General Session:

The ROI of Business Travel

Presented by:

Kenneth McGillExecutive Vice President, Research

Vantage Strategy, Inc

Ohio Valley BTA - Michigan BTA Education DayMillenium Hotel, Cincinnati, Ohio

September 9th, 2010

Presenter • Kenneth McGill, EVP Vantage Strategy, Inc. & Lead Research Consultant for National Business Travel Association (NBTA)

• Fifteen yrs at IHS Global Insight and its predecessors, most recently as EVP of Global Travel & Tourism Practice

• 20+yrs as an economist & market researcher

• Extensive experience in travel market analysis, forecasting, policy evaluation, & economic impact

• Recently completed landmark study of business travel ROI –how T&E contributes to corporate performance

• Kenneth McGill, EVP Vantage Strategy, Inc. & Lead Research Consultant for National Business Travel Association (NBTA)

• Fifteen yrs at IHS Global Insight and its predecessors, most recently as EVP of Global Travel & Tourism Practice

• 20+yrs as an economist & market researcher

• Extensive experience in travel market analysis, forecasting, policy evaluation, & economic impact

• Recently completed landmark study of business travel ROI –how T&E contributes to corporate performance

2009 NBTA Research: What is Value of Business Travel?

Global business travel topped $844B in 2009, down Global business travel topped $844B in 2009, down 9% from a revised $926B in ’08.9% from a revised $926B in ’08.

US biz travel, @$237B in’09, is 28% of the world totalUS biz travel, @$237B in’09, is 28% of the world total China, currently #2 ($121B) will surpass the U.S. as China, currently #2 ($121B) will surpass the U.S. as

world’s largest biz travel market as early as 2015world’s largest biz travel market as early as 2015 On average, US businesses spend about 1¢ of every On average, US businesses spend about 1¢ of every

sales dollar on biz travelsales dollar on biz travelSources: 2010 NBTA Business Travel Market Metrics

• Business Travel Market Metrics (sponsored by Visa)

• 2009 Are We Investing Enough on Business Travel? (sponsored by American Express)• 2009 Valuing the Contribution of Travel Management (sponsored by American Express)

2009 NBTA Research: What is Value of Business Travel?

• Biz Travel supported over 4M US jobs and generated $80B in tax Biz Travel supported over 4M US jobs and generated $80B in tax receipts in 2008 –it is our 13th largest “industry”receipts in 2008 –it is our 13th largest “industry”

• The correlation between T&E and Sales/Profit suggests that The correlation between T&E and Sales/Profit suggests that most US industries under-spend on biz travel. Investing $1 most US industries under-spend on biz travel. Investing $1 more in T&E could yield about $20 more in gross profitmore in T&E could yield about $20 more in gross profit

• Strategic Travel Management (STM) saved US companies about Strategic Travel Management (STM) saved US companies about $7.5B in 2008 –about $14 per itinerary$7.5B in 2008 –about $14 per itinerary

• Mfg companies with STM have an operating margin that is 3% Mfg companies with STM have an operating margin that is 3% higher than those that “wing” ithigher than those that “wing” it

Sources: 2010 NBTA Business Travel Market Metrics• Business Travel Market Metrics (sponsored by Visa)

• 2009 Are We Investing Enough on Business Travel? (sponsored by American Express)• 2009 Valuing the Contribution of Travel Management (sponsored by American Express)

AgendaValuing Business TravelValuing Business Travel

2009-2010 NBTA Research Initiative: 2009-2010 NBTA Research Initiative: DYK?DYK?

Business Travel Spend in Financial Business Travel Spend in Financial ContextContext

The ROI of Business TravelThe ROI of Business Travel

2010 ROI of Business Travel: Deeper 2010 ROI of Business Travel: Deeper DiveDive

Q&AQ&A

Measuring ROI…

• Easy to describe, difficult to execute• Typically left up to managerial intuition, experience,

feel• Its about cause (and cost) and effect (conversion)

There are generally four approaches: a. Management Opinion Surveys –measure awareness, priority,

present trade-offsb. Meeting / Trip Goal Attainment Audit – pre-state objectives,

then follow up post-trip to assess successc. Individual Conversion Studies -good for specific trip

measurement but difficult to apply to all travel activityd. Elasticity Analysis – better for measuring overall ROI but

finding adequate data can prove difficult and costly

There are generally four approaches: a. Management Opinion Surveys –measure awareness, priority,

present trade-offsb. Meeting / Trip Goal Attainment Audit – pre-state objectives,

then follow up post-trip to assess successc. Individual Conversion Studies -good for specific trip

measurement but difficult to apply to all travel activityd. Elasticity Analysis – better for measuring overall ROI but

finding adequate data can prove difficult and costly

2009-2010 ROI of Business Travel• In 2009, NBTA & American Express Business Travel sponsored a

landmark study of the size, growth, & contribution of business travel

• Objective: Is there a correlation between business travel & corporate performance? And if so, can we determine the optimal level of business travel? Corollary: how far can we cut before real damage is inflicted?

• Approach: Using data for 15 U.S. industries over the period 1998-2009, we examined the correlation between changes in business travel spend and changes in corporate sales & profits.

• Key Finding: While it varies by industry, on average there is 20:1 return on investment for each additional dollar spent on business travel

• Key Finding: While it varies by industry, on average there is 20:1 return on investment for each additional dollar spent on business travel

U.S Business Travel in Financial Context

U.S. Business Travel Spending & Travel-IntensityTop 20 Industries Ranked on Travel Spend

• Total US Business Travel Spend in 2008 was $261B

• Businesses spend about 1¢ of every sales dollar on business travel

• High? Equipment rental & leasing @ 4¢

• Business Services @1.3¢

• Low? Mining at < a tenth of a cent

Source: Vantage Strategy, IHS Global Insight, US Bureau of Economic Analysis –National Input/Output Accounts

Industry Profit & Loss AnalysisUS Economy –All IndustriesUS Economy –All Industries

Business Travel Expenses in PerspectiveBusiness Travel Expenses in Perspective

(Millions of $) 1998 2003 2007 2008 %5-year CAGR

10-year CAGR

Sales 14,505,111$ 17,890,895$ 23,407,509$ 24,086,545$ 2.9% 6.1% 5.2%

Cost of Goods SoldLabor Cost 4,190,188$ 5,245,850$ 6,484,017$ 6,676,055$ 3.0% 4.9% 4.8%Material & Service Purchases 6,698,946$ 8,111,543$ 11,072,796$ 11,339,429$ 2.4% 6.9% 5.4%

Business Travel 213,206$ 215,499$ 268,629$ 261,362$ -2.7% 3.9% 2.1%Other Costs & Expenses 627,828$ 792,395$ 1,000,945$ 1,027,515$ 2.7% 5.3% 5.0%Total Cost 11,516,961$ 14,149,787$ 18,557,758$ 19,042,999$ 2.6% 6.1% 5.2%

Gross Operating Profit 2,988,150$ 3,741,108$ 4,849,751$ 5,043,546$ 4.0% 6.2% 5.4%Gross Margin% 20.6% 20.9% 20.7% 20.9%

1.47% 1.20% 1.15% 1.09%

3.18% 2.66% 2.43% 2.30%

7.14% 5.76% 5.54% 5.18%

B-Travel as a Percentage of Material & Service Costs

Business Travel as a Percentage of Sales

Business Travel as a Percentage of Profits

(Millions of $) 1998 2003 2007 2008 %5-year CAGR

10-year CAGR

Sales 14,505,111$ 17,890,895$ 23,407,509$ 24,086,545$ 2.9% 6.1% 5.2%

Cost of Goods SoldLabor Cost 4,190,188$ 5,245,850$ 6,484,017$ 6,676,055$ 3.0% 4.9% 4.8%Material & Service Purchases 6,698,946$ 8,111,543$ 11,072,796$ 11,339,429$ 2.4% 6.9% 5.4%

Business Travel 213,206$ 215,499$ 268,629$ 261,362$ -2.7% 3.9% 2.1%Other Costs & Expenses 627,828$ 792,395$ 1,000,945$ 1,027,515$ 2.7% 5.3% 5.0%Total Cost 11,516,961$ 14,149,787$ 18,557,758$ 19,042,999$ 2.6% 6.1% 5.2%

Gross Operating Profit 2,988,150$ 3,741,108$ 4,849,751$ 5,043,546$ 4.0% 6.2% 5.4%Gross Margin% 20.6% 20.9% 20.7% 20.9%

1.47% 1.20% 1.15% 1.09%

3.18% 2.66% 2.43% 2.30%

7.14% 5.76% 5.54% 5.18%

B-Travel as a Percentage of Material & Service Costs

Business Travel as a Percentage of Sales

Business Travel as a Percentage of Profits

Industry Profit & Loss AnalysisUS Manufacturing SectorUS Manufacturing Sector

(Millions of $) 1998 2003 2007 2008 %5-year CAGR

10-year CAGR

Sales 4,054,468$ 4,201,111$ 5,339,571$ 5,362,765$ 0.4% 5.0% 2.8%

Cost of Goods SoldLabor Cost 870,035$ 943,261$ 1,028,272$ 1,022,119$ -0.6% 1.6% 1.6%Material & Service Purchases 2,637,829$ 2,758,142$ 3,624,576$ 3,640,320$ 0.4% 5.7% 3.3%

Business Travel 39,119$ 38,445$ 43,968$ 43,414$ -1.3% 2.5% 1.0%Other Costs & Expenses 39,206$ 49,236$ 60,650$ 60,913$ 0.4% 4.3% 4.5%Total Cost 3,547,070$ 3,750,639$ 4,713,497$ 4,723,352$ 0.2% 4.7% 2.9%

Gross Operating Profit 507,398$ 450,472$ 626,074$ 639,412$ 2.1% 7.3% 2.3%Gross Margin% 12.5% 10.7% 11.7% 11.9%

0.96% 0.92% 0.82% 0.81%

1.48% 1.39% 1.21% 1.19%

7.71% 8.53% 7.02% 6.79%

Business Travel as a Percentage of Sales

B-Travel as a Percentage of Material & Service Costs

Business Travel as a Percentage of Profits

(Millions of $) 1998 2003 2007 2008 %5-year CAGR

10-year CAGR

Sales 4,054,468$ 4,201,111$ 5,339,571$ 5,362,765$ 0.4% 5.0% 2.8%

Cost of Goods SoldLabor Cost 870,035$ 943,261$ 1,028,272$ 1,022,119$ -0.6% 1.6% 1.6%Material & Service Purchases 2,637,829$ 2,758,142$ 3,624,576$ 3,640,320$ 0.4% 5.7% 3.3%

Business Travel 39,119$ 38,445$ 43,968$ 43,414$ -1.3% 2.5% 1.0%Other Costs & Expenses 39,206$ 49,236$ 60,650$ 60,913$ 0.4% 4.3% 4.5%Total Cost 3,547,070$ 3,750,639$ 4,713,497$ 4,723,352$ 0.2% 4.7% 2.9%

Gross Operating Profit 507,398$ 450,472$ 626,074$ 639,412$ 2.1% 7.3% 2.3%Gross Margin% 12.5% 10.7% 11.7% 11.9%

0.96% 0.92% 0.82% 0.81%

1.48% 1.39% 1.21% 1.19%

7.71% 8.53% 7.02% 6.79%

Business Travel as a Percentage of Sales

B-Travel as a Percentage of Material & Service Costs

Business Travel as a Percentage of Profits

Business Travel Expenses in PerspectiveBusiness Travel Expenses in Perspective

Business Travel Productivity Has Risen MarkedlyBusiness Travel Productivity Has Risen Markedly

More efficient, more “dense” trips Rising penetration and effectiveness of managed travel programs Travel prices rising more slowly than other costs Growing technological alternatives to more marginal travel

Travel Spend as a Percent of SalesTravel Spend as a Percent of SalesAll US Industries

Travel Spend as a Percent of SalesTravel Spend as a Percent of SalesAll US Industries

Business Travel ROI: Review of Landmark 2009 Study

Finding1: Business Travel Productivity is rising

2009 ROI of Business Travel

Finding2: Increases in travel spend are correlated with rising sales & profits, albeit at a “decaying” rate

Business Travel Spending as a % of SalesTotal, All U.S. Industries

Finding3:

Most U.S. industries are under-spending on business travel

2009 ROI of Business Travel: Findings (cont.)

If all sectors were to move to their T&E If all sectors were to move to their T&E optimum:optimum:

• U.S. travel spend would increase by $13BU.S. travel spend would increase by $13B

• resulting in a $915B increase in sales, andresulting in a $915B increase in sales, and

• a $248B rise in profitsa $248B rise in profits

If all sectors were to move to their T&E If all sectors were to move to their T&E optimum:optimum:

• U.S. travel spend would increase by $13BU.S. travel spend would increase by $13B

• resulting in a $915B increase in sales, andresulting in a $915B increase in sales, and

• a $248B rise in profitsa $248B rise in profits

ROI of Business Travel? …about 20-to-1ROI of Business Travel? …about 20-to-1

What Does This Imply For Management of T&E?

• Travel spend is expanded by $220k for our $500m manufacturing company• Accounting for inflation and input productivity trends, the yield is +$20m in sales and +$2.9m in Operating Profit. Margin improves by 0.1%• ROI of additional travel spend is about 13 to 1

• Travel spend is expanded by $220k for our $500m manufacturing company• Accounting for inflation and input productivity trends, the yield is +$20m in sales and +$2.9m in Operating Profit. Margin improves by 0.1%• ROI of additional travel spend is about 13 to 1

(Millions of $) 2008

Max Sales from

Business Travel Difference

Sales 500.00$ 519.73$ 19.73$

Cost of Goods SoldLabor Cost 95.30$ 96.51$ 1.22$ Material & Service Purchases 339.41$ 354.87$ 15.46$

Business Travel 4.05$ 4.27$ 0.22$ Other Costs & Expenses 5.68$ 5.87$ 0.19$ Total Cost 440.38$ 457.26$ 16.87$

Gross Operating Profit 59.62$ 62.48$ 2.86$ Gross Margin% 11.9% 12.0%

Hypothetical US MFG Company

2010 ROI Study:

Do Recessions Alter The Link Between T&E and Corporate Performance?

The Great Recession of 2008-2009

T&E and Sales During Recession: T&E declines started in 2008. Recovery will begin in 2010, but not hit stride until 2011

Ouch! Great Recession peak-to-trough sales loss was -4%, T&E loss totaled -13%

Still, T&E and Sales remain strongly correlated…

T&E and Sales During Recession: T&E declines started in 2008. Recovery will begin in 2010, but not hit stride until 2011

Ouch! Great Recession peak-to-trough sales loss was -4%, T&E loss totaled -13%

Still, T&E and Sales remain strongly correlated…

U.S. Travel Spend & Sales Are Strongly Correlated

-12.0%

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

Yr-

to-Y

r %

Cha

nge

T&E Sales%

Divergence due to 9/11

T&E Falls Faster & Farther than Sales…

Methodology: Can we find a correlation between T&E and sales/profits?

Business Travel’s Contribution to the Bottom LineBusiness Travel’s Contribution to the Bottom Line

Econometric approach that isolated the statistical relationship between travel spend & sales/profit

12 yrs of data for 15 industries…

Travel spend, sales, labor & other costs, operating profit,

inflation, and industry demand drivers

12 yrs of data for 15 industries…

Travel spend, sales, labor & other costs, operating profit,

inflation, and industry demand drivers

Model helped compare the cost of increased travel spend with resulting increases in sales to calculate the optimal level of business travel for each industry

Industry sales was regressed against travel spend, demand factors, & supply variables in order to isolate the influence of each driver

Modeled using a quadratic functional form –increases in

travel spend will increase sales but the payoff diminishes

Modeled using a quadratic functional form –increases in

travel spend will increase sales but the payoff diminishes

Most, but not all, industries were

below their optimal levels in 2009

Most, but not all, industries were

below their optimal levels in 2009

2010 Industry ROI Methodology2010 Industry ROI Methodology

• Industry data covering sales, demand, costs, and T&E from 1998-2009 (12 periods) Sources: DK Shifflet & Associates, OTTI, IHS Global Insight, BLS, BEA, Vantage Strategy

• Econometric model to measure correlation between Sales and T&E

• 14 individual industries and U.S. Total were estimated• Dependent Variable: Industry Sales• Key Explanatory variables: T&E, Production (demand),

Cost (supply), Sector PPIs, Travel Price Index2010: Estimated Model with Two Scenarios

- All Periods (1998-2009) including 2 recessions- Expansion Only (1998-2000, 2002-2007)

T&E’s Contribution to the Bottom LineT&E’s Contribution to the Bottom Line

For the statisticians and economists in the audience…

Model attempts to explain the variation in sales over time as a function of key drivers:

industry affiliation

product/service demand

cost and inflation

business travel spend

business travel spend2

Model attempts to explain the variation in sales over time as a function of key drivers:

industry affiliation

product/service demand

cost and inflation

business travel spend

business travel spend2

Model Specification:

Correlation Between Sales and T&E Definitely There But Weaker When Recessions are Added…

T&E Optimization: Most US Industries Are Still Under-spending on Travel

NBTA Convention & Exposition | August 8-11, 2010

Most Industries Remain Below Optimal T&E Level

Even With Recessions Factored In, Most Sectors Have Room to Profitably Expand T&E

If each industry had moved to its optimal point in 2009:

• T&E would be $9B (3.9%) higher ($246B)

• Biz travel would have declined by 6% rather than 9%.

• US Sales would have been $1trillion (+4.1%) higher

• -$925B = sales loss logged during the Great Recession (2008-2009)

Moving to Optimal in Perspective…

Sector2009 T&E

per Employee

New T&E Required to Move

to Optimal(in millions $)

Optimal T&E Increase per

Employee

Manufacturing $ 3,363 $ 1,519 + $128Transportation $ 1,886 $ 320 + $75Health $ 1,284 $ 744 + $46Business Svcs/Consulting

$4,005 $ 1,195 + $72

Total U.S. $1,809 $9,241 + $70

How Much Would Your T&E Budget Have to Rise to Move to Optimal?

How Did the Inclusion of Recessions Change the Optimal T&E Level?

Including recessions, particularly 2008-2009, reduced the upside sales potential from optimizing T&E.

Do We Go Too Far in Cutting T&E During Recessions?

Quantifying the Overshoot: Did We Make the Great Recession Worse Than It Had To Be?

NBTA Convention & Exposition | August 8-11, 2010

Findings:

• In 2009, industries cut T&E by about $4B more than was necessary to address falling sales during the Great Recession

• Consequently, total sales were nearly $26B less than they might have otherwise been

• Had the overshoot been avoided, T&E would have declined by 11.4% during the recession rather than the actual 12.7%

• $4B in T&E equates to about 66,000 jobs in the business travel industry and its supply chain

• $26B in total sales equates to about 135,000 jobs across all industries

Findings:

• In 2009, industries cut T&E by about $4B more than was necessary to address falling sales during the Great Recession

• Consequently, total sales were nearly $26B less than they might have otherwise been

• Had the overshoot been avoided, T&E would have declined by 11.4% during the recession rather than the actual 12.7%

• $4B in T&E equates to about 66,000 jobs in the business travel industry and its supply chain

• $26B in total sales equates to about 135,000 jobs across all industries

Quantifying the Overshoot: Did We Make the Great Recession Worse Than It Had To Be?

NBTA Convention & Exposition | August 8-11, 2010

The Great Recession would have been slightly less severe and the early 2010 recovery stronger w/o the hedge

The T&E Hedge Varies Slightly By Industry But Averages About 10%…

Resisting the tendency to overshoot,

Industry Sales could have been higher and T&E would still be in

line with recessionary

top-line revenue

Next Up: Company Level Analysis –Benchmarking T&E

2010 ROI Deeper Dive –Company Level Analysis*2010 ROI Deeper Dive –Company Level Analysis*

* Produced in partnership with NBTA Foundation and American Express Business Travel

Will the inclusion of 2009 results materially alter the original industry-level findings? How do recessions change the ROI picture?

Will the application of this approach on company-level numbers reveal a similar story?

Can we also include other critical company attributes –size, number of locations, global-v-local reach, sub-sector, corporate hierarchy…?

Can we incorporate a way for individual companies to compare their metrics to an applicable theoretical optimal?

End Game: Benchmarking Information to Assist Corporate & Travel Managers

2010 ROI Deeper Dive –Company Level Analysis*2010 ROI Deeper Dive –Company Level Analysis*

• Currently in process. Top line results to be released later this month• Based on data for 850+ public companies across a broad array of

sectors and representing all size classes• Similar approach as sectors but with more robust set of company-

specific data• Important step towards benchmarking capability

* Produced in partnership with NBTA Foundation and American Express Business Travel

Note: Air Spend Only

KEY TAKEAWAYS

The correlation between increasing T&E and rising sales is more than just anecdotal. Our analysis has both confirmed and measured the strength of their link.

Although varying by sector, most US industries under-spend on business travel –about $9B in 2009. Our model relates this to over $1trillion more in US sales, slightly more than what was lost during the Great Recession.

Recessions weaken the link between T&E and sales due, in large part, to management’s tendency to overshoot during times of uncertainty –by about 11% on average.

The hedge made the Great Recession slightly worse than it had to be. In 2009, the overshoot amounted to $3.7B in T&E relating to $26B in lost top-line sales.

The correlation between increasing T&E and rising sales is more than just anecdotal. Our analysis has both confirmed and measured the strength of their link.

Although varying by sector, most US industries under-spend on business travel –about $9B in 2009. Our model relates this to over $1trillion more in US sales, slightly more than what was lost during the Great Recession.

Recessions weaken the link between T&E and sales due, in large part, to management’s tendency to overshoot during times of uncertainty –by about 11% on average.

The hedge made the Great Recession slightly worse than it had to be. In 2009, the overshoot amounted to $3.7B in T&E relating to $26B in lost top-line sales.

KEY TAKEAWAYS

$3.7B in T&E equates to about 66,000 US jobs in the travel industry. $26B in foregone sales equates to over 135,000 jobs across all sectors.

The lingering hedge also hampers early recovery. In 2010, the model-estimated hedge totals over $650M correlating to $25B in much-needed top-line revenue. Is it time to remove the handcuffs?

Industry-level data confirms the link, but Company-level analysis will help to make our findings more prescriptive. Next up: public company analysis of T&E and top-line revenue.

End-game remains benchmarking information to help inform better travel management decisions and competitiveness

$3.7B in T&E equates to about 66,000 US jobs in the travel industry. $26B in foregone sales equates to over 135,000 jobs across all sectors.

The lingering hedge also hampers early recovery. In 2010, the model-estimated hedge totals over $650M correlating to $25B in much-needed top-line revenue. Is it time to remove the handcuffs?

Industry-level data confirms the link, but Company-level analysis will help to make our findings more prescriptive. Next up: public company analysis of T&E and top-line revenue.

End-game remains benchmarking information to help inform better travel management decisions and competitiveness

R E S E A R C H

Thank You!