American Airlines irks travel managers by doing away with volume discounts

Business travel

July 27, 1992|By Tom Belden | Tom Belden,Knight-Ridder News Service

SAN FRANCISCO -- You may not get much sympathy for American Airlines' $166 million second-quarter loss from travel managers who work for big corporations and consider themselves among the airline industry's best customers.

Many of the travel managers have been in a snit since April when American revamped its fare structure in an effort to simplify it, and in the process eliminated most of the volume discounts it had been giving large corporate customers. Most other major carriers followed American's lead. The airlines also eliminated most cut-rate fares for business travelers attending meetings and conventions.

To help make up for ending those special deals, American cut its benchmark "full" coach fare by an average of 38 percent. Those are the fares that many business people use to have flexibility in their travel plans.

American officials said a key reason for restructuring its pricing was fairness. Only 2 percent of its customers work for companies with more than 1,000 employees, while 80 percent work for companies with 100 or fewer employees, an American spokesman noted.

But many larger companies that spend millions of dollars a year on air travel had special arrangements with the carriers that gave them average ticket prices 40 percent to 50 percent below the old, full-coach prices,the travel managers said. That means a 38 percent price cut may not be such a good deal for them.

Then, a chink appeared in the airlines' armor. Northwest, the fourth-largest carrier, used the very public setting of a recent major business travel conference to say it would reopen negotiations with companies seeking volume discounts.

Northwest President John Dasburg, speaking to the National Business Travel Association annual meeting here, criticized American for its pricing practices, including its recent half-price fare sale. Northwest and other airlines have sued American over that sale, accusing it of selling tickets below cost to drive competitors out of business.

"Let's be blunt about this," Mr. Dasburg said. "What we have seen the last few months from American is not legitimate price competition. Itis predatory pricing, deliberate pricing below profitable levels to undercut competition to the point that few airlines will survive."

It's ironic, he said, that when American, Northwest or any other big airline does business with a hotel chain for its own employees, or buys long-distance services, it seeks and receives volume discounts.

"One company in our industry has told you, 'Here's what we are offering, and here's what we will force the entire industry to offer. Take it or leave it,' " Mr. Dasburg said.

Continental Airlines and Trans World Airlines had said they will continue to give companies volume discounts. But those airlines are in deep financial trouble and, except in a few major cities, are less important carriers for business travelers than American, Delta, Northwest, United or USAir.

The more than 3,000 travel managers, travel agents and industry officials at the National Business Travel Association conference gave Mr. Dasburg a sustained ovation at the end of his luncheon speech. Northwest, incidentally, had sponsored the lunch. But such convivial events aren't usually the setting for such strongly worded statements.

Association President John Hintz, to the annoyance of sales managers from American, United and other airlines that were exhibiting at the association's trade show, quickly praised Northwest's initiative.

Mr. Hintz said he wasn't endorsing one airline over another. But he does want airlines to know how strongly managers believe that companies that can promise a carrier a high volume of business, and then deliver on the promise, deserve special treatment.

"Northwest has confirmed that they will make a commitment to any corporation that will make an honest commitment to them," he said. "The essence of these pledges is the very basis of volume purchasing.

"Since when," he said, "does Joe's Radiator Shop deserve to pay the same price as General Motors" for anything it buys?

The business travel association is seeking meetings with airline boards to argue its case for volume discounts, said Mr. Hintz, who is travel-services manager for the Price Waterhouse accounting firm. Meetings have been held with four airlines, which he didn't identify.

Fred Swaffer, corporate-travel manager for computer-maker Hewlett-Packard Co., said many of the volume-discount deals he negotiated in the last year or so for his company remain in effect. So he doesn't know what the impact of the new policies will be on his $300 million-a-year travel budget.

But Mr. Swaffer said other airlines might be forced by their competitors to follow Northwest's lead in opening negotiations again.

"I question whether the airlines will refuse to renew [volume-pricing] agreements," he said.

American Airlines officials have been unmoved by complaints about the new fare system.

Far more individual business travelers should see their air-travel costs lowered by the 38 percent fare cut than will see them rise, said American spokesman Tim Smith. Most of the volume-discount deals that American had before April represented savings of only 40 percent from the full coach fare, so not even the biggest companies will see costs rise much, he said.

The big corporations' claim that they deserve a volume discount on airline tickets also "doesn't ring true," because of the nature of the airline business, Mr. Smith said.

"There is no unit-cost advantage to us to sell in volume," he said. "It's not like manufacturing a product, where it costs less the more you make."

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