Advanced Airline Sourcing

Transcription

1 Advanced Airline Sourcing Scott Gillespie Managing Partner tclara Travel Data Made Brighter August 2013 San Diego 2013 Scott Gillespie 1

2 About Scott Gillespie Leading expert on travel procurement, data analysis and Managed Travel 2.0 Managing Partner of tclara, an on-demand data analysis shop specializing in the travel category Author of a U.S. patent covering airline bid analysis Author, Gillespie s Guide to Travel+Procurement Founder and CEO of Travel Analytics, the industry s leading independent travel consultancy ( ) A.T Kearney s global expert on travel sourcing ( ) MBA, University of Chicago 2

3 Where we re headed Key concepts Assessing your supplier landscape The impact of the AA-US merger on airfares Building good scenarios Finding the best negotiating targets Analyzing your options Avoid these mistakes Q&A 3

4 Revenue Management Illustration Illustrative 100-seat Aircraft X 30 Seats $1,500 X 10 Seats X 100 Seats $900 X 20 Seats $1,200 $500 X 70 Seats $700 X 30 Seats $400 $300 X 40 Seats $50,000 $55,000 $72,000 4

5 Airfare Inventory Classes High prices help ensure last-minute availability Illustrative Low prices make planned trips more affordable Airfare Inventory Booking Classes Coach Cabin More Flexible Less Flexible Higher Quality Product Lower Quality Product 5

6 Fare Ladder Discount Implications Higher discounts Illustrative Low or no discounts Airfare Inventory Booking Classes 6

7 Standard Air Sourcing Data Fields Key Field: POS-CP-CR-BC Two Data Fields Each inscope country Nondirectional airport codes Trimmed from fare basis code. NOT Cabin Half a round trip, regardless of connections 7

8 TMCs are best for air sourcing data Most card data doesn t report Booking Class and One-Way Equivalent segment counts Expense reports get data from TMC or card >manual entries = worthless Data consolidation, scrubbing and normalization are still needed If your TMC cannot provide data in this format, get a better TMC 8

9 Lower prices! More market share! Airline sourcing made simple 9

10 Recognize a good deal 10

11 Q: Which is the better deal? A. 30% off F, C, Y, B and M in all markets served globally by United, or B. 10% 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 11

12 Fair Market Share (FMS), aka QSI or Quality of Service Index Measures neutral capacity, before price or brand loyalty Expressed as a percentage of the market, e.g., AA s FMS in DFW<>JFK is 54% (illustrative) Time periods, connections and direction can matter a lot 12

13 Fair Market Share Delta 100 seats a day Delta s FMS = 50% United s FMS = 50% (assumes wing-to-wing schedules) United 100 seats a day Airport A Airport B Fair Market Share is the airline s expected share of seats in a market, based on seats, schedules and routings 13

14 Fair Market Share Delta 100 seats a day Delta s FMS = 40% United s FMS = 40% Southwest = 20% Airport A United 100 seats a day Southwest 100 seats a day Airport B Less weight for connections, and for longer connections Connecting Airport 14

15 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? 15

16 Example of Alliance FMS Analysis Alliance Neutral Coverage of our FY 2012 Top 100 City Pairs 41% 25% 28% 6% oneworld Star SkyTeam None Source: tclara s FMS Engine, July 2013 Flight Schedules 16

17 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. 17

18 FMS Determines Airline s Scenario Status Primary, or Tier 1 Secondary, or Tier 2 Tertiary, or Tier 3 18

19 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 scenarios 19

20 Sample Scenario Results (Illustrated) Last year s Program Net Spend was $3,000K Scenario Scenario Total Net Spend Scenario Savings ($000s) DL s Net Spend ($000s) 1. DL/AF/KL, then Star 2, DL+AA, then UA+AC 2, Star, then DL+AA 2, Avoid DL 2,

21 Scenario Implications DL JV prefers No. 1 Buyer prefers No. 2 Scenario Scenario Total Net Spend Scenario Savings ($000s) DL s Net Spend ($000s) 1. DL/AF/KL, then Star 2, DL+AA, then UA+AC 2, Star, then DL+AA 2, Avoid DL 2, So, Delta, here are your options 21

22 Goals Matter, Too! We ll give you a 30% discount, so long as you give us 75% market share Two types of goal risk: Can you deliver 75%? (Unrealistic?) Have you promised more than 25% to any other airline? (Unachievable!). 22

23 Risky goals need attention Compare goal share to Historic Share Fair Market Share Scenario (projected) Share Identify overlapping goals (promising more than 100% share in a same market Negotiate for achievable goals, or take your risk of a reduced discount 23

24 Sample Scenario Results (Illustrated) Last year s Program Net Spend was $3,000K Scenario Scenari o Total Net Spend Scenario Savings (000s) 2. DL/AF/KL, then Star 2,940 $ DL+AA, then UA+AC 2,930 $ Star, then DL+AA 2,960 $ Avoid DL 2,970 $ Scenario Risk Score 24

25 Category (e.g., Air) Sourcing Options Map 1 2 High Risk 5 = Airline Supplier Scenario << Loss <<Reward >> Savings >> 25

26 Category (e.g., Air) Sourcing Options Map Risk = Airline Supplier Scenario 1 Apply Logical Elimination 2 3 High << Loss <<Reward >> Savings >> 26

27 Sourcing Options for CEOs Risk = Airline Supplier Scenario We recommend Option 6, but if you really want 7 High << Loss <<Reward >> Savings >> 27

28 Classic vs. Turbo Sourcing Classic RFP Seeks bids from all qualified airlines Willing to revamp preferred suppliers Share goals are negotiable Seeks more savings than Turbo. 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. 28

29 The Surprising Truth About Airline Discounts: Spend Doesn t Matter 29 29

30 Discount Drivers: Shift and Margin; NOT Volume Profit Contribution Cost to Serve $200K $1,000K Gross Best Case $500K Gross $100K Worst Case $400K $800K Source: Gillespie s Guide to Travel+Procurement Minimum Maximum Supplier s Revenue from an Account 30

31 What s the Maximum Discount? Profit Contribution Cost to Serve $1,000K Gross $100K Negotiable $500K Gross $100K Worst Case, NOT Negotiable $100K $400K Source: Gillespie s Guide to Travel+Procurement Worst Case $800K Minimum Maximum Supplier s Revenue from an Account Maximum Discount $100K Negotiable $1,000K Gross = 10% 31

32 Key Is To Increase The Min-Max Contribution Gap Profit Contribution Cost to Serve Source: Gillespie s Guide to Travel+Procurement Minimum Maximum Supplier s Revenue from an Account 32

33 Fare Ladder Discount Implications Higher discounts Illustrative Low or no discounts Airfare Inventory Booking Classes 33

34 Expected Profit Margin and Share Shift, NOT Spend, Drives Discounts More precisely, the credible threat or promise drives % Y Class Disct. Curve 34

35 Expected Profit Margin and Share Shift, NOT Spend, Drives Discounts More precisely, the credible threat or promise drives % J Class Disct. Curve Y Class Disct. Curve 35

36 Buyers control only one key variable: The ability to move share You ve offered 8%. We think we can move a lot more share. Weak Policy, No competition, Low margin fares Strong Policy, Strong competition, High margin fares 36

37 How will the AA-US merger affect our program? Oneworld will become our largest alliance by capacity Illustrative Pre-merger Post-merger Analysis of FY12 s top 500 global city pairs using tclara s July 2013 FMS engine 37

38 Research shows how airfares correspond to the number of carriers in a market Source: GSA City Pair YCA Fares as of April 2013, Scott Gillespie analysis 38

39 Profit margins decline as competition increases Source: GSA City Pair YCA Fares as of April 2013, Scott Gillespie analysis 39

40 Buyers should understand their exposure to higher post-merger airfares Illustrative Source: tclara Merger Exposure model 40

41 Then draw implications regarding discounts and airfares Illustrative Our discounts will likely shrink, while airfares will rise. Net impact: Cost increase of XX% 41

42 Airline Sourcing Mistakes to Avoid 42

43 Cramming the RFP process Here s your RFP. You have two weeks to respond Should be: Minimum 3 weeks for single point of sale Minimum 4 weeks for Alliance bids more if you need a bid from Air France during the summer 43

44 Over-estimating the procurement savings potential We should be able to save 10% by strategically sourcing our airlines Worse when a consultant says that, especially without looking at your deals Reality may be far different Victory might be minimizing the cost increase 44

45 Wandering around the Land of Stupid Statistics $257, +/-? Includes taxes? Leisure or Corporate? Which Cabin(s)? Booked how far in advance? 45

46 The Value of Benchmarking Diverse opinions of benchmarking s value Pricing comparisons among like-sized corporate contracts provides valuable feedback that can in fact highlight contract improvement opportunities. Matthew Patterson, CWT Air Solutions, 2010 Airline price benchmarks are crap. Scott Gillespie, ~2001 Issues include: True apples to apples comparisons Doesn t reveal share shift basis Timing of discounts and their associated jet fuel prices 46

47 De-coupling discounts from goals Some RFPs ask for discounts without their associated goals We ll talk about goals later Better: Show us how discounts change in return for more share shift 47

48 Failure to agree on realistic market share goals Unrealistic goals Buyer commits more share than practical Factors: Uses poor FMS baseline, overestimates traveler compliance Unachievable goals Overcommits to 2+ carriers, e.g. promises each 60% market share 48

49 Fare Mix, Discounts and NER, WAD (Net Effective Rate, a.k.a. Weighted Average Discount) Fare mix is key to calculating discounts Historic fare mix determines the spend-weighted Net Effective Rate 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% Net Effective Rate = 13.0% 49

50 Buyer and Airline must use same fare mix Airlines may use an expected or new fare mix Impossible to guarantee availability. Share of Spend Booked Fare Class Discount Net Eff. Rate 10% J 30% 3.0% 5% Y 0% 0.0% 55% M 20% 11.0% 30% T 0% 0.0% New Net Effective Rate = 14.0% Old Net Effective Rate = 13.0% 50

51 Alliance doesn t mean common pricing Delta AirFrance-KLM JV Partners in TATL, share profits Alitalia Czech Korean Aeromexico Kenya Airlines Have US ATI, pricing authority Aerolineas Argentina Aeroflot Air Europa China Airlines China Eastern China Southern Middle East Airlines Saudia TAROM Vietnam Airlines Xiamen Air SkyTeam Alliance Members Single point of contact for contracting, but no price control 51 51

52 All City Pairs Don t boil the ocean. Focus your negotiations on healthy markets With good margins And significant volumes Where you can move share 52

53 In Summary Understand Fair Market Share Use scenario modeling Use realistic market share goals and option maps Spend doesn t drive discounts share shift and profit margins drive discounts Expect higher airfares and smaller discounts in AA-US non-stop and one-stop markets Avoid making typical air sourcing mistakes 53

54 Thank You! Scott Gillespie (O) Gillespie s Guide to Travel+Procurement Active on LinkedIn 54