NBTA Convention & Exposition | August 8-11, 2010
Houston, Texas
Travel Procurement
Workshop
Scott Gillespie
Author
Gillespie’s Guide to Travel+Procurement
NBTA Convention & Exposition | August 8-11, 2010
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MODERN
AIRLINE
SOURCING
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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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Fair Market Share (FMS)
• A.k.a. QSI, or neutral share, or share of lift
• Best estimate of carrier’s 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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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
Discount
Net Eff.
Rate
10%
20%
J
Y
30%
20%
3.0%
4.0%
40%
30%
M
T
15%
0%
6.0%
0.0%
Net Effective Rate =
13.0%
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Fare Mix Issues
Buyers use historic fare mix data
Airlines may use non-historic fare mixes when
bidding
• Buyer’s calculation of Net Effective Rate, and
savings, will differ from airline’s
No practical way to guarantee inventory availability
– or the future fare mix
• Standard practice is to use last year’s fare mix
• But check with each airline!
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Spend at Fair Market Share
Airline Supplier Map
$3.0 MM
DL
Primary, or Tier 1
AA
Secondary, or Tier 2
UA
US AC
Tertiary, or Tier 3
$0.0
Very Low
Ability to Move Share
Very High
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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 carrier shares and buyer’s
savings for each scenario
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scenario modeling
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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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Buyers Focus on Scenario Savings
Last year’s net program spend
- Scenario’s projected net spend
= Scenario Savings
Weaknesses:
• Uses last year’s published fares and
last year’s fare mix
• ** Understates savings when fares fall
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Sample Scenario Results (Illustrated)
Last year’s Program Net Spend was $3,000K
Scenario
Scenario Scenario
Total Net Savings
Spend
($000s)
DL’s Net
Spend
($000s)
1. DL, then Star
2,950
50
700
2. DL/AF/KL, then Star
3. DL+AA, then UA+AC
4. Star, then DL+AA
5. Avoid DL
2,940
2,930
2,960
2,970
60
70
40
30
600
400
300
200
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Scenario Implications
DL prefers No. 1
Buyer prefers No. 3
SkyTeam prefers No. 2
Scenario
Scenario Scenario
Total Net Savings
Spend
($000s)
DL’s Net
Spend
($000s)
1. DL, then Star
2,950
50
700
2. DL/AF/KL, then Star
3. DL+AA, then UA+AC
4. Star, then DL+AA
5. Avoid DL
2,940
2,930
2,960
2,970
60
70
40
30
600
400
300
200
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Hotel
Clusters
101
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How should you group hotels for negotiations?
Distance between hotels Artificial boundaries:
matters a lot
•State borders
You want to group hotels
•City borders
into actionable markets
- Small enough to •Zip Codes
be create valid
competition
- Regardless of
artificial boundaries
NBTA Convention & Exposition | August 8-11, 2010
•“Midtown”, “Downtown”
•“Near Airport”
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Clusters are actionable markets
• Clusters are small areas, maybe 1-3 miles in
diameter
• Clusters are built around your program’s highstay 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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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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Slide 1 detail (Arial 44)
NBTA Convention & Exposition | August 8-11, 2010
Houston, TexasFrom a Hotel Usage Map…
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Slide 1 detail (Arial 44)
NBTA Convention & Exposition | August 8-11, 2010
To Hotel Clusters
Houston, Texas
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Slide 1 detail (Arial 44)
NBTA Convention & Exposition | August 8-11, 2010
Houston, Texas Including Unused Hotels
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Modern
Hotel Sourcing
NBTA Convention & Exposition | August 8-11, 2010
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Hotel Sourcing’s Typical Annual Cycle
Summer
Data
Collection
NBTA Convention & Exposition | August 8-11, 2010
Fall / Winter
RFP
Winter >>>
Implement
& Manage
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The Missing Step: Sourcing Strategy
Summer
Data
Collection
NBTA Convention & Exposition | August 8-11, 2010
Summer
Sourcing
Strategy
Fall / Winter
RFP
Winter >>>
Implement
& Manage
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Strategy Study’s 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 management’s appetite for savings
and change
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Socialize with Senior Management
=
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Clusters Create Meaningful Insights
Which clusters
need more
Which clusters
preferred
have
hotels?
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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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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What’s 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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Some Key Metrics
Spend Under Contract
Average Discount
$2.0 million (80%)
x 20%
Negotiated Savings
$0.4 million
Average Booked Rate
$143
Average Hotel Quality
3.7 stars
Total Hotel Spend
$2.5 M
-22% YoY
-10% YoY
-30% YoY
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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
Travel Managers
are expected to
influence most of
these factors
Room availability
Local market conditions
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Chain
Fitting
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If you had $1 million in spend in these
secondary markets…
Tacoma
Tampa
Toledo
Topeka
…Which hotel chain
gives you the best
coverage?
Tucson
Tulsa
NBTA Convention & Exposition | August 8-11, 2010
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Scenario
Option
Risk Score
Quality
Policy Mgmt.
Relationship
Strategic Value
NBTA Convention & Exposition | August 8-11, 2010
Expected
Savings
Discount or
New Price
X
Projected
Spend
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“Well, let’s look at our
historic spend by chain”
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Evaluate chain-wide deals on Neutral
Share – not just Actual Share
Share of beds in the
selected clusters
Strong Candidates!
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Know which
chains
best fit
your
program
NBTA Convention & Exposition | August 8-11, 2010
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