Promotional airfares are driving significant savings across country wide travel programs. From January 01 to March 31 2016, there has been a reduction in fares across both long-haul and European routes. The savings increase is driven in large part by an increase in promotional fares, offered exclusively to Reed & Mackay by airlines which are increasingly outperforming the savings delivered by corporate route deals.
Some of the contributing factors to this trend include:
- Competitor growth in both long-haul and short-haul markets leading to increased capacity
- Thousands of new and expanded routes launching each year
- Lower oil prices beginning to come through after fuel hedging winds down
- Airlines assessing the effectiveness of their distribution channels and choosing to work more closely with Travel Management Companies (TMCs) where distribution costs are lower and opportunity for relationship build is higher than internet fare aggregators
What we’ve seen so far in 2016
At Reed & Mackay we have seen a particular downturn in fares to Middle East and Indian Subcontinent. This follows the intense competition between the Middle East ‘Big Three’ (Emirates, Etihad and Qatar); the region’s unique geographical position – most of the world’s population is within an 8 hour flight – means they are positioned to capture a disproportionate share of the long-haul market as it grows. This is in line with the International Air Transport Association (IATA)’s latest report showing a 16.7% capacity growth in the Middle East and 3.8% fall in load factors meaning the airlines will need to continue to find ways to fill more of their seats. The significant growth of smaller airlines is also contributing to this drop in fares, particularly in India where several new airlines are competing for both domestic and international routes.
We’ve also seen Reed & Mackay’s average London to New York ticket value drop 7% so far this year (compared to the same period last year) with other trans-Atlantic routes including Chicago, Boston and Miami also falling by 7-13%.
The effect of the rapid route growth of the European low cost carriers (LCCs) is also being reflected in our results. Average fares to destinations including Oslo, Hamburg and Copenhagen have fallen by a significant 20% compared to last year.
In the first quarter of 2016, movement away from corporate deal fares to ‘best on the day’ fares, where policy permits, and where these are cheaper than the client’s Corporate Deal has seen savings soar. We’ve seen use of promotional and best on day fares increase 8% so far this year, whilst use of Corporate Deals has decreased 16% over the same period.
Growth in competitors
Significant growth in LCCs alongside several consolidation deals is leading to an extremely competitive landscape. In the U.S. and other mature markets, ‘ultra’ LCCs are growing faster than any other segment of the airline market and represent an increasingly competitive threat to legacy and even mature LCCs. According to a recent PwC survey, 88% of airline CEOs rated an increase in the number of direct and indirect competitors as likely to be a significant disruptive threat over the next five years.
The London – New York trans-Atlantic route is seeing a particular surge in competition as it continues to be the busiest intercontinental route in the world; North American flight capacity in total grew 9% just in the month of February this year. British Airways still owns the largest trans-Atlantic market share; however, the growth of the combined Virgin Atlantic/Delta offering could lead to the biggest transformation in the market. United and American Airlines are also working to improve their trans-Atlantic in-flight experience, and with the addition of budget airline Norwegian Air and Business-only La Compagnie, plus others including Middle Eastern carriers into this space, the competition is likely to continue growing.
Thousands of new, busier routes
The London – New York route isn’t the only one becoming ever busier with flights. More than 3,100 new services across 173 countries were launched by 359 airlines in 2015 as reported by Airline Network News and Analysis; of these, 1,760 were entirely new routes. Ryanair and Easyjet each launched 99 new routes, making them the joint top airlines in route expansion. The dramatic increase in low cost European competition has put pressure on higher cost carriers to find ways to remain competitive including more creative fare offerings and frequent promotions. With over 1,100 new services already announced for 2016, the competition shows no signs of slowing down.
Oil price drop beginning to affect fares as fuel hedges end
According to a report by IATA, global airfares fell approximately 4-4.5% in 2015 compared to the previous year. The report predicts increased competitive pressures plus the decline in oil price seen around the end of 2015 are likely to translate into further declines in fares, as fuel hedges secured at previous higher prices begin to wind down.
Capacity keeping ahead of demand meaning more seats to fill
International passenger demand rose 9.1% in February this year, but capacity rose even further at 9.9%, meaning overall load factors (capacity utilisation) fell. The number of scheduled departures is forecast to exceed 36 million in 2016; an average of 69 every minute. With capacity and availability increasing at this rate to stay ahead of demand, it is likely that we will continue to see lower fares and more incentives arrive into the marketplace as carriers compete to fill their planes.
Fare distribution and offerings
Historically, sales and tactical fares injected into the marketplace were a rare occurrence; the best value for frequent fliers could be found in agreeing corporate deals with specific carriers. However, airlines have had to become significantly more strategic in what they offer to the market, when, and where.
For airlines wanting to tap into the core business travel market, many are finding that working with TMCs is more beneficial than solely focusing on direct website sales. Offering flights directly through an airline’s own website provides the best cost benefit for the airline; however it does not provide sufficient volume. Whilst online flight aggregator sites are popular, the distribution cost to the airline is far higher than the costs incurred by using a TMC. A healthy working relationship with a TMC also benefits airlines in understanding the requirements and priorities of business travelers – allowing them to build fares accordingly to maximize value on both sides.
At Reed & Mackay your expert consultants are incentivized to add value and save money, so all flight options are always considered to ensure the lowest logical fare is secured. Additionally, Reed & Mackay’s Consultancy team can conduct a full strategic analysis and review of possible policy changes that could lead to significant cost reductions across your travel program.