing their travel purchases to a single alliance. They negotiate on an airline–by–airline basis for corporate clients. This raises the question of whether all the management time spent strategising and harmonising is really cost–effective.

The second issue revolves around the issue of the differential that evolved between published business–class and economy–class fares. During the business travel boom, the US Majors and British Airways, in particular, opened up the gap between business and economy fares to a ratio six or seven to one. BA, unintentionally, projected the message that business–class passengers were to be totally pampered while economy–class travellers were to be just tolerated.

Now market forces are closing the gap to a ratio two or three to one, but airlines are very reluctant to take the lead on this initiative. They, very understandably, worry about the elasticity of demand for business travel, suspecting that it is very inelastic and that a fare reduction will simply reduce revenues.

American Airlines tried to impose "value pricing" in the mid–90s, splitting fares into four transparent classes. It didn’t work, largely because of the aggressive response of its competitors. America West seems to be trying something similar at the moment with major cuts in walk–up fares, but it is small player in the business travel market.