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1 NBTA Convention & Exposition | August 8-11, 2010 Houston, Texas Travel Procurement Workshop Scott Gillespie Author Gillespies Guide to Travel+Procurement NBTA Convention & Exposition | August 8-11, 2010

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2 MODERN AIRLINE SOURCING

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3 Key Analytical Concepts Fair Market Share (FMS) Airline Supplier Map Fare mix, discounts, and Net Effective Rate (NER); a.k.a. Weighted Average Discount Scenario modeling Program savings and CEO Map Program optimization

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4 Fair Market Share (FMS) A.k.a. QSI, or neutral share, or share of lift Best estimate of carriers market share before pricing and loyalty factors Very important basis for all modern airline sourcing projects Drives minimum, maximum and goal share, and the corresponding spend projections Key variables are connection logic and interline logic

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5 Fare Mix, Discounts and NER (Net Effective Rate) Fare mix is key to calculating savings Historic fare mix determines the spend-weighted Net Effective Discount Share of Spend Booked Fare Class DiscountNet Eff. Rate 10%J30%3.0% 20%Y 4.0% 40%M15%6.0% 30%T0%0.0% 13.0% Net Effective Rate =

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6 Fare Mix Issues Buyers use historic fare mix data Airlines may use non-historic fare mixes when bidding Buyers calculation of Net Effective Rate, and savings, will differ from airlines No practical way to guarantee inventory availability or the future fare mix Standard practice is to use last years fare mix But check with each airline!

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7 Airline Supplier Map Spend at Fair Market Share $3.0 MM $0.0 Ability to Move Share Very LowVery High DL AA UA Primary, or Tier 1 Secondary, or Tier 2 Tertiary, or Tier 3 US AC

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8 Scenario Modeling is Critical Basis for modern airline sourcing Scenarios are What if options Typically involve Tier 1, 2 and 3 airlines A.k.a. Primary, Secondary and Tertiary Can have Co-primaries, co-secondaries, etc. Easy to model alliances Calculates detailed carrier shares and buyers savings for each scenario

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9 9 scenario modeling

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10 Scenario Examples DL as Primary, Star as Secondary DL/AF/KL as Primary, Star as Secondary DL + AA as Co-Primaries, then Star Star as Tier 1, then DL + AA as Tier 2 Avoid DL: Make FL/AA/UA/US as Tier 1 Modeling tools test 50-250 scenarios

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11 Buyers Focus on Scenario Savings Last years net program spend - Scenarios projected net spend = Scenario Savings Weaknesses: Uses last years published fares and last years fare mix ** Understates savings when fares fall

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12 Sample Scenario Results (Illustrated) Scenario Scenario Total Net Spend Scenario Savings ($000s) DLs Net Spend ($000s) 1. DL, then Star2,95050700 2. DL/AF/KL, then Star2,94060600 3. DL+AA, then UA+AC2,93070400 4. Star, then DL+AA2,96040300 5. Avoid DL2,97030200 Last years Program Net Spend was $3,000K

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13 Scenario Implications Scenario Scenario Total Net Spend Scenario Savings ($000s) DLs Net Spend ($000s) 1. DL, then Star2,95050700 2. DL/AF/KL, then Star2,94060600 3. DL+AA, then UA+AC2,93070400 4. Star, then DL+AA2,96040300 5. Avoid DL2,97030200 Buyer prefers No. 3 DL prefers No. 1 SkyTeam prefers No. 2

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14 Hotel Clusters 101

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15 How should you group hotels for negotiations? Distance between hotels matters a lot You want to group hotels into actionable markets - Small enough to be create valid competition - Regardless of artificial boundaries Artificial boundaries: State borders City borders Zip Codes Midtown, Downtown Near Airport NBTA Convention & Exposition | August 8-11, 2010

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16 Clusters are actionable markets Clusters are small areas, maybe 1-3 miles in diameter Clusters are built around your programs high- stay areas Artificial boundaries (State, City, Zip Code, etc.) are ignored Clusters include non-preferred and unused hotels Clusters create actionable markets, much like city pairs

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17 Ignore Orphan Hotels! Orphans are low-stay hotels outside cluster boundaries They show up in TMC booking and credit card reports Ignoring orphans can eliminate 50-70% of booked hotels, 10-20% of Room Nights In no way weakens negotiations Significantly streamlines the Hotel RFP process

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18 NBTA Convention & Exposition | August 8-11, 2010 Houston, Texas Slide 1 detail (Arial 44) From a Hotel Usage Map

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19 NBTA Convention & Exposition | August 8-11, 2010 Houston, Texas Slide 1 detail (Arial 44) To Hotel Clusters

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20 NBTA Convention & Exposition | August 8-11, 2010 Houston, Texas Slide 1 detail (Arial 44) Including Unused Hotels

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21 NBTA Convention & Exposition | August 8-11, 2010 Modern Hotel Sourcing

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22 Hotel Sourcings Typical Annual Cycle NBTA Convention & Exposition | August 8-11, 2010 Data Collection RFP Implement & Manage SummerFall / WinterWinter >>>

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23 The Missing Step: Sourcing Strategy NBTA Convention & Exposition | August 8-11, 2010 Data Collection RFP Implement & Manage SummerFall / WinterWinter >>> Sourcing Strategy Summer

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24 Strategy Studys Key Deliverables Estimates the Major Savings Opportunities Higher compliance to as is program Broader coverage (more preferred hotels) Less upgrading and/or more rate availability Better rate negotiations Realistic tier-down scenarios Which then drives the Bid List Depends on managements appetite for savings and change

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25 Socialize with Senior Management =

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26 Clusters Create Meaningful Insights Which clusters need more preferred hotels? Which clusters have competitive alternatives? Where is there non-compliant spend? Is it a rate problem? Which clusters have lower-tier hotels? By how much do rates differ?

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27 Strategy Study Shapes Your Bid List Compliance savings > existing preferreds Coverage savings > add more preferreds Tier-down savings > bid lower-quality hotels NBTA Convention & Exposition | August 8-11, 2010

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28 Whats the Total Cost of Stay? Models need: Prices for room rates - Last Room Avail., Non-LRA - Best Available Rate (or AAA rate) Ancillary Costs (Internet, breakfast, parking) Utilization estimates for ancillaries Volume estimates per property Quality ratings (3 star, 4 star, etc.) NBTA Convention & Exposition | August 8-11, 2010

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29 Some Key Metrics Spend Under Contract $2.0 million (80%) $0.4 millionNegotiated Savings Average Discountx 20% Average Hotel Quality3.7 stars -10% YoY Average Booked Rate$143 -22% YoY Total Hotel Spend$2.5 M -30% YoY

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30 Drivers of Average Booked Rate Quality tier of hotel (5 star vs. 4 star) Preferred vs. non-preferred status Room type Negotiating process Room night volume Room availability Local market conditions Travel Managers are expected to influence most of these factors

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31 Chain Fitting

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32 If you had $1 million in spend in these secondary markets Tacoma Tampa Toledo Topeka Tucson Tulsa NBTA Convention & Exposition | August 8-11, 2010 Which hotel chain gives you the best coverage?

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33 NBTA Convention & Exposition | August 8-11, 2010 Scenario Option Risk Score Expected Savings Quality Policy Mgmt. Relationship Strategic Value Discount or New Price Projected Spend X

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34 Well, lets look at our historic spend by chain

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35 Evaluate chain-wide deals on Neutral Share not just Actual Share Strong Candidates! Share of beds in the selected clusters

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36 NBTA Convention & Exposition | August 8-11, 2010 Know which chains best fit your program