Expect changes in corporate travel.

• Author: Brown, Kevin
• Position: Special Advertising Section - Directory

These are, putting it mildly, difficult times for the country's second-largest industry. Over the past two years the airline industry alone lost $16 billion, and even the most optimistic forecasts sound dismal. Virtually all hotels and rental-car suppliers have felt the brunt of a decline in travel and have made major adjustments in their business planning.

The sharp fall in business travel that began in mid-2001 has persisted as employers continue to slash travel budgets, search for more effective travel-management techniques and insist on travel-policy compliance. As expected, the decline in travel demand also has produced a ripple effect on industry workers leading to the loss of tens of thousands of jobs at carrental companies, major airlines, hotel chains and travel-management businesses.

Two of the nation's largest airlines are operating under bankruptcy protection, and more could follow. The travel industry is in the midst of what many call the gravest financial crisis it has faced since the inception of commercial aviation.

While the primary reason for the dramatic downturn in travel is the sluggish economy, there are several important factors that have had significant impact on corporate America's reduced travel and heightened focus on travel-expense reduction. While the most obvious is the concern over security following 9/11, most experts agree this is not the key dynamic. What is a primary factor is that despite the steady decline in leisure fares, business fares have increased about 34% since 1996, something that has drawn the ire of most corporate travelers and travel managers. Bottom line: they simply refuse to continue to pay the huge premiums associated with business travel.

Also notable is last year's elimination of travel-agent commissions by virtually all airlines, equal to about $35,000 per $1 million of airfare (down from about $100,000 in 1995.) The eradication of commissions has resulted in a direct increase in cost to the average company, which now has to pay travel agencies when it uses them. Combined with the fact that business travel and entertainment expenses are among the fastest-growing and most controllable corporate budget items, it's easy to understand the attention being given to company travel budgets. Finally, both the introduction of unprecedented security measures at our nation's airports and a recent spate of almost incomprehensible ticket-purchase restrictions have had a negative influence on travel.

In all likelihood, 2003 will be another tense year for the industry, beginning with how the major airlines address their two most critical issues: high costs and declining revenue. The former will require developing a viable business model to compete with an expanding -- and increasingly profitable -- list of low-cost carriers, including Southwest, JetBlue and AirTran, which now fly an estimated 23% of all domestic seat miles and whose labor costs are 30% to 40% lower than the majors. This will necessitate winning employee wage and benefit concessions and making big productivity gains. It will also mean replacing large, aging planes with smaller regional jets as well as cutting service in small to mid-size airports. The latter will require a new pricing scheme that better addresses the reality of the marketplace, including a more reasonable spread between advance purchase and last-minute travel.

While the airline industry attempts to fix itself, business travelers should probably expect fewer flight options, fewer seats, longer travel times, less service, more restrictions and higher fares. In the near term, it's not a pretty picture, but many experts agree that these, and possibly more, drastic steps are necessary to return the industry to profitability.

In the meantime, there are things that all corporate-travel managers should do to maximize their company's travel investment:

* Evaluate current online-booking and automated-expense management technologies to reduce costs and...