Advanced Airline Sourcing

Scott Gillespie Managing Partner tClara Travel Data Made Brighter

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Scott Gillespie’s Bio Managing Director, tClara – Travel Data Made

Brighter

Founder and CEO, Travel Analytics

Managed 300+ airline sourcing projects

Analyzed $20 billion of corporate air spend

Clients included 40% of BTN’s Top 100

Sold firm to TRX

Author of a U.S. patent covering airline bid analysis

Author of Gillespie’s Guide to Travel + Procurement

Former travel sourcing expert at A.T. Kearney

MBA, University of Chicago

Where we’re headed

True Travel Spend Optimization

The Power of Scenarios

The Reality of Airline Discounts

Instant Air Sourcing Diagnostics

Key Air Sourcing Concepts

Strategic Sourcing and the Travel Category

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Strategic Sourcing and the Travel Category

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Why CEOs Like Procurement Purchased goods and services can be more than half of a firm’s total revenue

…without layoffs

~ 60% ~

Purchased Goods and

Services

25%

Salaries, Wages and

Benefits

10%

Taxes, Depreciation and Interest

5%

Profit Before

100%

Total Revenue

8%

Profit After

5% Reduced spending falls right to the bottom line…

How does Strategic Sourcing work?

• Consolidate the spend • Control the spend • Tighten supply relationships • Find ways to cut costs

Buyer Buyer

Fragmented Suppliers

Travel Is a Signal

Category

Travel is not a commodity — right?

Common Points We Could Be Talking About…

“It’s a significant expense category.”

“The spend is very hard to control.”

“It touches most employees.”

“You can’t just switch suppliers like you can with office supplies.”

“It really affects sales and/or productivity— but you can’t quantify it.”

Travel isn’t as different as we might think

… or Advertising

…Travel

… or Health Benefits

… or I.T. Consulting

… or Enterprise Software

Complex Moderate Simple

Still, Sourcing Travel Isn’t Very Hard

Laptops Temp Labor

I.T.

Advertising

Carpeting

Coal

Cars

Hotels

Airlines

Agencies

Sourcing Complexity

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Four Complicating Factors

Travel Policies Impact Travel Spend and Sourcing Efforts

Purchase Process •Pre-trip approval •Booking •Payment

How

Quality Specs •Cabin •Connex •Hotels •Car size

What

Preferred Suppliers •Air •Car •Hotel •TMC

Who

Savings Safety Reimbursement Consequences

Why

Weak Travel Policy = Weak Discounts

Two Main Sourcing Options

Turbo RFP

• Faster RFP process

• Keeps current preferred airlines

• Seeks better discounts in key markets

• Strives to keep current share goals

• In return for not going to Classic RFP mode

Classic RFP

• Seeks bids from all qualified airlines

• Willing to revamp preferred suppliers

• Share goals are negotiable

• Seeks more savings than Turbo

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credible

promises

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credible

threats

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Recognize

a good deal

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Key Air Sourcing Concepts

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More market share!

Lower prices!

made simple Airline sourcing

Q: Which is the better deal?

A. 10% off F, C, Y, B, M, H in all markets served globally by United, or

B. 30% off all fares in all markets served by Delta from Atlanta and Minneapolis

A: Depends on • Your travel footprint (city pairs)

• Each airline’s coverage • Your fare mix

Fair Market Share is the airline’s expected share of seats in a market,

based on seats, schedules and routings

Airport A Airport B

Delta schedule: 100 seats a day

United schedule: 100 seats a day

Delta’s FMS = 50% United’s FMS = 50%

(assumes wing-to-wing schedules)

Fair Market Share (FMS)

Airport A Airport B

Delta’s FMS = 40% United’s FMS = 40%

Southwest = 20%

Connecting Airport

Southwest: 100 seats a day

Less weight for connections, and for longer connections

Delta schedule: 100 seats a day

United schedule: 100 seats a day

Fair Market Share (FMS)

Getting FMS: Inputs are City Pairs and their spend

Fair Market

Share (FMS,

aka QSI)

Calculator

Beware – many versions of “Fair” - include or ignore extra connections? - JV/Alliance/Interline, or not? - Define “good” connection?

Share Gaps Are Key Indicators

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35%

45%

55%

65%

75%

Last QTR This QTR

< Fair Market Share >

Under

Over

Of Contract Performance

Contract Goal

Market Share

Share Gaps Are Key Indicators

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20%

30%

40%

50%

60%

Carrier A Carrier B

Fair Market Share

Avoiding

Supporting

Of Airline Popularity Market Share

Coverage and Overlap

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City Pair Spend = $100k Coverage = 70% or $70K

AA 40%

UA 30%

Coverage and Overlap

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AA 40%

UA 30%

City Pair Spend = $100k Overlap = 30% or $30K

Revenue Management 101 Illustrative 100-seat Aircraft

$50,000

$900 X 30 Seats

$400 X 70 Seats

$55,000

$500 X 100 Seats

$1,500 X 10 Seats

$1,200 X 20 Seats

$700 X 30 Seats

$300 X 40 Seats

$72,000

Airfare Inventory Booking Classes

Illustrative

How Buyers Benefit from Revenue Management High prices help

ensure last-minute availability

Low prices make planned trips more

affordable

Illustrative

Fare Ladder Discount Implications

Higher discounts

Low or no discounts

Airlines cannot afford to offer deep discounts on their low-bucket inventory

Fare Mix, Discounts and NESR, aka WAD (Net Effective Savings Rate, aka Weighted Avg. Discount)

• Fare mix is key to calculating savings

• Historic fare mix determines the spend-weighted Net Effective Discount

Share of Spend

Booked Fare Class

Discount Net Eff. Rate

10% J 30% 3.0%

20% Y 20% 4.0%

40% M 15% 6.0%

30% T 0% 0.0%

13.0% Net Effective Rate =

Standard Air Sourcing Data Fields

Key Field: POS-CP-CR-BC Two Data Fields

Each in-scope country

Non-directional airport codes

Trimmed from fare basis code. NOT Cabin

Half a round trip, regardless of connections

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Instant Air Sourcing Diagnostics

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Use These Key Metrics For Instant Analysis

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Fair Market Share and Share Gap

Coverage and Overlap

Buyer Power

Relative Price

Ticket Profit Margins

Partnership Pricing Value

No need for expensive contract analysis at this stage

Buyer Power Reflects Degree of Competition

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$350,000

$1,100,000

$1,550,000

$950,000 $950,000

Very Weak (1) Fairly Weak Moderate (5) Fairly Strong Very Strong (9)

Air Spend by Buyer Power Rating

Monopoly Markets

Battleground Markets

Overall Score = 5.3

Higher Score > Higher Discounts

Most Buyers Want High Coverage And Low To Moderate Overlap

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Carriers Coverage OverlapAA,UA 70% 30%

AA,DL 68% 5%

AA,WN 65% 15%

DL, UA 58% 26%

DL,WN 42% 14%

WN, UA 42% 10%

Share Gaps Reveal Traveler Preferences

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16%

-11%

22%

-9%

3%

American Delta JetBlue United Southwest

Share Gaps vs. Fair Market Share

A Great Procurement Perspective

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American

Delta United

Southwest

Lufthansa British

Airways

0%

10%

20%

30%

40%

50%

-10% -5% 0% 5% 10% 15% 20% 25%

Est. Ticket Profit Margin

Supplier's Pricing Relative to Airfare Benchmarks

Airline Pricing Landscape size = spend

Overall: Pricing +4% Profit +27%

Take a Balanced View of the Airline’s Prices

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0%

20%

40%

60%

80%

100%

Est. Ticket Profit Margin

Buyer's Airfares, as Graded by 3rd party

Partnership Value Analysis size = spend

Cheap Fairly Cheap

Average Fairly Expensive

Expensive

8% in Buyer’s Favor

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The Reality of Airline Discounts

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What Really Drives Discounts? Two Key Factors:

1. Movement: Ability to move share

2. Margin: Profit contribution

Essential for figuring out how much to pay for revenue

Discount Drivers: Movement and Margin; NOT Volume

Supplier’s Revenue from an Account

Minimum Maximum

$500K Gross

$400K

Profit Contribution

Cost to Serve

$800K

$200K

$1,000K Gross

$100K Worst Case

Source: Gillespie’s Guide to Travel+Procurement

Best Case

What’s the Maximum Discount?

$800K

$100K

Supplier’s Revenue from an Account

Minimum Maximum

$500K Gross

$400K

$1,000K Gross

Worst Case

$100K Worst Case, NOT Negotiable

$100K Negotiable

= 10%

Maximum Discount

$100K Negotiable

$1,000K Gross

Source: Gillespie’s Guide to Travel+Procurement

Profit Contribution

Cost to Serve $200K

Expected Profit Margin and Share Shift, NOT Spend, Drives Discounts

More precisely, the credible threat or promise drives discount %

“You’ve offered 8%. We think we can move a lot more share.”

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The Power of Scenarios

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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 market shares by carrier, and buyer’s savings for each scenario.

Why Use Scenarios?

• Scenarios are built to test specific sourcing strategies:

• Maximize or minimize a carrier’s spend

• Compare alliance deals

• Shift toward LCCs

• Minimize traveler friction

• Maximize savings

Sample Scenario Results Last year’s Program Net Spend was $3,000K

Scenario Scenario Total Net Spend

Scenario Savings ($000s)

DL’s Net Spend ($000s)

1. DL/JV, then Star 2,950 50 700

2. DL/JV+AA, then UA/LH 2,980 20 400

3. Star, then DL/JV+WN 2,910 90 300

4. Avoid DL 2,970 30 200

Scenario Implications

Scenario Scenario Total Net Spend

Scenario Savings ($000s)

DL’s Net Spend ($000s)

1. DL/JV, then Star 2,950 50 700

2. DL/JV+AA, then UA/LH 2,980 20 400

3. Star, then DL/JV+WN

2,910 90 300

4. Avoid DL 2,970 30 200

Buyer prefers: DL/JV prefers:

Category (e.g., Air) Sourcing Options Map

<<Reward >> << Loss Savings >>

Risk

High

3 4

5

6

7

2

1

8

= Airline Supplier Scenario

<<Reward >> << Loss Savings >>

Risk

High

3 4

5

6

7

2

1

8

Apply Logical Elimination

Category (e.g., Air) Sourcing Options Map = Airline Supplier Scenario

Sourcing Options for CEOs

Risk

High

4 6

7 “We recommend Option 6, but if you really want 7…”

= Airline Supplier Scenario

<<Reward >> << Loss Savings >>

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True Travel Spend Optimization

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Travel Policy 5 Star 1 Star

High

Costs

Supplier Cost

Travel Supplier Costs Are Controlled by Travel Policy and Procurement

Source: Scott Gillespie

High

Costs

Supplier Cost

Traveler Friction Is The Hidden Cost of Travel. It’s an HR Issue

Source: Scott Gillespie

Human Cost, or Traveler Friction

• Lost productivity • Reluctance to travel • Negative impacts on recruiting & retention •Traveler health issues

Travel Policy 5 Star 1 Star

High

Costs

Supplier Cost

The Total Trip Cost Is What Matters

Source: Scott Gillespie

Total Trip Cost

Supplier Cost + Human Cost = Total Trip Cost

Travel Policy 5 Star 1 Star

Human Cost, or Traveler Friction

• Lost productivity • Reluctance to travel • Negative impacts on recruiting & retention •Traveler health issues

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Thank you!

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Questions and comments?

Scott Gillespie scott@tclara.com

Glad to connect on LinkedIn