advanced airline sourcing for strategic impact

Advanced Airline Sourcing

for Strategic Impact

Scott Gillespie

About Scott Gillespie

• CEO, tClara – Benchmarks for Travel Leadership

• Designer of the Air Clarity airfare benchmarking tool

• 20 years consulting in travel procurement and analytics

• Sourced airlines for 300+ engagements

• Inventor of patented process for analyzing airline proposals

• Author, Gillespie’s Guide to Travel + Procurement

• Former CEO, Travel Analytics; Principal at AT Kearney

• MBA, University of Chicago

Where We’re Headed Today

• Airline sourcing 101

• Discounts debunked

• Upgrading from tactical to strategic sourcing

• Measuring strategic impact

• Checklist

• Discuss and debate

For a copy of this presentation, text TCLARA to 22828

Airline Sourcing 101

More

market

share!

Bigger

discounts!

made simple Airline sourcing

Fair Market Share is the airline’s expected

share of seats in a market, based on seats,

schedules and routings

Delta’s FMS = 50%

United’s FMS = 50% (assumes wing-to-wing

schedules)

Fair Market Share (FMS, aka QSI)

Airport A Airport B

United: 100 seats a day

Delta: 100 seats a day

Nonstop

Airport A Airport B

Delta’s FMS = 40%

United’s FMS = 40%

Southwest’s = 20%

Fair Market Share (FMS)

United: 100 seats a day

Delta: 100 seats a day

Nonstop

Connecting Airport

Southwest: 100 seats a day Less weight for

connections,

and for longer

connections

Most Buyers Want High Coverage

And Low To Moderate Overlap

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%

Revenue Management 101 Illustrative 100-seat Aircraft

$50,000

$900

$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

x 30 seats

How Buyers Benefit From

Revenue Management High prices help

ensure last-minute

availability Illustrative

Low prices make

planned trips

more affordable

Airfare Inventory Booking Classes

Fare Ladder Discount Implications

Higher discounts

Low or no

discounts

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

Illustrative

Essential Air Sourcing Data Fields

Four Key Fields, Two Data Fields

Point of

Sale

(POS)

City Pair

Code (CP)

Carrier

(CR)

Code

Booking

Code (BC)

One-Way

Equiv.

Segments

Ticketed

Spend

USA ORDLHR UA B 1,000 $1,200,000

USA ORDLHR BA H 700 $550,000

Each in-

scope

country

Non-

directional

airport codes

Trimmed

from fare

basis code.

NOT Cabin

class

Half a round

trip, regardless

of connections

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

• Historic fare mix

determines the

spend-weighted Net

Effective Savings

Rate

• Fare mix is key to

calculating savings

Booked

Fare

Class

Share of

Spend

x Contract

Discount =

Net Effective

Savings Rate

J 10% 30% 3.0%

Y 20% 20% 4.0%

M 40% 15% 6.0%

T 30% 0% 0.0%

13.0% Net Effective Savings Rate = 100%

Typical Airline Sourcing Results

Airline or

Alliance or

Scenario

Best Case

Share of

Travelers

Price

Impact

A 72% -2%

B 65% -1%

C 58% +2%

D 52% -3%

Very focused

on savings

and discounts

Travel Policies Are Key to Sourcing

Purchase

Process •Pre-trip

approval

•Booking

•Payment

How

Quality

Specs •Cabin

•Connex

•Hotels

•Car size

What

Preferred

Suppliers •Air

•Car

•Hotel

•TMC

Who

Weak “Who”

Travel Policy

= Weak

Discounts

Discounts Debunked:

Size of Spend

Does Not Matter

What’s the maximum rational discount? Profit

Cost

Airline’s Revenue from an Account

Minimum

$500K Gross

$400K

$100K

Source: Gillespie’s Guide to

Travel+Procurement

Maximum

$800K

$1,000K Gross

$200K

$800K

$1,000K Gross

Maximum

Worst Case

Profit

Cost

Airline’s Revenue from an Account

Minimum

$500K Gross

$400K

$100K

Source: Gillespie’s Guide to

Travel+Procurement

Maximum Discount

$100K Negotiable

$1,000K

Gross = 10%

$100K Worst Case,

NOT Negotiable

$100K Negotiable

What’s the maximum rational discount?

Q1 2016 data shows no correlation between

spend and price gap* on American and United Airline Number

of

Accounts

Price Gap %

explained by

Spend (Incr. Adj. Rsq)

American 400-700 0.0%

United 400-700 0.0%

Delta 400-700 0.2%

Source: ARC data, analysis by tClara. Price gap is the account’s average ticket price compared to the ARC

corporate average ticket price in each of the account’s city pairs, using tClara’s Clean & Simple ticket criteria.

Accounts had a minimum spend of $300K and a minimum positive 2-point share gap on the airline in Q1 2016.

Your average price = $475

Benchmark price = $500

The price gap is $25

Size of spend accounts for

5 cents

What Really Drives

Airline Discounts?

1. Movement: Your

ability to move share

2. Margin: Profits on

tickets you buy

Size of spend

doesn’t matter

Upgrading From

Tactical to Strategic

Sourcing

Transaction Costs, e.g., airfare, hotel

Trip Quality (Travel Policy)

5 Star 1 Star

High

Trip Costs

Transaction costs depend

highly on the type of travel

policy and trip quality

Buyer

Discount

Tactical

Sourcing



5 Star 1 Star

High

Trip Costs

Human Cost, or Traveler Friction

Tougher travel policies make

travelers take on more wear and tear



5 Star 1 Star

High

Trip Costs

Human Cost, or Traveler Friction

Total Trip Cost

Optimal

Companies want the lowest total trip cost,

which is a truly optimized travel program

Putting the Strategic Into Your Sourcing

Business Goal?

Product Specifications

Sourcing Event

“Grow Sales”

Strategic

Alignment

Tactical

Sourcing

Customer Requirements for

Category Impact?

Category Impact

Health & Safety

Recruiting

Retention

Willingness to Travel

Trip Outcome

Travel Budget

What Are

Your Travel

Program’s

Customer

Requirements?

Duty of Care

Traveler

Friction

Transaction

Costs

Strategic Sourcing of Travel Means

Focusing on Road Warriors

Travelers are the

most important part

of a travel program

Road warriors (35+

nights away/yr) are

the most important

group of travelers

31% of Travelers

67% of Air Spend Source: ARC 2015 Trip

Friction database

covering 110K travelers

Here’s What Really High Traveler Friction Looks Like

35 Trips

88 Nights Away

(4 work-months)

138 Time

Zones Crossed

267 Flight Hours

(nearly 7 work-weeks)

236 Hours in

Economy Class

(88% of flight hours)

147 Hours on

Personal Time

(62%; ~4 work-weeks)

*Averaged across 10,564 travelers who each were at or above the 75th percentile for each metric shown above

as measured by the ARC 2015 Trip Friction® Benchmark Database, covering 110,000 travelers in 2015

10% of all

travelers*

“Traveler Friction: Insights From U.S. Road Warriors”

• Big implications for recruiting, retention

• Survey of 757 road warriors, May 2016

• Sponsored by ARC, GBT and tClara

• Executive Summaries available at American

Express GBT and ARC booths

Must-read research for all

travel category stakeholders

Text TCLARA to 22828 for a copy

Travel Policy Is

a Major Factor

for Recruiting

Road Warriors

85% are interested in offers from firms with very favorable travel policies, with the same amount of travel as done now

83% say a firm’s travel policy would be at least equally or much more important than the new job’s pay and responsibilities

Source: “Traveler Friction: Insights from U.S. Road Warriors”, American Express GBT, ARC, tClara 2016

What

Road

Warriors

Want

10%

10%

11%

12%

13%

13%

18%

Work from home before orafter trips

Reimb. airline lounge, TSAPrecheck

Premium economy ondomestic flights

Paid time off after too muchtravel

Choice of better hotels

Business-class over 6 hours

Non-stop flights when available

Shown: Those with at

least 10% of top two

choices. Total across all

24 choices sums to 200%


Traveler-friendly

Environments Are

Good for Retention

5%

11%

20%

38%

27%

Little or no effect

Somewhat positive effect

A positive effect

Very positive effect

Extremely positive effect

“If your firm gave you each of the top four improvements

you just selected, what impact would that have on your

willingness to stay with your current employer?”


65%

Link Business Goals to Travel-related Goals

Recruiting

Reduce

time to fill

open road

warrior

positions

by two

weeks

Business

Goal

Increase

sales

among

road

warriors

by 5%

Health &

Safety

Reduce

road

warrior

sick days

by 20%

Retention

Reduce

road

warrior

turnover

from 12%

per year

to 4%

Air Sourcing Strategy: Impact x Policy Matrix

Category Impact Goal

No Extra

Connec-

tions

Business

Class,

6+ Hours

Premium

Economy,

< 6 Hours

Health & Safety

Recruiting

Retention


Trip Outcome

Travel Budget

Total Cost

of Travel

Transaction

Costs

Traveler

Friction

Costs

Total Benefits

of Travel

Trip

Outcomes

Willingness

to Travel

Air Category Impact

Business Goal

Transaction

Costs

Measuring Your

Strategic Impact

How Can

You Tell If

Your Air

Sourcing

Strategy Is

Working?

Crappy

Performance

Indicators

Why? They don’t predict

category impact

Savings

Discount

Average Ticket Price

Price per Mile

Spend Under Contract

CPIs

Category Impact

Health & Safety

Recruiting

Retention


Trip Outcome

Travel Budget

Savings

Discount

Average Ticket Price

Price per Mile

Spend Under Contract

Useless Predictors

Tactical, not

Strategic

Road Warrior Attrition

So What’s Better? Category Impact

Health & Safety

Recruiting

Retention


Trip Outcome

Travel Budget Real Procurement Impact

Flight (or Trip) Quality

We Can Measure Flight Quality

No. of

Stops

None

4+

Seat

Lie-flat

Bar Stool

Aircraft

Size

Wide-body

Broomstick

Arrival

Time

Delay

On Time

Months

Best

10 pts

Worst

0 pts

Must Factor Flight Quality Into Sourcing Decisions

Airline or

Alliance or

Scenario

Best Case

Share of

Travelers

Price

Impact

Flight

Quality

Weighted

Score (Illustrative)

A 72% -2% +3% 75

B 65% -1% +1% 65

C 58% +2% +5% 55

D 52% -3% -4% 45

Travelers are the

most important part

of a travel program

Road warriors* are

the most important

group of travelers

Road warrior attrition

is the most important

travel metric

Must Measure Road Warrior Attrition

31% of Travelers

67% of Air Spend Source: ARC 2015 Trip

Friction database

covering 110K travelers

*Minimum 35 nights away per year

Must Measure Real Procurement Impact

We Should

Have Paid,

Per Our

Benchmark

$500

We Did

Pay

$475 Same city pair

Same airline

Same ticket types

Same month

Across all TMCs

Benchmarks must come from

“We paid

5% below our benchmark

price”

Tell Your Sourcing Success Story

With Four Lines

on One Chart

-4%

2%

Q1 Q2 Q3 Q4

Our prices are slightly

over our benchmarks

The Real Procurement Story Line

New Air Contracts

-4%

6%

2%

Q1 Q2 Q3 Q4

Our travelers are taking

higher-quality flights


over our benchmarks

The Flight Quality Story Line

New Air Contracts

12%

-4%

6%

2%

Q1 Q2 Q3 Q4



Our road warrior

attrition rate is falling


over our benchmarks

The Road Warrior Story Line

New Air Contracts

12%

-4%

6%

2%

Q1 Q2 Q3 Q4



Our road warrior

attrition rate is falling


over our benchmarks

The Business Goal Story Line

Our sales are growing

New Air Contracts

Checklist for Strategic Airline Sourcing

Good air data, 3rd-party benchmarks, effective analytics

Strategic sourcing framework tied to category impact

Road warrior goals set by the travel budget owners

Flight quality clearly linked to sourcing decision

Key Story Lines, not Crappy Performance Indicators Real Procurement Impact

Flight Quality

Road Warrior Attrition

Business Goal

Thank you! Scott Gillespie

[email protected]

m 216 272 1637

Glad to connect on LinkedIn

Discussion?

For a copy of

this presentation

Text

TCLARA

to 22828

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