Monday, February 17, 2003
Guest Column: Sharing Risk with Travel Banks
Michael Boggs is the manager of airport business services for Mead & Hunt, a Madison, Wis. based-consulting company specializing in aviation. He is the creator of the Airline Travel Bank concept and has over 25 years as an airport manager and consultant to small hub and non-hub airports and their communities. He is a naval aviator and has a master's degree in public administration from Harvard University.
Across the nation, small communities are hungry for air service. Each year hundreds of their representatives meet with airline executives to solicit air service for their local airports. Some of these communities have good markets and service gaps and can make solid cases for additional air service. Others are, at best, high-risk ventures. Regardless of the merits of the proposals, the representatives always promise, "If you come, we will use it." Despite these good intentions, many new air service initiatives in smaller markets fail for lack of local support. As a result, airline executives now attach little value to these commitments and rank them along with other oft-broken promises such as "the check is in the mail," or "I'll pay you on Friday."
Why is creating successful air service initiatives especially difficult in small markets? In smaller air travel markets, the barriers-to-entry consist of existing frequent- flyer programs, travel agency/airline relationships, corporate purchase agreements and the existing travel habits of the local population. Recently, an airport manager in a small city related to me a phone conversation that he had with a local citizen one month after a new airline began service to the community. The woman began the conversation by saying, "I wanted to call and thank you for the work that you did getting another airline to serve our town." The airport manager responded, "Well, I appreciate your taking the time to call, have you tried the new service?" She answered, "Oh no, but I have booked a trip on (the incumbent airline) and now that we have another airline the (incumbent airline) ticket prices have come down and I can still get my frequent flyer miles (on the incumbent airline)."
Over the past two years, communities in the United States and Canada have begun to partner with airlines to develop a new concept to obtain and retain air service, one that provides a different type of air service support program that moves beyond promises to put people in airline seats. These relatively new programs are called travel banks.
Examples of travel banks currently in place - the communities that have created them and the airlines using them - include Pensacola, Fla., and Wichita, Kan., with AirTran Airways; Eugene, Ore. with America West Express/Mesa Airlines and Horizon Air; Stockton, Calif., with America West Express; and Wichita with Frontier Express/Mesa. At present, Mead & Hunt is working with three communities, including one in Canada, to create airline travel banks (ATB) to support air service initiatives planned for 2003. The Canadian program is to develop a travel bank in Fredericton, New Brunswick, for Delta Connection service into Boston. That one is in the process right now and should be successful within the month.
An ATB is not a typical subsidy or revenue guarantee - it is the financial commitment of a business community to use a specific air service initiative for a specified period. The ATB concept capitalizes on the airline's interest in the business flyer and the business community's interest in air service that supports economic activity in the community. Unlike subsidies, which do not guarantee air service use by the flying public, the ATB guarantees that local business travelers will, for a specified period, use air service provided by the partner airline.
So while a revenue guarantee just pays a carrier to come to town, a travel bank provides financial resources for a carrier, with those financial resources directly tied to people getting on the airplanes.
The concept behind travel banks is really basic - it is that you are trying to tie the business customer in a community to an airline in a contractual arrangement for both parties. The business customer is the customer the airlines want the most, so if you can aggregate those business customers in a community and get them to act in a group, you can leverage the buying power of that group for air service.
If you coalesce the core of your business community into this group, then you have a huge number of people, because it is not just one individual, it's a business, and each one of those businesses has employees, so there is a multiplier effect. For instance, in Wichita, there were 398 businesses, but included in those businesses were companies such as Bombardier, which represents tens of thousands of employees. Even businesses with five or six employees really count, because what you want is a cross section of the community. You don't want just big businesses. To make it work you have to have a cross section. You want the mom and pop, the medium size as well as the large. We usually find that if there are 300 participants, probably 270 will be medium and small businesses and the other 10 percent will be larger businesses.
At the core of the ATB is a banking arrangement that contractually locks in the financial commitment of individual businesses in the community to support the partner airline. ATB funds cannot be used for any other purposes than for travel on the partner airline. This has the effect of mitigating the barriers-to-entry mentioned above. When businesses have funds on deposit that can only be used to purchase travel on the ATB partner airline, they use that airline regardless of other influences.
What a travel bank does is tell the business community that if it wants a carrier to come to town, here's what they have to do. Each company that wants to be part of the program has to put money into an account - usually held by the Chamber of Commerce or somebody in the community. For those participants, the money is locked in and cannot be used for any other purpose than to buy airline tickets on the targeted airline. It's a "use it or lose it" deal. They have to use it within a specific period of time, so the incentive is for these people to start using the carrier once it comes to town, and to use it up very fast.
ATB program periods are structured to get participating businesses to spend their ATB funds rapidly, jump-starting air service initiatives with the goal of reducing the breakeven period for the partner airline. It gets people on the airplane very quickly with the thought in mind that the travel banks are going to be in place for a finite period of time, usually one year. Beyond that period of time it is up to the airline to keep the business travelers as customers. But it overcomes those barriers to entry. I don't care whose frequent flyer card someone has in their wallet, if they have $10,000 sitting in a bank account and can't use it except to fly on a particular airline, they will get on that airline.
Mead & Hunt's ATBs have included anywhere from 75 to 400 participating companies with total ATB deposits of $500,000 to $7.2 million, depending on the size of the community. The Pensacola travel bank with AirTran was set up with $2.1 million and 319 participants, while Wichita was $7.4 million with 398 businesses, but included both AirTran and Frontier Express.
Can any community partner with an airline to create an ATB program? It is clear from past experiences that every community is not a candidate for an ATB program. First and most importantly, market forecasts must support the contemplated air service. Neither ATBs nor anything else will make a marginal air travel market strong.
Secondly, a community must include a large business travel component - leisure markets such as Los Vegas, Reno or Aspen are not candidates for ATBs. The reason they won't work there is because those areas don't have a strong business component.
Third, the task of creating an ATB is much like that of a United Way campaign. It requires a strong and engaged lead business organization like a Chamber of Commerce that is committed to expending the time and effort it takes to educate and bring together individual companies. Lastly, the grass-roots nature of creating an ATB and the airline dynamics in larger markets tend to favor ATB applications in smaller communities.
The ATB is a tool that is being used by airlines and communities to lock in business community support for air service initiatives and mitigate airline risk. It creates a win- win situation - communities get the air service they need to sustain economic activity and airlines get up-front community support. It is not reasonable in today's airline environment to ask airlines to assume all the risk for air service initiatives. True community/airline partnerships, like travel banks, provide a mechanism for shared risk and reward.
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