Today’s airline contracts are largely one-dimensional – higher discounts for more market share. Simple and sensible, right? This basic formula has served its purpose for the last 30 years. Still, like many older business models, it is losing its ability to deliver value both to airlines and their corporate customers.
Fading Discounts
Airlines have learned that relatively few buyers can move significant market share. The work-from-anywhere factor has forced employers to be more accommodating. Travel policies have shifted toward “should” and away from “must” to help attract and retain travel talent. The buyer’s ability to move share is weaker.
Meanwhile, airlines have long made empty threats about pulling discounts on unmet goals. They would face the unattractive consequence of losing market share due to their higher undiscounted prices. This reinforces the buyers’ belief that moving market share doesn’t much matter.
Airlines are decreasing their discounts in response to smaller gains in market share, as they should. Unfortunately, this trend weakens the ROI of a preferred program’s airline contract. This helps neither the buyer nor the airline. More ways are needed to justify healthy, mutually beneficial airline discounts.
The key is choosing new dimensions for building better contracts. Besides market share gains, what are airlines and their corporate customers keenly interested in?
Decarbonized Airfares
Airlines and many of their corporate customers say they are committed to decarbonizing air travel. Making this a new contract dimension should be a high priority for those airlines and corporate accounts willing to walk their talk.
The mechanism is straightforward. Get both parties to agree on a desirable carbon intensity level for the account’s air spend, one which represents a notable improvement from a recent level. This contract dimension must define carbon intensity as CO2e kg per unit of net airline revenue – for example, 200 kg per net ticket dollar.
This revenue-denominated metric is the key to aligning the airline’s need for more profitable fares with the account’s ability to achieve its targeted carbon intensity value. Note that the buyer can reduce the carbon intensity value, everything else being equal, simply by purchasing more expensive airfares.
In addition to reducing the carbon intensity of their air spending, buyers will provide their travelers with higher-quality itineraries while lowering demand for low-value trips and their carbon emissions. These higher-priced airfares will deliver higher profit margins to the airline, which will help it afford its investments in SAF and other decarbonization pathways.
Directed Content
Airlines and buyers each want the airline’s most appropriate content and services exposed to their travelers. While distribution strategies are in flux, it’s clear that airlines need more direct awareness of corporate travelers.
Buyers can facilitate this by promoting loyalty program enrollments and direct bookings. Assume the travel managers and their TMCs will get immediate visibility of these direct bookings via services such as Traxo’s or Concur’s Triplink. New contract dimensions can be built around direct booking and loyalty program enrollment targets. Meeting these targets will lower the airline’s cost of sales and improve traveler experiences.
More Paths to Discounts
A three-dimensional airline contract will give buyers more ways to earn discounts. Here’s what a 3-D contract term might look like:
For a given set of city pairs, the airline offers a 15 percent discount on FCY and 10 percent on HMKL fares so long as any two of these four conditions are met:
a) Our airline’s market share is at least 55 percent;
b) The carbon intensity of our airfares bought by you is less than 0.70 kg per dollar;
c) 20 percent or more of your bookings are done directly with us;
d) 80 percent or more of your flights on us are done by your travelers enrolled in our loyalty program.
Yes, there are details regarding the thresholds and how to measure performance against these goals. Assume those can be worked out. This approach gives the buyer multiple paths to earning and keeping a valuable discount, and the airline benefits when the buyer reaches any of these goals.
Higher ROI
3-D airline contracts will benefit both parties by expanding the ways that mutually beneficial value can be created. This is the hallmark of high-ROI contracts. Buyers and airlines, grab your drafting pencils and start designing the first generation of 3-D airline contracts.
