Up in the Air

Travellers are torn between the temptation of lavish business-class options and the pressure to tighten their belts.
Esther Shein and Gabor TaroczyNovember 3, 2008

Airlines are piling on the luxury, presenting a dilemma for business travellers. As financial conditions worsen, how committed are flyers to cutting costs when their own personal comfort is at stake? CFOs can expect the strain on their corporate travel policies to be particularly severe.

So far, many companies are reluctant to cut back significantly on this big part of their T&E budgets. According to the International Air Transport Association (IATA), an industry group, global premium traffic grew by 1% in the year to July, the latest data available.

Yet some CFOs such as Rick Davis of NMT Medical, a Boston-based medical devices manufacturer, says that their company is trying to strike a balance. “When you have a 13- or 14-hour flight, you need to have someone who is reasonably comfortable and can get shut-eye and rest, which is very difficult when you’re not flying business class,” he says. “That said, given the economy and the cost, we’re cutting back on the number of people who can go on a trip and perhaps the type of accommodation that they get while they’re travelling.” Davis says that NMT would rather send one person overseas in business class than two or three people in economy.

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And those who are still allowed to book seats in business-class cabins have never had it better. To woo business travellers, major airlines around the world are upgrading their offerings. British Airways is spending £100m (€126m) on a revamp of business class, with full rollout across its fleet expected by the end of this year. Roomier beds, a wider selection of entertainment and celebrity chefs advising on meals are a few highlights of the redesign. Meanwhile, the suites on Singapore Airlines’ new double-decker Airbus A380 were planned by French luxury-yacht designer, Jean-Jacques Coste. Cathay Pacific recently opened a new lounge in Hong Kong equipped with showers, full-service restaurants, luxury bath areas and reading rooms to business-class travellers.

Air Traffic Control

Not surprisingly, there is a steep price to pay for all this luxury. In the second quarter, the average international one-way fare, according to American Express Business Travel, reached the highest level since it began tracking prices in 1999. The average fare for travel between Europe and the US jumped 9% compared with a year ago, while prices for the increasingly popular Europe-to-China route went up by 27%. Kurt Knackstetd, head of advisory services for Asia Pacific at American Express Business Travel, says that he “highly doubts” business-class fares will come down any time soon. “These tend to be the most profitable seats, and carriers are reluctant to cut prices on anything that’s profitable,” he says.

As a result, now is the time for CFOs to overhaul their corporate travel policies. Finance chiefs wield the power necessary to make travel policies “as tight and mandated as possible,” says Richard Tams, head of corporate sales for BA. According to Carlson Wagonlit Travel (CWT), companies can save around 8% of total travel spending by improving corporate policies, from requiring advanced booking to favouring restricted fares. A further 12% can be saved by strictly enforcing these policies. (See “Cut It Out” at the end of this article.)

In for the Long Haul

It is possible to trim costs without relegating all travellers to economy class or making video-conferences mandatory. An emerging practice is “point of origin pricing,” whereby a preferred-carrier agreement on a popular route is available to bookers outside the countries of departure and arrival. Often, for example, a discount rate negotiated by a company for the London-New York route is not available if a ticket is booked from Germany. Extending the coverage of these deals is “a valuable new way to optimise spend,” according to a recent report by CWT.

Another way to reduce long-haul travel costs is to lengthen the flying time needed to qualify for business-class travel. One UK auction house recently extended this limit to ten hours, from six, thereby forcing employees to fly economy-class from London to New York, one of the company’s most frequently travelled routes.

Measures such as these require tact, because travel is “an emotional commodity, and many people who travel for work expect certain things — for example, if you travel overnight that you get to fly business class,” Knackstetd explains. “Even if the travel department decides to change the policy with the buy-in of the CFO, enforcing that change can be a very painful exercise.”

It’s another story for short-haul premium travel. This market has been in long-term decline globally, according to Lloyd Brown, an airline analyst at Ernst & Young. The reasons are simple, he says: “There are only so many services you can get during a one- or two-hour flight.”

Access to special lounges and other services on the ground improve the business-class experience, but the cost is increasingly difficult to justify. This is especially so when many high-speed rail services offer more economical options, with only marginally longer travel times, particularly when travel to and from airports is taken into account. Premium air traffic within Europe fell by 7% in the first seven months of the year, according to the IATA.

Some low-cost carriers, such as FlyBe and Air Berlin, have dedicated business sales teams aiming to attract corporate travellers with flexible tickets, exclusive lounges, free in-flight food and, of course, low fares. Between the full-service flag carriers and the no-frills budget airlines, there exists a “middle ground where we operate,” notes Andrew Knuckey, CFO of UK-based FlyBe.

Around 40% of an airline’s customers are business travellers, double the share of most other low-cost airlines, Knuckey adds. This helped make it one of the few carriers with a recent positive earnings surprise. In its latest financial year (ending in March), turnover increased by nearly 50% and pre-tax profit more than doubled. That does sound like luxury.

Esther Shein is a regular contributor to CFO and Gabor Taroczy is an intern at CFO Europe.