advanced airline sourcing by gillespie
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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
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