HOW BUSINESS AIRFARES CHANGE

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1 January 2014 HOW BUSINESS AIRFARES CHANGE Have you ever wondered, what happens to airfares for business travelers over time? We constantly hear about rising airfares in various markets - maybe we might even hear about decreasing airfares as well. But some of us here at Topaz International were curious about trends in airfares specifically related to the corporate travel industry. We hope you find this visual white paper useful as you work to better manage this large spend in your company. One of the more interesting charts is what average airfares have done over the past few years when adjusted for inflation. In this chart we see that actual Actual Airfare Adjusted Airfare airfares have remained mostly flat over the years, but if we adjust these airfares for inflation over the years we can see that there has been a dramatic decrease in airfares. But what is expected to happen over the coming years is more telling. In short, airlines have become better at controlling their inventory and their pricing, resulting in more consistent upticks in pricing as we are starting to see in 2010 thru 2012 data above. 1

2 January 2014 Domestic US Travel: It is obvious from this graph that the percentage of travel within the United States that is purchased in coach has not changed much over the years. Corporations that spend their corporate money for travel in the US rarely allow their travelers to travel in upper level classes. By virtue of frequent travel programs, most frequent travelers in fact pay for coach but are able to obtain a first class seat. As you would expect, the net result of this for airlines is that upper classes of service are most likely rarely sold, but are in fact given to the airlines most valued customers. In the end, the result of this will be airlines focusing more on obtaining more revenue from each of those seats in coach, and quite possibly removing those first class seats in favor of more coach seats. But will this happen? Probably not as JetBlue has bucked this prediction most recently by adding a Percentage of Travel in the U.S. purchased in coach first class section to their % previously coach only cross country journey s as a result of stiff competition from 75.00% legacy and other carriers. The manner in which air carriers manage their fleet, their seats and their airfares has become much more strategic and successful in recent years, and the success of real estate usage in first class will also be evaluated % 25.00% 0.00%

3 January 2014! International Travel: International travel is highly competitive for the business traveler because the likelihood of the business traveler purchasing a premium cabin seat is dramatically higher than for domestic travel. During 2000 and 2003, almost 50% of all international business trips that Topaz tracked were purchased in business class. However, since then there has been a steady and dramatic decline in business class purchases for Topaz clients, to a current low of about 25%. This is consistent with industry discussions where many corporations have been unable to sustain the high expense of business class travel, and they have changed their policies to be more restrictive for such travel comforts. This decline in business class purchase percentages, is similar for first class travel as well. In % of the international trips were purchased in first class, but as of 2012 that was down to 1%. As further comparison shows, coach travel for international trips has increased from 56% in 1996 to 72% in The future is very interesting for this product. Can other demand for a premium product fill the seats that take up substantial real estate in each plane? Or will airlines offer a middle type product that businesses can afford? 3

4 January 2014 Other Parts of the World: In other parts of the world (point of sale) you see a similar movement from premium classes to coach class, but the airline product does provide opportunities for more companies to allow business class purchases. In the early years of this study almost half of all travelers were in classes other than coach, but since 2000 there is more consistency with around 20% of travelers utilizing premium classes for business trips. Many times there is a business class product that is not ten times the cost of coach - but provides extra legroom and amenities that corporations may be more willing to provide. This is most likely the reason behind this disparity - combined with data that includes more long haul travel where business class is allowed. Coach Business First 100% 75% 50% 25% 0%

5 January 2014 Type of Airfares Used in the United States: So now that we know what class of service are being purchased, what type of airfares are being used? Over the years there has been more and more focus for corporations worldwide on how much is spent on business travel, and what it the most effective use of corporate funds when travel is required. Our data supports the trend in policies for travel that the lowest airfares must be taken - and those low airfares are driven by non-refundable airfares offered by airlines and negotiated discounts. Discussions in our industry have recently been focused on open bookings and allowing travelers the freedom to do what they want, when they want, in part based on a perceived trend that discounts are not being offered by airlines. However, our data would suggest that this is not the case, that with effective and proper management of this spend, corporations can still obtain discounts that are a good value for their corporation and for their travelers. Negotiated Airfares Non-Refundable Airfares The future once again will be interesting, as there is a reduction in the number of carriers in the US Market, will airfares rise and discounts go away as a result of the consolidation? No one really knows for sure, except industry experts widely agree on the belief that airfares will rise. In the end, the most effective manner to obtain low airfares continues to be the trilogy of success: Discounts, Non-Refundable Airfares, and Advance Purchasing.!! 5

6 January 2014 International Fare Trends: For international trends there are a few highlights that should be noted. First, negotiated discounts are decreasing for the three classes of airfares that are tracked by Topaz International. While this is an alarming trend for corporations, the marketplace naturally fluctuates based on supply and demand. In addition, there have been more aggressive changes in the Asian and European markets with airlines driving changes to the old way of doing business. Another interesting observation from this data is the increase in non-refundable airfares. This trend may be a reflection of policy changes in corporations upon the realization that their discounts were decreasing or being eliminated entirely, and they need to change their policies to drive behavior change in their travelers. Changes of this nature result in travelers less likely to obtain upgrades or seat preferences resulting in dissatisfied travelers at the expense of lower costs for the corporation. Business Negotiated First Negotiated Coach Negotiated Coach Non-Refundable T h e f u t u re w i l l b e v e r y interesting and the battle begins to be fought between travelers and corporations as in the United States with the increased noise over travel 2.0 and the freedom of travelers to do what they want, who will win out? The travelers or the corporations that foot the bill and pay the cash? Our bet is on the corporation that can provide value from a travel program and with no value you should have no travel program. 6