It's the Economy Traveler, Stupid! - trends in business travel services market - Statistical Data Included

Brandweek, June 4, 2001 by Mike Beirne

Presumably, the current business slump could trigger a second look at the airlines' reliance on high-yield business travelers for the bulk of their revenue. These frequent road warriors account for less than a quarter of tickets purchased, but generate more than half of the big carriers' overall sales. The perks, bonus miles, airport lounges and roomier seats were all geared for the airlines' best customers.

But corporations are cutting back on business travel and using remote conferencing options. No wonder American Trans Air--no darling when it comes to service rankings--has planes filled with passengers carrying laptops on its new flights from Chicago Midway to Northwest Airline's Minneapolis stronghold.

When the slump is over, will corporations go back to the level of travel they purchased before? If not, where does that leave the airlines that rely on the elite passengers for the bulk of their sales? Probably cutting costs. Some carriers may re-examine their cabin configurations if road warrior loyalty wanes and price becomes king.

That leaves American Airlines' More Room in Coach program, which is looking pretty good in a market where the typical economy seat means having your knees pushed up to your ears. The tagline evolved to "More Room Throughout Coach for More Coach Passengers," a snub directed at United's Economy Plus, which only has up to 12 rows offering extra legroom. Even before redecorating the cabins and painting over the livery on aircraft which it acquired last year in purchasing Trans World Air, American will increase legroom on those planes during the next nine months.

The economy is playing to the strength of low-fare champ Southwest. The no-frills carrier, now with more nonstops and coast-to-coast flights, consistently posts the lowest cost per available seat and would still be in a position to post enviable profit margins if a fare war erupts. It also topped rivals in quality.

Another cost-obsessed airline is Jet Blue, rumored to be an IPO candidate ever since it notched its first profitable month last August, just six months after it began flying from New York's JFK. Like Southwest, the startup is having success booking customers through its Web site and winning them over with friendly service. Unlike Southwest, Jet Blue has more legroom, leather seats and satellite TV on every seatback.

Loyalty most likely will be in play with international travelers through the airline alliances. For these passengers, seamless service and recognition/status are still most important. "Some products are perceived by customers as airline products, and some are products they expect from an alliance," said Graham Atkinson, svp-marketing for United, which leads the Star Alliance." Alliance products are those that help passengers connect seamlessly to their destination, so you'll see more Star emphasis on where our partners can link with each other."

The Star partners are already connecting the dots by reviewing their flight inventory and allocating service to plug up any existing holes. Last year, BMI British Midland dropped service to Warsaw, Prague and Budapest and started flights between London's Heathrow to Rome, Milan, Barcelona and Madrid, because Lufthansa already had a much stronger Eastern European operation from Frankfurt.

"The alliances are trying to give the business traveler a real choice to stay in the fold," said James Hogan, chief operating officer of BMI British Midland. "Over the coming years ... [we will] sit down as Star partners and start to rearrange our networks."

On the merger front, American became the largest carrier after buying TWA's assets, while United waits for justice Department approval of its proposed merger with financially strapped US Airways. The $4.3 billion deal (not including the assumption of $7.3 billion of US Airway's debt) has United, whose own stock is trading in the mid $30s, offering $60 a share for the struggling airline. United can walk away from the offer if no deal is on the table by Aug. 1.

The slow economy means there will be trading down in the hotel category. Business folks have marching orders to visit all their accounts but to do so with a smaller travel budget. So rather than going to premium brands like Hilton, Sheraton or Marriott, travelers will stay at cheaper mid-tier and economy brands.

There could be a shakeout in the works for the economy segment, according to Joe Kane, president and CEO of Days Inn, the leading economy brand. That niche has seen more competition in terms of brand introductions and hotel growth, while its occupancy rates declined faster than any other hotel segment.

Mid-tier brands may have a better chance at grabbing the premium customers, particularly if they offer food, beverages and a business center that doesn't nickel and dime guests for faxes and copies, said Adrian Kurre, svp-brand management for Hilton Garden Inn. Hilton bowed a print campaign that showed travelers destined for no-frills hotels trying to pack microwaves, coolers and fax machines for the trip.