Airlines feel turbulence in biz travel

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If the current airline industry recession has been good for anyone, it’s Southwest Airlines Co. and other low-fare carriers, which are aggressively marketing to business travelers fed up with the higher prices traditional carriers are charging—even in the face of shriveling demand.

Business travelers used to account for about 60% of occupied seats, according to estimates by Boyd Consulting Group Inc., an aviation consulting and research company. In the wake of Sept. 11, however, business travel has been sharply curtailed, and business travelers now account for about 40% of occupied seats.

This dramatic change has placed intense financial pressure on the airline industry, especially on major carriers such as American Airlines and United Airlines, which have built their revenue models on charging business travelers as much as the market will bear.

"This is a wacky business," said Bill Oliver, VP for Boyd Consulting Group. "The airlines have a history of doing bad things to their very best customers."

In the post-Sept. 11 financial tumult, the airline industry has posted billions of dollars in losses. American announced a major restructuring; US Airways filed for bankruptcy; and United is threatening to do the same.

To boost revenue and cut costs, several airlines have announced measures that are unpopular with business travelers. These moves, industry observers say, undercut the airlines’ brands, most of which have been built on service and convenience.

"They’re cutting back on the amenities and services that differentiated them, and more and more they come to look like Southwest, except at a $400 premium," said Kevin Mitchell, chairman of the Business Travel Coalition.

This brand erosion puts the major carriers at a severe marketing disadvantage in the current climate, and industry observers say Southwest and other low-fare carriers now have the upper hand when it comes to building a brand with business travelers.

Southwest goes after business

Southwest is in the midst of an aggressive TV campaign targeting business people. It spent $38.5 million on network, spot, syndicated and cable TV advertising in the first half of this year, outspending American ($10.9 million) and United ($17.3 million) combined, according to Competitive Media Reporting.

In a 30-second spot titled "MacGregor," Southwest depicts a group gathering for a conference call with an associate named MacGregor, only to reach his voice mail. The punch line is that MacGregor is poised to enter the conference room in person. "Business travel is back," declares the spot, which was created by GSD&M, Dallas.

Southwest is running the spot on sports programming, such as "Monday Night Football," to reach businesspeople. The ad promotes Southwest’s capping of walk-up fares at $299 each way, down from its previous cap of $399.

"It’s a big reminder that we have very low unrestricted fares," said Richard Sweet, Southwest’s executive director-sales and marketing, "and if you’re paying more than $300, you’re paying too much."

Southwest’s simple marketing approach of emphasizing its low fares is one that many industry observers find effective.

"Southwest’s advertising tends to be direct," said George Hamlin, senior VP of consulting firm Global Aviation Associates, "and they’re going at the Achilles heel of the competition. They say, ‘Here’s our maximum price, and you could find with other airlines that that’s their minimum price.’ They have something to say and they’re saying it."

Larry McNaughton, president-COO of branding consultancy CoreBrand L.L.C., agrees. "Southwest’s advertising tells you exactly what they’re going to do."

In CoreBrand’s quarterly Brand Power study, Southwest’s rating, which is a combination of familiarity and favorableness, grew by 1.3 points to 46, between the first and second quarters of this year. Among airlines, Southwest trailed only Delta Air Lines, which had a brand power rating of 50.9 in the second quarter, up from 50.5 in the first quarter.

American touts frequent flights

An American Airlines ad that ran in the Aug. 19 issue of Variety underscores some of the marketing challenges facing the traditional carriers.

The ad shows eight American planes heading back and forth between New York and Los Angeles with a headline that reads, in part, "Schmooze in NY. Pitch in LA. Scout in NY. Cast in LA." The subhead declares the benefit, "More Nonstops Between LAX and JFK Than Any Other Airline." The body copy extols the value of first class, business class and coach.

"They’re offering frequent service, which is something the business traveler is looking for," said General Aviation’s Hamlin, critiquing the ad’s message. "That they offer other than basic services—not only business class, but first class is still available—that makes sense. But telling people you have coach is a head-scratcher."

American declined to comment for this story.

A United spokesperson said the carrier planned to continue its current advertising with little change. In an e-mail message sent to customers late last month, Chris Bowers, senior VP-marketing and sales, assured them that United would continue its Mileage Plus Program despite its financial troubles.

But even with the continuance of such perks as frequent flyer programs designed to build customer loyalty, carriers such as American and United are facing an ornery marketplace that has become used to lower fares and is suspicious of higher fares, no matter what extras come with them.

Carriers such as American are facing an ornery marketplace that has become used to lower fares and is suspicious of higher fares, A recent survey by the Business Travel Coalition found that 44.7% of business travelers described traditional carriers as providing "good" or "very good" value, while 79.7% described low-fare carriers as providing "good" or "very good" value.

Now, the traditional carriers, which find themselves financially strapped, are scaling back services or charging for them. US Airways, for instance, announced that it will begin charging passengers with nonrefundable tickets a second full fare if they miss their plane and want to board a later flight.

The idea, Hamlin explained, is for the airline to begin ridding itself of the passengers habitually paying the lowest fares. The tactic may be aimed at the leisure traveler, but business travelers, particularly those flying to a trade show or other event scheduled well in advance, may find themselves in the cross hairs of this policy.

With such rigorous rules regarding ticketing, the traditional airlines are finding that their advertising messages are at best confusing, and at worst, disbelieved. After decades of branding themselves as upscale service providers, the airlines are now scaling back amenities with no apparent scaling back of fares.

"Let’s just say that from a branding point of view the experience promised in the advertising is nowhere near the experience delivered in reality," CoreBrand’s McNaughton said. "This poses a serious problem."

The Business Travel Coalition’s Mitchell has his opinion on the airlines’ current policies and their approach to marketing them. "It’s dumber than dirt," he said.

Turnaround not apparent

The near future offers little hint of a turnaround for traditional carriers. According to recent research by the National Business Travel Association, 56% of corporate travel executives said it would be 12 months or more before a healthy level of business travel returns. Additionally, 56% said that the turnaround would only come with reduced costs.

This cannot be good news for traditional carriers, especially when 78% of corporate travel executives said they have tried to renegotiate contracts with travel suppliers, and 61% said they’ve urged employees to increase their use of conference calls and Webcasts.

Some observers foresee fewer two-tier airlines—those that serve both low-fare leisure travelers and higher-fare business travelers—in the future. Instead, the market may split into low-fare carriers like Southwest and higher-fare carriers catering to business travelers craving the comforts of first class or business class.

In the meantime, Wall Street is making it clear which model it thinks has the most profitable future.

JetBlue Airways, a low-fare airline modeled after Southwest but featuring the luxuries of leather seats and DirectTV for all passengers, has boosted its advertising spending in 2002 versus 2001, according to Tim Claydon, VP-sales and distribution. The ads promote the company’s fare range of $49 to $299 each way.

As of last Thursday, 2-year-old JetBlue had a market capitalization of almost $1.65 billion.

UAL Corp., the parent of venerable United Airlines, had a market cap of $183.3 million.

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