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Duty of Care and Duty of Loyalty

Duty of Care is the idea that Corporations are responsible for the security of their employees during travel and when engaged in activities that support the company’s interests. The European Union’s Duty of Care Act is the most prominent regulation in Europe to codify this requirement. The EU spells out how companies should behave regarding employee safety and security, but the United Kingdom took this a step further with the UK Manslaughter Act that allows companies to be held criminally liable for harm that come to their employees. The regulation applies to UK employees abroad, or the non-UK Company employees while they are in the UK to conduct business. These regulations jump-started the Duty of Care industry in Europe and North American Corporations are still playing catch-up.

Duty of Care describes the set of behaviors, planning, and actions companies must take to safeguard their employees. Duty of Loyalty is the concept of employee compliance with their employers’ efforts on their behalf. If a company makes a car service available, or requires employees to meet minimum safety guidelines, Duty of Loyalty is the force that compels an employee to meet those standards. Companies that go out of their way to create a high quality of life for during employee travel and are proactive about serving travelers on the road will generate much higher loyalty. Companies undermine their employees loyalty through cumbersome or overly-restrictive policies and should strive to strike a balance that rewards loyal behavior while not driving the employee to another company.

Risk Management Travel Management
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Do You Know How to Maximize Hotel Savings?

Lanyon does. They’re the de facto market leader for hotel program management, and the white-label tool behind several travel management companies’ hotel sourcing solutions. Mike Boult and his team just released a brief, information-rich, white paper to help you optimize savings from your hotel rates. Your 2012 room rates may sunset before 2013 pricing is available. The biggest gap in most hotel program is auditing rates after they’ve been approved. Trust but verify – and Lanyon’s tools can automate that for you. Check out their new paper here.

Travel Management
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Loyalty Programs that Work

Background

Contemporary loyalty programs generate power by transforming dreams into action. The Marina Bay Sands hotel pictured above epitomizes the aspirational destinations customers enjoy through participation in a travel loyalty program. Great loyalty programs inspire customers to choose the host company even when less expensive alternatives exist. So when the search for profitable customers drives you to create a loyalty program, here is how to do it right.

There isn’t a single recipe, but certain ingredients are known to taste better and every compromise you make to the set of principles outlined here will reduce the number of people you can influence. When applied carefully these principles will improve customer engagement and lead to higher profits and lower costs. Exceptional loyalty programs offer meaningful value. That value is accrued seamlessly without obstacles. Great programs are transparent and customers understand them intuitively; they eliminate friction at every turn.

Loyalty is measured by the number of customers you inspire to select you over and over again. Loyal customers spend more than average customers, they do it more frequently, and they’re more likely to stick with you after a bad experience. Your Customer Relationship Management team has segmented your customers thoroughly and you know how much your best customers are worth, and numerous white-papers and empirical research conclude loyal customers are responsible for a disproportionate share of business profits. But how do you inspire customers to remain loyal? More importantly, how do you convert ‘good’ customers to behave more like your most profitable, loyal disciples?

To answer those questions and for a thorough understanding of the loyalty space its worth exploring consumer and business loyalty programs including American Airlines’ AAdvantage program, Delta’s Skymiles, the Citibank AAdvantage credit card, Capital One cards, Starwood Preferred Guest for Business, Starbucks Rewards, and a host of business-to-business programs designed to engineer loyalty or drive customer retention. I’ll focus on travel industry programs and a few non-travel schemes.

History

Loyalty programs have spread to include everything from hotels, rental cars, sandwiches, haircuts, oil changes, and home mortgages. Many of the largest programs allow customers to transact with partners on both sides – earn and burn. Before Capital One credit cards, AAdvantage Miles and AMEX Rewards Points, companies rewarded consumers with “green stamps” from Sperry and Hutchinson (S&H). Greenstamps were literally stamps awarded to customers at the point of sale for a variety of behaviors. They started in 1896 and continued through the mid 1980’s. Retailers, supermarkets and other retailers purchased “Greenstamps” from S&H to issue to their customers and once the customer accumulated enough stamps they would redeem them for products from an S&H catalog. At their peak in the 1960’s S&H’s reward catalogs were the most widely distributed publication in the United States, while they issued more than three times as many stamps as the US Postal Service.

SH-green-stamps

By 1978 competition following deregulation of the airline industry and the widespread use of more powerful computers supported expansions in airlines’ sales and marketing programs. In 1981 American Airlines launched the AAdvantage frequent flyer program (followed closely by United Airlines) and a few years later added a co-branded credit card product with Citibank. The frequent flyer program gave people a chance to accumulate credits quickly, while the Citibank AAdvantage card offered another way for less well-traveled consumers to enjoy the benefits of cheap flights. Throughout its history, American’s AAdvantage program had the highest enrollment and member participation rates among frequent flyer programs and loyalty credit cards. Over the past decade American’s partners have purchased more than $1 billion annually to distribute across 50 million members making AAdvantage one of the most influential contemporary consumer loyalty programs. Mergers have driven Delta’s Skymiles and United’s Mileage Plus programs ahead recently, while global alliances including Oneworld, Skyteam and the Star Alliance expand program reach to customers who may never step foot on a US or European owned aircraft.

Airlines operate ‘anchor’ programs that drive scale and reach that few retailers can match (McDonald’s and Starbucks are notable exceptions). The most successful travel programs have powerful, exclusive relationships with consumer banks. Those banking relationships are driving the next wave of business-to-business loyalty programs and the future looks bright.

Value Proposition

Loyalty programs must be meaningful – the accrued value must be worth managing. Customers must be able to calculate value intuitively. Earning behavior must be easy to describe, easily understood, and programs should give credit for wide-ranging transactions, not just a narrow band of profitable behavior. This is distilled to Simple, Seamless, and Comprehensive.

Global Airlines run the largest programs and typically offer a free domestic coach ticket for 25,000 flown miles. An average round trip is 2,500 miles, so travelers generate 10% of the award value from each trip. That’s a good value trade-off. Travelers who also spend $25,000 on an airline credit card have an easy way to earn two award tickets every year.

Effective loyalty programs drive customer behavior. They reward profitable behavior – they are structured to generate more frequent, higher value business from program participants. So why doesn’t everyone join your program? A look at the airlines reveals that about 50% of all passengers do not belong to the airline’s program. Customers participate in programs that are personally relevant. The public is inundated with offers to join various programs, but they will not participate unless they’re offered enough value to justify wallet-space. Marginal Airline offers end up in the trash while a favorite restaurant makes the cut by offering a free entrée every tenth trip.

Currency

Currency choice matters – it must be intuitive and the average customer should be able to calculate the currency’s value and identify the activity or behavior required to earn common awards. Consumers get it when their barber issues a card that requires ten visits to earn a free haircut. Simple, seamless, comprehensive.

The earliest airline programs called their currency ‘miles.’ Miles are intuitive – when a traveler flies between New York and Los Angeles – they’ll earn one mile of currency for each mile in the air. That’s 2,472 miles each direction in this example. Miles are the basic building block – they’re analogous to a penny. Once you ‘earn’ 25,000 mile you can redeem them for a free coach ticket (treating miles like pennies is equivalent to $250 value). Loyalty credit cards lean towards ‘Points’ and a typical value is one ‘point’ for every dollar spent. The pure credit card programs often offer travel awards as a redemption option so a currency that converts easily to ‘miles’ makes it simple for most consumers to adopt the ‘point’ system and it gives them confidence about an already well-understood earn and burn structure. In the largest programs points and miles are equivalent and fungible – it’s like a foreign exchange system, you can often trade airline miles for the same number of hotel points.

In recent years other airlines, particularly the low cost carriers adopted segment based currencies – Southwest Airlines Rapid Rewards famously offered a free round trip ticket every time a customer flew sixteen segments. It’s easy, but customers could earn a ticket after purchasing just three trips if the routing required double connections (three segments each way). The other end of that spectrum is the customer who bought eight round-trip tickets for non-stop flights before earning the free ticket.

Southwest’s program didn’t seem equitable, so Southwest updated Rapid Rewards to issue ‘points’ based on two variables – the type of ticket and the price. Now customers earn six points for every dollar spent on Southwest’s “wanna get away” leisure fares, while it takes 6,000 points to ‘buy’ the same type of ticket. A quick calculation reveals free tickets are available after spending just $1,000. It’s a good system, but it leaves program players shaking their heads to calculate earn and burn values quickly – members need to read their statements carefully.

Companies that offer separate programs for consumers and businesses should think twice before they create parallel currency and banking systems for each type of customer. Specifically, many domestic airlines offer consumers mileage-based currency through their frequent flyer program, while offering companies a spend-based, point currency in their business rewards program. A review of award menus at United and American reveals similar awards are offered through each program, but the redundant systems increase costs and management workload.

An example on the hotel side can be found in Starwood Preferred Business (SPB) program; SPB is integrated with Starwood’s Preferred Guest program and can be managed in parallel and through the same systems – this arrangement reduces the cost and eliminates currency confusion since both programs payout in similar fashion – the traveler accrues points in their individual program, while their employer accrues points in the Starwood business program. This co-mingling makes it easy on the front-desk staff too and the entire company is aligned with the program messaging.

Companies can manipulate value on both sides of the ‘earn and burn’ equation, so consumers need to be familiar with program rules on both sides – the less fine print the better. And don’t neglect cash controls – management often overlooks the cash value of their awards or loyalty currency. Robust controls must be implemented to ensure employees don’t have the ability to give points or awards away without comprehensive tracking and reporting.

Awards

Give ‘em what they want! If you sell widgets because people value them, it goes without saying that widgets should be on the award menu. In fact, your award menu should include ‘starter’ widgets, widget covers, widget ‘bonus-packs’ all the way to up ‘premium’ widgets. Airline awards begin with highly restricted, long advance purchase, mid-week, domestic, coach tickets, and move up to last-minute, international first-class, around-the-world fares. A collection of ancillary benefits are available too – including lounge passes, upgrades, cash plus program credit, reduced fees and other special awards. All priced in loyalty currency.

Hotel award menu’s include rooms, upgrades, all priced in ‘point-based’ currencies tied to spend and room-nights. Another popular option for larger hotel programs allows point transfers into airline miles.

“Earn and Burn”

Program participation must be simple, seamless, and comprehensive.  Loyalty program members should be able to attach their membership numbers or customer identification to their transactions easily. Their purchases should be tied to online profiles or a barcode or a RFID membership card. Companies should take action so members don’t need to remember their member numbers and, if they do need to remember them, companies should create as many opportunities as possible to add the number throughout the purchase or use process. Effective programs make it easy to claim credit long after the purchase.

Avoid obstacles that reduce participation. Awards must be meaningful to the customer – in its simplest form awards should have the following qualities:

  1. Meaningful
  2. Easy to earn
  3. Easy to burn
  4. Supported by seamless customer service
  5. Common currency
  6. Multiple award levels
  7. Bonus structure with point multipliers
  8. Relevant partners

Customer Service

Same rules – simple, seamless, comprehensive. Most common requests – 1. provide ‘earn’ credit; 2. Reset account access; 3. Merge accounts ; 4. Provide enrollment support; 5. Provide redemption support (complicated program rules will drive these requests up). Companies should acknowledge that customers want to communicate in different ways (phone, email, and text) and should offer customer service through common channels. If your program can’t support a live 24/7 operation, at least provide self-help online and find a way to show customers you appreciate their business.

Promotions and acquisition campaigns 

Collect the low-hanging fruit – that means a laser focus on your existing customers before you move on to new or potential customers. Advertise your unique value proposition, currency and program rules to your existing customers with your existing marketing and communication channels. As enrollments begin to climb study your data to determine characteristics your most profitable customers share and seek out non-customer populations that exhibit the same qualities or behaviors. Future campaigns should target those potential customers and develop creative A-B test groups to hone your marketing skills and test intuition about your customers. Enrollment offers should include ‘seed’ points or miles to jumpstart member participation. Follow-up campaigns should segment customers in meaningful ways including a group that have earned enough points for basic awards, but have never redeemed points or miles. The possibilities are endless, but a careful approach that combines your industry knowledge with insight about your most profitable customers will yield the best results.

Common sense and the desire to limit liability suggest acquisition offers should be richer in competitive markets, and lower  where the host has higher market share. Targeted offers and A-B tests may require you to use a promotion code system (one-time use codes are recommended to prevent wide distribution via the Web). Before you get too far down this path it’s instructive to educate yourself about ways promotions can go wrong so here’s a great Website you should spend some time on to avoid making similar mistakes.

Conclusion

This is just a glimpse into the loyalty cook book – these programs are important tools to manage the relationship between companies and their best customers. Done well,  thoughtful programs can give you an edge and drive bottom-line performance. Use this simple guide to create a solid framework as you invent your own program and embrace ideas from successful programs across multiple industries. Finally, ask yourself why programs and their components work and what conditions exist that drive customers to participate in them? Answer those questions and you’ll understand new ways to achieve better results.

Coaching Sales & Marketing Travel Management
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Profit From Foreign Exchange Rates

The value of goods and services may remain steady, but the cost depends on the currency they are priced in. Specifically, a hotel room in Europe listed for €130 would cost an American buyer $165 today, while a European booking a hotel in Chicago for $130 would pay slightly more than €102 at current exchange rates.

Consider that the Euro was designed to lock or peg exchange rates between member countries when it launched on January 1, 1999. The single Euro-area currency eliminated more than a dozen local currencies and provided transparency across Europe as people in many countries were better able to compare the value of their Euro’s in any participating country (the British are noticeably absent and trade between the island nation and the continent must still be converted in or out of British Pounds). The new currency closed at 1.19 Euros to the USD on its launch, but within twelve months had fallen to 1:1. That triggered a crisis that only abated after the Euro reached a low of 82¢ in late 2000. In 21 months the Euro lost a third of its value, a striking decline. I had just started a new job and was tasked with designing exchange rate collars for consumer financial products offered in international markets. That experience replaced the history and theory I’d been taught with a ringside view of the real-world destruction foreign exchange rate fluctuations can have on a business. I’ve paid careful attention ever since and I’m never surprised by how few people understand what these fluctuations can do. Seven years later, in March 2008, the Euro reached a high 1.578USD – almost a 100% gain from the earlier low.

Forex isn’t just for quant’s in the corporate treasurer’s office. Foreign exchange rate observations should be on every international marketing professional’s list of things to pay attention to. Here’s the short version – businesses should promote their products in places where their currency is cheap and pull back where or when their currency is expensive. Specifically, the US airlines should have promoted travel to Europe from January 2000 through 2002 to residents in North America. Leading up to Euro peak in March 2008 and even after a modest decline US and foreign flag carriers should have promoted travel to the US to take advantage of the Euro’s high value against the USD.

So what happens to revenue and profits? Most companies report their earnings in their home country currency – so when the Euro was cheap in 2000-2002 US airlines and hotels would have lost money on sales made in Europe. Hotels offer a good example. Assume Hyatt, based in Chicago, offered rooms in Europe for €130 at the low. That room in Paris, or Frankfurt would have contributed $106 in revenue. Conversely, the same €130 room converted at the Euro high in 2008 would have contributed $205 to Hyatt’s revenue. Same room, same price, very different result – remember the Euro appreciated almost 100% over seven years.

Where are we today? The Euro traded last week at $1.28, an eight percent increase in a few months, but the longer term trend has been down. Pressure from insolvency in Greece, Spain, Ireland, and Italy is mounting. As the European Central Bank implements measures to solve the crisis, it will add downward pressure to the Euro currency value. Barring civil unrest to protest against local austerity measures, travel companies should advertise the relative values in Europe to travelers from the Western Hemisphere. A quick look at the sources of financial tension in many countries, especially youth unemployment rates, leads me to conclude that trip insurance for business or leisure travel is a good idea too. The key takeaway is that Europe is on sale and will remain that way for the foreseeable future.

About the author. Paul Laherty is passionate about problem solving. He led the Americas Air and Hotel consulting teams at Advito, a travel management consulting company. Paul also managed teams in Sales, Marketing and Finance at American Airlines. His work at AA included supervising the global corporate contract team, working closely with large customers in Global Sales, and  managing the Los Angeles sales team where he met some very well-known customers. Paul managed American’s business loyalty program and he launched a loyalty credit card with American Express. He enjoys applying original research (he calls it Phynancial Fisics) to solve problems. Paul lives in Southlake, Texas with his wife and two daughters and flies a Cherokee 140 as often as time allows. He is active on Linkedin where you can view his detailed profile here:http://www.linkedin.com/in/paullaherty, follow him on twitter @Paul_Laherty or send questions to paul.laherty@gmail.com.

Sales & Marketing Travel Management
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Pick a winner – Yield beats Average Ticket Price

Winners play the odds. During a recent discussion with a friend of mine who is the Travel Manager for a large corporation we agreed that yield is a superior metric. Naturally the next topic was how do you explain it to people?

Simple – Yield is more flexible and offers more information faster.

Average Ticket Prices (ATP) should only be used to evaluate pricing or cost performance in a single market. Ticket prices can be used to compare airlines against one another in one Origin and Destination (O&D) market or for timescale comparisons on a route (y-o-y / qtr-o-qtr / m-o-m). Average Ticket Prices should not be used to compare aggregated markets. An example would be the average price between Boston and several European cities: London, Paris, Frankfurt. You could show the 2012 ATP is $2,300, while in 2011 it was $2,000 – a 15% increase, but you still need to break it down. What if the ATP is driven by increases in the London market, while the Frankfurt and Paris markets declined. On a absolute basis, the London flight might still be cheaper than the longer flights to Paris or Frankfurt. Average Ticket Price comparisons require more anchors – you need to be familiar with far more prices and it still doesn’t give you enough information to know if your preferred carriers are offering a good deal. In this case, the change (increase or decrease) is the meaningful number not the price.

Yield is superior to average ticket price because it allows meaningful comparisons between O&D’s of different lengths and it produces fewer decision errors when markets are grouped.  Yield is the primary metric PRISM users apply to market strategies since it  reduces the number of marginal flights when you’re evaluating a large data-set. Specifically, average ticket price (ATP) is very sensitive to context (cabin and distance), while yield is less sensitive to distance since the number is derived by dividing the ATP by the flight’s distance. In domestic terms once a sales manager removes East coast shuttle markets (the bulk of those marginal, yield-skewed flights), it’s much easier to build a US domestic to domestic term and assign reasonable share goals. Like ATP, Yield comparisons should be reported at the cabin level since there will be large differences across cabins.

An example. A yield comparison between Boston->London and Boston->Paris might show both markets ‘cost’ $.60 per mile for business class, while the coach fare was $.25 per mile. Given the same yield, the Average Ticket Prices between both cities would be higher on the longer haul market – Paris. Therefore, it’s yield that shows you quickly that you have equitable contracts – not price.

I still like Average Ticket Prices, I just don’t think they win as often.

Aviation Travel Management
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The Power of PRISM

The Power of PRISM.

PRISM-Group has established itself as the de facto standard for consolidated corporate airline spend. Airlines have grown dependant on Prism’s reports since they provide an actionable level of detail about the airlines’ sales performance. The standard Contract Qualification Analysis and Contract Term Analysis reports dominate airlines’ customer reviews, and sophisticated customers can learn how to manage their program more effectively with them. This article will walk you through the power and value Prism reporting puts into airlines’ managers hands, and offers insights about how Travel Managers can use the data too.

Airlines exchange discounts for higher share from clients – that quid pro quo forms the basis for a managed travel relationship with their corporate partners. It’s an easy exercise for Airlines to determine how much share or revenue a particular customer delivers. But without PRISM Airline managers were in the dark about how customers performed for other suppliers. Here’s an example: in the crowded trans-continental market between LAX and JFK, American has dominated for over fifteen years with the only three-class, wide-body aircraft. Today a client can fly transcon, non-stop, on AA, United, Delta, JetBlue, or Virgin America. Since DL’s market share is about 20%, a customer who spends $1MM would need to spend $200K on DL to achieve ‘fair market share.’ In the past, carriers relied on booking reports from the corporations’ travel agencies to determine total spend. It was fairly easy to manipulate the picture given to airlines by excluding reports from divisions that supported other preferred carriers. In the transcon example a corporation or lead agency would provide a report that summed to $300K on Delta (a 50% share premium above the $200K required for fair share), and $300K on other carriers. Delta is happy – they’re earning half the customer’s business and have a 50% share premium in the market since they only ‘see’ $600K. Unfortunately, another preferred carrier receives a similar report showing Delta’s performance, but also a second report from the VIP agency that accounts for the missing $400K – and if 95% of that spend and the bulk of the other $300K from the report to Delta would actually sum to about $700K. That reveals a situation where Delta is a secondary carrier and another preferred actually earned far more than a 50% share premium.

Trust is an important ingredient in any relationship – in a world without PRISM it was in short supply. Airline account managers spent considerable time performing due diligence on the self-reported data used to calculate travel agency commissions and airline rebates and performance. Airlines had entire departments dedicated to audit reports and they sent a steady stream of email and faxes to field sales managers directing them to verify data. The transcon example is extreme, but it could happen through careless reporting or by design, and the possibility alone was enough to keep airlines on guard against manipulation.

PRISM changed that and delivered transparency and simplicity to a formerly cumbersome, error-prone process. PRISM acts as a data clearing house – and the more airlines that rely on it, the more accurate the information becomes for all airlines. Prism created a positive feedback loop for data integrity. Now travel agencies send their reports directly to PRISM for evaluation and airlines gain visibility on their true share and how ‘other’ carriers are performing for the same corporate customer.

PRISM reporting primer.

Prism reports allow airline sales managers to investigate Origin and Destination performance by cabin, by fare basis, and even display the average ticket price or yield for ‘other’ carriers (their competitors aggregated data). For the first time an airline could determine if price was really the driving force behind lost share or uncover other possible causes.

Another terrific feature that benefits airlines and travel managers alike is the ability to run contract performance reports by travel agency. Travel programs that use multiple travel management companies have a way to compare their agencies compliance with the corporation’s business rules. Simply run PRISM reports and isolate the agency. This is especially helpful to identify performance drivers in International markets. For example, in the Paris<>New York market travelers are supported by agencies on two continents and it’s likely that each agency has different incentives that conflict with their responsibility to their corporate customer. Different decisions at each agency might lead to very different outcomes when viewed in the context of support to preferred carriers. Simply put, a Paris-based agency is more likely to support Air France, while a US based agency will support Delta. That’s probably harmless if SkyTeam has a metal-neutral view of the relationship, but it could be harmful to the corporate customer if their US agency is supporting the Star Alliance. The sum of the parts matter – skilled travel management teams will ensure that over-performance in one area doesn’t compensate for under-performance somewhere else. The best programs will align the entire team to support their policies and drive contract performance to maintain or enhance industry leading discounts from their travel suppliers.

In a previous article I described how important yield is to the travel management teams as a corporate performance metric here. Yield is the primary metric PRISM users apply to market strategies. It’s superior to average ticket price because it reduces the number of marginal flights when you’re evaluating a large data-set. Specifically, average ticket price (ATP) is very sensitive to context (cabin and distance), while yield is less sensitive to distance since the number is derived by dividing the ATP by the flight’s distance. Once a sales manager removes East coast shuttle markets (the bulk of those marginal, yield-skewed flights), it’s much easier to build a US domestic to domestic term and assign reasonable share goals.

Contract strategy.

PRISM makes it very easy to create airline offers for corporate customers – particularly since every flight may only be assigned to one term. The most simple contract form would contain a single term: all flights, and a corresponding share goal: 50% (PRISM also allows goals to be measured by revenue or share of flights). The next logical division would be the addition of a separate International term. Still another term would isolate the shuttle markets (BOS<>LGA, BOS<>WAS,LGA<>WAS). So far, this isn’t very fancy, but it’s manageable.

The dominant US Carriers need to prevent margin erosion in markets they own, and only pay for the most competitive markets (without losing money). The most effective way to do this is to create terms that segment markets based on relative dominance. Essentially, flights to and from fortress hubs should receive little to no discount, while focus cities would earn moderate discounts, and competitive spoke cities would achieve the highest possible discounts. Additionally, a second variable, fare basis code would be layered on top of this too – no point paying a rich discount for a deeply discounted ticket out of LAX when they could sell the same ticket through their website. Add in a few international terms, some Alliance terms, train service in Europe, terms to price departures by the day of week and different points of sale or points of origin and your  sales manager has created a whopping 75 term, 120 page contract. Multiply that by twenty carriers in a program and suddenly corporate airline travel managers have 1,500 pages of detailed contract language to support (airlines should be cautious here).

PRISM has changed the business.

Even with the endless strategies – hubs, spokes, focus-cities, market groups, cabin, fare-basis, tiers by frequency, country, day of week, static or dynamic share goals, revenue or share of flights – network airlines face the same dilemmas that plague smaller, start-up carriers. How do you extract more revenue from a customer that repeatedly misses their share goals? Those goals were established to reward the client for additional share, but in cases where an airline is negotiating with a multi-national corporation carriers have little choice but to offer rich incentives just to maintain their fair share. Consider a situation where a large bank has offices in London, Frankfurt, Hong Kong, New York, Tokyo and Singapore. Which carriers or alliances are likely to earn a preferred status? It’s difficult to determine, but assuming an equal distribution in the traffic patterns flowing between these cities, it’s very likely that the travel management team would like to participate with all three major global alliances to maximize traveler flexibility and retain world-class pricing in as many non-stop markets as possible.

An example. Assume the travel policy allows business-class for any over-water segment, and first-class for any flight over seven hours. Carriers with two cabins will be passed over for those with a traditional three-class cabin on the longest haul flights. Additionally, it’s not hard to imagine that at least one Alliance would offer discounts >50% off of published fares. This forces the non-preferred alliance to offer >35%~40% just to remain on the shelf. This is catch 22 for vendors. It’s extremely difficult to earn preferred carrier status when travel committees and travelers are unfamiliar with the products, and VIP agents have not yet established trusting relationships with the hopeful vendor’s support staff. Unfortunately, a 40% discount that achieves less than fair share places constant pressure on the Airline’s sales leadership and account teams.

Based on the numbers its very likely that the industry’s best path forward is to decline to offer discounts to large customers that will not perform to fair market share (FMS). This problem is similar to OPEC and the cartel’s attempts to extract higher prices for oil. Too frequently at least one participant cheats and drives prices down. The same is true in the corporate discount world – airlines have a strong incentive to remain connected to customers who may never choose them, but would happily accept a discount. Any carrier or alliance that didn’t achieve FMS would enhance their competitors’ position by enforcing discipline and only carrying passengers who paid the published fares. Over time, this behavior would reduce the need to offer the rich discounts offered today. In the long run, consolidation will improve this situation for carriers, and shift the profit burdens to their corporate customers.

PRISM-Group provides many ways for airlines to measure their decisions, uncover competitors’ strategies, and discover how customers’ behaviors change. Prism gives airlines confidence that didn’t exist before – they’re here to stay.

Paul Laherty is passionate about Travel Management. Paul has led the Americas Air and Hotel consulting teams at Advito, BCD’s travel management consulting company. Prior to Advito he managed teams in Sales, Marketing and Finance at American Airlines. Paul’s work at AA included supervising the global corporate contract team, working closely with large customers in Global Sales, and he managed the Los Angeles sales team where he met some very well-known customers. He also has extensive experience in loyalty marketing, both business-to-business, and consumer. Paul managed American’s business loyalty program and he launched a loyalty credit card with American Express. He enjoys applying original research (he calls it Phynancial Fisics) to solve problems. Paul lives in Southlake, Texas with his wife and two daughters and flies a Cherokee 140 as often as time allows. He is active on Linkedin where you can view his detailed profile here: http://www.linkedin.com/in/paullaherty, follow him on twitter @Paul_Laherty or send questions to paul.laherty@gmail.com.

Travel Management
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PRISM is a great match for Sabre…

The day after Sabre announced their purchase of the PRISM-Group, fund manager and author, @JamesGRickards tweeted, “Difference in traders& economists is traders are not in a ceteris paribus world.” That’s true for Sabre too. Scott Gillespie shared his views in the Beat earlier this week, so I’ll take  a different direction.

Sabre will add PRISM to their product suite as part of Sabre’s Airline Solutions portfolio. This makes sense since PRISM is the de facto standard in airline sales reporting and Sabre’s current offerings include many go-to products for airlines and airports. The combination creates two challenges that didn’t exist before so it will be interesting to watch how Sabre reacts to these.

First, PRISM offers a unique, stand-alone software tool that drives premium ‘value’ pricing from airline customers. The tool is still fantastic and incredibly powerful, but there’s a risk their premium will be sprayed across a product buffet as PRISM is absorbed by Sabre’s Airline Solutions group. Many acquisitions have generated this kind of problem, so I trust it’s well-traveled ground Sabre has a solid plan for – and frankly, PRISM gives Sabre more power when it comes to GDS negotiations.

The second issue might be more surprising. As an independent company, PRISM’s data relies on free reports from corporations’ Travel Agencies. PRISM’s customers, Airlines, require their corporate customers’ Agencies of Record to provide reporting to PRISM. Data management and reporting is integral to Travel Management Companies (TMC’s) daily activities and is a necessary component of their client offerings. However, PRISM reports feed airline systems, not TMC’s client reports and PRISM has driven costs up for the TMC’s. Since there wasn’t a good way to push the reporting cost back to the corporate customer it has just been an accepted cost of doing business. Until now. Many travel agencies are also Sabre customers, and PRISM, and specifically the recurring costs associated with preparing PRISM reports, will now be part of the conversation.

This is a great match between two solid companies – it will be interesting to track the side-effects.

Paul Laherty is passionate about Travel Management. Paul has led the Americas Air and Hotel consulting teams at Advito, BCD’s travel management consulting company. Prior to Advito he managed teams in Sales, Marketing and Finance at American Airlines. Paul’s work at AA included supervising the global corporate contract team, working closely with large customers in Global Sales, and he managed the Los Angeles sales team where he met some very well-known customers. He also has extensive experience in loyalty marketing, both business-to-business, and consumer. Paul managed American’s business loyalty program and he launched a loyalty credit card with American Express. He enjoys applying original research (he calls it Phynancial Fisics) to solve problems. Paul lives in Southlake, Texas with his wife and two daughters and flies a Cherokee 140 as often as time allows. He is active on Linkedin where you can view his detailed profile here: http://www.linkedin.com/in/paullaherty, follow him on twitter @Paul_Laherty or send questions to paul.laherty@gmail.com.

Travel Management
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Airline Ticket Prices Explained

Start with yield

Revenue yield is a terrific measurement to compare airlines, corporate travel programs, prices, cost structures, and traveler behavior. It’s widely known that two travelers on the same flight may have very different profit or loss profiles. The first passenger might generate 7¢ per mile, while the second spends over $1.00 per mile on the same flight. Still another passenger who shelled out 9¢ per mile on a long-haul in coach, might have contributed to an operating loss for the same carrier when they connected to a 200 mile flight on a regional jet that needs to generate 40¢ per mile to break even. It’s important to avoid comparing the margins against each other, but instead, travel managers and analysts should group flights by trip distance, cabin choice, advance purchase and price paid to develop skills to separate good deals from expensive ones.

Automobile financials and operating statistics are similar to airlines on a smaller scale. They provide a framework for readers who are less familiar with airline data. Edmunds.com hosts a terrific tool that allows you to determine the “True Cost to Own” any vehicle with specific options you select. This feature provides a breakdown of the factors used to calculate ownership costs including: Depreciation, Taxes and Fees, Financing, Fuel, Insurance, Maintenance and Repairs. When you know the cost over a five year period, you can divide that by the number of miles you drive to find the Cost Per Mile. Edmunds’ formula for a top seller reveals that a 2012 Camry XLE will cost about $44,000 to own for five years and drive 75,000 miles. This means the owner will spend 59¢ per mile and this yield is an apples to apples comparison to the cost to fly.

The Edmunds values make sense especially when you compare them to the IRS mileage reimbursement rate currently 55.5¢ per mile.

iStock_000011195758XSmall

Let’s expand the personal auto example and add airline-like overhead. Consider the revenue per mile Yellow Taxi generates from customers in Chicago, Illinois. They use a two-part pricing model that combines an “access fee” $3.25 for the first 1/9th mile, with 20¢ for each 1/9th mile after that (ignore the other add-ons for this). A one mile ride costs $4.85, but that drops down to $2.41 per mile by the fifth mile. We already know that 55¢ is a reasonable estimate for Yellow Taxi’s operating cost, but that excludes a taxi license, communications expenses and the driver’s wages – it’s not a stretch to imagine that a taxi company’s expenses could top $1.00 per mile and double that when you consider mileage without a passenger. Drivers and taxi permits are major expenses that dramatically increase the cost to operate a taxi company in any city and “repositioning” costs are not insignificant and analogous to airlines’ costs for terminals and flight crews. Airlines can carry passengers far below the $2.00 per mile Taxi’s need, and they do it a thousand percent faster.

A refresher about the cost of personal transportation is a great segue into the world of airline finance and passenger yields. I’ve written about Form 41 data before, here, but want to point out a few excellent resources for airline data – the Global Airline Industry Program at MIT and their Airline Data Project. Additionally, Bill Swelbar’s blog, Swelblog, houses his opinions and analysis of current industry trends. Those sites along with select annual reports provided the data for my analysis.

As fuel prices continue to have an outsized impact on airline operating expenses it’s important to understand what’s going on behind the scenes to make predictions about how prices may change in the future. I modeled an airline’s cost structure first; I’ll  describe a few assumptions through a discussion about aircraft operations that allowed me to calculate the variable and fully allocated costs of each seat mile.

Begin with a short haul flight between Boston and LaGuardia, a 186 mile flight scheduled to operate over 113 minutes – only 31 minutes in the air. The balance of that time is used to taxi, park, load and unload. Short flights are burdened with higher costs for low aircraft utilization, gate expenses, ground handling and other costs that cannot be sprayed very far when you only have 186 miles to generate revenue. A fifty seat regional jet would create 9,300 Available Seat Miles. The flight will consume more than 230 gallons of Jet A priced at $2.80 per gallon and the crew salaries and benefits will be about $437. That gives us a variable cost near 11¢ per seat mile, while adding ownership costs, maintenance expenses, landing fees and other SG&A drives the cost per available seat mile up to around 37¢ per mile. The flight needs to generate more than $3,500 to break even.

On the other end of this model: Chicago -> Hong Kong, with a three cabin Boeing 777-200 with generous cabin space and 245 passengers. Current fuel prices demand this flight generate more than $290,000 over the 7,800 miles between these two cities. The fuel expense alone is more than $100,000.

Gate time incurs agent expense and airport rent, while taxi time drives full pay for the cabin crew and burns fuel. Wheels-up time is actual flying time (high fuel burn). Block time is literally the sum of minutes the plane isn’t parked with wheel chock blocks in place. Each phase of the commercial operation has a different expense profile – the key takeaway is that flying is only a fraction of the cost. Click on the table for a detailed view.

block times

Now that you know something about the time demands based on stage length, you can combine that with expense ratios to predict how much revenue an airline must generate for each seat. Airline expenses are captured in the following categories in predictable ratios starting with fuel expenses (38% of revenue), crew costs (30%), aircraft ownership (10%), maintenance  (10%), SG&A (12% – includes airport leases, landing fees, and other selling, general and administrative). Fuel, Maintenance and Crew costs are cash expenses an airline can avoid when they reduce their schedules, but rent, leases, ownership and overhead will continue to be paid and those costs will rise in the short term as capacity declines.

Break-even Yield data is available and fare information is easy to find – they can be used to construct a simple excel model to allow “goalseek” and other “what-if” scenario tools to apply simple rules and ratios to predict fares by cabin on a few routes. In the table below Cash Cost is the direct cost of operating the trip including crew salaries and benefits and fuel; VCASM means Variable Cost Per Available Seat Mile, CASM is the fully allocated Cost Per Available Seat Mile, blended CASM is the average Cost Per Available Seat Mile and combines costs for coach and other premium cabin seats.

trip costs

Predictive pricing models

Since fuel, crews and maintenance account for 70% of airlines’ total passenger revenue (at break-even margins), a leisure fare, marketed directly, is unlikely to sell for less than the variable cost of the seat; variable costs put a floor under the model’s leisure price (consolidator’s frequently have access to fares that just cover the fuel cost). I modeled a few variables to see how this assumption holds up and to determine if a simple model could predict industry pricing.

Divide fares into Leisure, Full Y (full fare coach), then F/J (domestic first, or business class), assume Leisure fares are 150% of the variable cost of fuel and crew expenses, then full Y is 300% of the leisure fare, and First class is double the full Y fare. Those assumptions produce results that look very similar to ticket prices customers are paying. Click for detail.

trip cost assumptions

I changed the previous assumptions to take a deeper look at a three class, long haul trip. Starting with the $295,000 breakeven revenue required from passengers on a 245 seat flight to Hong Kong, I used “goalseek” to find the coach ticket price required if you assume Business Class is three times more than coach, and First Class is three times more than Business Class? The result is below.

Expected Fares by Cabin

Business Class yield stands out – it’s very low compared to what most corporations are paying. Few customers actually pay 77¢ per mile in First Class, and a number of Coach passengers have a better price than shown above – that puts the burden squarely on the shoulders of the bread-and-butter Business Class travelers to make up revenue deficits in other cabins.

This back of the envelope analysis suggests that airlines that operate two-cabin aircraft on International routes actually have enhanced pricing power vs. airlines that operate three cabins. Two-cabin aircraft can dedicate more floorspace to business class and offer all travelers a price point below their three-class competition, while generating higher average revenue. Additionally, more business class seats allow an airline greater flexibility to upgrade coach customers and eliminate expectations that business class customers will be upgraded. Furthermore many airlines use the upgrade waterfall to eliminate overbookings in Coach by closing business class before it sells out, but First remains available. They protect oversales by moving travelers from business to first, and from coach to business. This reduces their First Class revenue and creates disappointment for top-tier, premium travelers when the waterfall doesn’t work out for them.

Both models offer you a framework to bin ticket prices by distance and cabin to help you develop your own cost ratios. That information can become the basis for a deeper analysis on your travelers’ buying patterns and will help uncover ways you can change behavior to drive cost savings and negotiate with suppliers.

For more articles about airline operating costs check out: The Secret Behind Airline Fuel Surcharges.

Aviation Travel Management
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Do Your Wingmen Soar?

Let’s get real about your sales people, consultants and account managers in the travel management space. Your contracts should do the heavy lifting, but great sales people can make an enormous difference in your program. You have far more leverage than you think. Here’s a test: are you courageous? Curious? Assertive? Then how often do you tell your friends and colleagues when their out-of-office email or voicemail is out-of-date. Judging by how long some of them remain active I’ll risk offering that we don’t do it enough. We think we’re more assertive than we actually are, but HOPE could improve this situation – Help One Person Everyday. So the next time someone’s out of office is expired – be assertive and let them know.

Hope is often applied to managed travel – the other kind of hope. We hope that travelers will comply with our policies, we hope our CFO understands why rates go up, and we hope that we’ll have the best sales people, account managers and consultants assigned to us. Travel Management is notoriously lax at holding people accountable. For most airlines it’s nearly impossible to identify and measure sales teams against a metric they control that flows to profitability. All too often they’re not held accountable. Consultants are often treated the same way – many people act as if one is as good as the next. Experience proves otherwise. In the hotel and airline business awards are often given to the sales person responsible for customers in an industry or location that’s growing while scorn is offered to the person living and working in a declining market. This is where Travel Managers come in. Great account managers can be found anywhere (even declining markets) and you’re just as likely to find mediocre performance in growing markets. You must provide feedback to enhance your program and to serve your customers better and you do that by being part of the assignment process. This is where assertiveness is important.

Successful programs rely on great partners. Those partners develop and contribute outstanding account managers. Those managers share three qualities that you should focus on: 1. Competence; 2. Initiative; 3. Fit. All three are necessary for a best-in-class program.

Competence: combines a thorough understanding of the market, customer, products, policies, and procedures. Competent Sales people listen and ask questions before making sound recommendations. This can be improved with training and experience.

Initiative: take the appropriate action to solve or prevent a problem. These people are responsive – they’re on top of issues and have a sense of urgency commensurate with the situation. Improvements in this area often requires an attitude change – it’s more difficult to improve than competence, but good customers shouldn’t bear too many mistakes that thorough talent selection could solve.

Fit: Often overlooked, but personality characteristics and nuances are important to develop respectful, trusting relationships. Your account manager or consultant should be someone you enjoy working with and you should be comfortable around them. Too often Travel Managers tolerate bad behavior from account managers – they don’t return calls, they’re dressed inappropriately for meetings, they are slow to respond to problems, they have a sense of humor that is offensive to others. The list goes on, but sometimes what works with a few customers doesn’t work well with others and you shouldn’t tolerate it. Great account managers should hold customers accountable for their performance too – but sometimes everything else being equal, the fit just isn’t there and when it isn’t you should take action.

You get what you reward – if you make it a priority to gain one excellent airline sales person and two or more outstanding Hotel sales managers each year on your terms, you would very quickly build a network that will delight your travelers and make your job easier. You can even make freedom of choice part of your RFP process to tie it to something positive for the vendor.

Asking for sales people by name is very easy. But how do you get their name in the first place? I’ve discussed this problem with a few friends in the medical field and their example is instructive. How do you pick a great surgeon?

A great surgeon isn’t someone with good bedside manners (they might score well in this category, but it’s insufficient) – its the person who is calm under pressure when things don’t go right; a person who makes good choices about how to handle this never-seen-before situation. These are surgeons who are quick to ask a medical device representative standing next to the operating table – “how have other surgeon’s handled this successfully?”

You don’t find the best one by asking another doctor – they’re rarely in surgery together.  Anesthesiologists and surgical nurses have a small consideration set. That brings us back to medical device sales people. They see many surgeons as they operate and they have more evidence and better experience to give you an educated referral.

Great consultants, sales people, and account managers can be identified through your network – ask your peers and your suppliers’ sales leaders which sales person or consultant they admire or they have heard frequent compliments about from shared customers.  travel industry sales leaders generally have a larger customer network since they manage teams and are exposed to most of the largest, high touch customers in their area. It’s also helpful to understand that sales and consulting leaders maintain balanced territories – so if you don’t ask for someone by name, you’ll often be assigned the person who is available, and good people rarely have a light load. Consultants will have a larger impact on your program; it’s acceptable and I recommend that you ask about your consultant’s training and experience before a project or contract is implemented. Suppliers don’t offer different price points based on the team they assign to support you and you have a right to make requests related to this part of their offer.

Due diligence about your vendor’s personnel is your responsibility, and the management leaders who do this well will achieve championship results.

Coaching Travel Management
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Navigate Bigger Airline Discounts

At first glance there’s no secret – airlines exchange higher share for better discounts. This seems easy enough, but there are a few things going on behind the scenes that smart corporations know and will use to their advantage to secure higher savings rates. Well managed travel programs are all the same. They have strong management teams and their policies and practices are aligned with business goals and traveler service. They generate “duty of Loyalty” – employees are driven to comply with policies because they receive excellent service; their travel management team is partnered with them to achieve each travelers business goals.

Airline customers come in all shapes and sizes, but a single number cannot tell the whole story. Airlines capture a lot of data, but four numbers standout to describe a customer: 1. Yield (average revenue per seat mile); 2.  Premium share (Percent of revenue above (below), the carriers fair market share (FMS)); 3. Total spend (revenue to airlines); 4. Customer concentration (Percent of traffic in markets the airline serves). This article will offer a simple scoring system corporate customers can use to determine how much leverage they may have in negotiations with their preferred airline suppliers.

Good airlines create detailed reports to measure the health and profitability of their corporate contracts. Major network carriers have 1,500 – 4,500 managed contracts in place, with another 5,000 – 30,000 agreements serviced through corporate loyalty programs (American – Business ExtrAA, United – PerksPlus, Delta – SkyBonus , Southwest – SWAbiz). Airlines would keep a close eye on trends that correlate the Net Effective Discount rates (NER) to the Yield and Revenue of a particular client. A rational and financially savvy sales team drives profitability higher by controlling NER’s  across industries or clients with similar spend patterns and size. Outliers are analyzed to determine if a particular team or sales person offered higher discounts than necessary to secure preferred carrier status. Additionally, sales support and analysis teams pay attention to specific customer issues.

As an example two consumer packaged goods companies have similar travel policies and total spend might, but warrant different discount levels based on their travelers’ compliance and support for their preferred carriers. Travel managers in the same industry would be disappointed if they expect equal treatment and ignore differences beyond size and policy compliance.

Airlines use sophisticated modeling and regression analysis to determine if their programs are working as designed. They produce graphs similar to the one below to share internally and use as a framework for strategy discussions about discounts and commissions.

Yield V Revenue

A simple scatter plot that contains data for the carrier’s top 100 clients might look like the graph above. The point on the far right depicts a corporate client that produced $35M, at a $.25 yield. It’s a large customer, but not an extraordinarily high yield. Notice there are several customers at or just above a $.10 yield. They are unlikley to receive industry leading discounts, but these customers can take steps to secure better discounts.

In the next graph the airline’s management team would look for a low slope angle and points clustered around the best-fit line. The slope indicates the relationship between yield and the customers’ discount levels. The lower the slope, the less sensitive to discounts higher yields are, while a high slope indicates that as yield rises, discounts are likely to increase rapidly too. Again, this is sample data, but it should give you an idea about how your program is viewed by your preferred vendors.  Additionally corporations without a contract should be able to achieve a savings rate at least as high as available through a loyalty program, so I’m always amazed to see NER’s below the 5% line (a typical valuation for SkyBonus or Business ExtrAA).

NER

Travel Managers should evaluate their program’s performance to establish realistic goals as they position their company and their Travel Management partner to launch an airline RFP. At this point, trust and respect between your team and the account managers and sales people at each supplier are vital for a smooth negotiation, but an honest appraisal can jumpstart the process and show you areas where your suppliers may expect work on your side to achieve your RFP goals.

Travel Managers who understand the airlines point of view and have strong influence over the qualities that matter will be rewarded.

Here’s a model I developed to determine how much leverage you have as you begin the negotiation process.

Leverage

Yield: Begin here. More than $.25 give your program two points. You have a travel policy that likely includes a healthy combination of domestic first class, some International flights (in business class), and a decent percentage of domestic coach-class, business fares. If you achieved this primarily because your headquarters office is in Boston, and your team flies to New York, Laguardia on the shuttle, exclude that data for this exercise. And for those companies that have a combined yield below $.20, don’t try too hard with the airlines, you’re already doing a great job – your travelers buy coach, and they book at least seven days out (no points). Everybody else, between $.20 – $.25 give yourself one point.

Premium Share: This is the one that separates well-managed programs from also rans. Does your travel team have the ability to influence travelers vendor choices? If you can answer yes – you have leverage. Do you enforce contracts to do the heavy lifting or do you need constant support from vendors each time a traveler finds a lower fare online or a checked-bag disappeared? Honesty here will uncover opportunities to drive incremental savings, but more of the same if the same means high maintenance then you will have a difficult negotiation. If you’re a bank or a movie studio and you give one of the legacy carriers an unbelievable share above their Fair Share or Seat Share in the LAX<>JFK market, then you get two points. If you’re based in Atlanta Delta earns all of your business, don’t get too excited, but I would still give you two points here (we’ll address this more in Concentration). For everyone else, use your judgement.

Spend: Are you a big hitter? Does your company spend more than $1BN each year on air travel (you know who you are), than give yourself two points – you’re big enough to dictate some terms. Even if you spend >$25MM and you have a well-managed program you’re likely to have more leverage than a smaller program.

Concentration: This one is more subjective than the others, but if more than half your spend originates or ends in a fortress hub, you should score yourself lower. A company with operations in New York, Los Angeles, Chicago, or any number of up-for-grabs cities will find that this will give you leverage to negotiate better terms with your vendors.

Leverage Scale

Here’s an example – If you combine low concentration, high premium share and high yield you will find yourself in a rare position and should expect industry leading discounts – even if you have a relatively low spend ($5MM). Carriers should fight over this business and the winners would expect to receive profitable traffic.

Leverage Score

The graph above depicts the best customer – one that can dictate terms and may be able to include “most favored” status in parts of their contracts. Any score above five would put a corporation in an excellent position as they negotiate with vendors. Four or below leaves room for improvement, but you should distinguish between values you can control and those you cannot. Total spend is something you’re unlikley to have influence over, but premium share is.

Travel Managers have a significant influence over the premium share variable, and travel policies are yield’s biggest drivers. Before any negotiation you should determine which avenue for savings would be more effective a policy change or carrier discounts. Remember four constituents should be delighted at the end of the process: travelers, corporations, airlines, and travel management partners.

Aviation Travel Management