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

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

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

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

Strategic Travel Managers Know Chemistry

Imagine a dashboard that could show you how much carbon dioxide your travelers generate every day. It’s actually a straight-forward problem and one I’ll try to solve for you today. Information about aviation fuel economy isn’t very accessible, but there are good clues and accurate data is easy to capture. Your frequent flyer account will keep track of the miles you’ve flown, but it’s impossible for most people to connect the dots to determine what their trips cost. Not in dollars, but in fuel, or in CO2 emissions. In a previous article I calculated “mileage” rates for aircraft by cabin and type of plane (single aisle or twin aisle) “The Secret Behind Airline Fuel Surcharges.” In this report I’ll show you how much Carbon Dioxide a particular flight created and give you a quick, easy-to-use grid to provide travelers with information about the carbon footprint their choices make.

Just when you thought you wouldn’t need to remember anything about High School chemistry…actually you don’t. I’ll lay out the chemistry and math to solve this problem. First, Jet Fuel, or Jet A, contains a blend of different carbon-based molecules that combine with Oxygen to generate heat and pressure that jet engines convert to thrust. For simplicity, I’ll ignore the blend, and assume that “Octane”, a string-like molecule that contains a backbone with eight carbon atoms and eighteen Hydrogen atoms along the sides and endcaps, is a good proxy for everything else in the gas tank. During the combustion reaction, each carbon atom will combine with two Oxygen atoms to form Carbon Dioxide (CO2), while the Hydrogen will also combine with Oxygen, but their marriage yields water (H20). The reaction balances when two Octane molecules react with twenty-five Oxygen molecules (O2) which contain two Oxygen atoms. The exhaust product contains sixteen Carbon Dioxide molecules and eighteen water molecules. Here’s the equation: 2 C8H18 + 25 O2 -> 16 CO2 +18 H20.

This detail isn’t useful until we convert molecular weights and ratios into terms that people are more familiar with. In this case, jet fuel weighs about 6.5lbs per gallon, and that mass is 81% carbon. We already know that our Octane molecule will split to form water and CO2, but the result most people struggle with is the conversion to weight. Specifically, Oxygen is heavy, about a third heavier than Carbon, so when each Carbon atom combines with two Oxygen atoms, the resulting molecule, CO2 is four times heavier than the Carbon atom by itself. This means each gallon of jet fuel (6.5lbs) will combine with 23lbs of Oxygen and turn into twenty pounds of CO2, and just over nine pounds of water!

How much CO2 does a Boeing 777-200 create on a flight between Chicago and Hong Kong? Let’s work through it – fuel is a liquid, and measured in gallons, but the exhaust is a gas, that’s why we use weight rather than volume to describe the output. I calculated the 777-200’s gas mileage in a previous post here. At .1836 miles per gallon, a 7,821 mile flight needs 42,000 gallons. The flight would generate 851,000lbs of CO2. That’s 30% more than the maximum takeoff weight on departure, including the plane, fuel, passengers and cargo. The table below contains a comparison among cabins and shows passengers, fuel burn and CO2 emissions.

CO2 per flight

Now that you have information about how to calculate the CO2 emissions for an entire flight, we need to add more information to break this down to the seat level. Previously I calculated the fuel burn per seat to provide a table that shows how much the fuel costs per mile for each cabin and at various price points for fuel. That’s a good starting point, but this time the data table will display how much CO2 an international flight would create for different distances and cabin. See below.

C02 per seat 777-200

The Boeing 777-200 offers a useful snapshot of the likely performance other aircraft could achieve. It’s a good benchmark because it’s currently in production and it’s flown on transatlantic, transpacific and intra-Asia flights.  However, the design requirements for long-haul international flying require twin aisles, more lavatories, large galleys, more storage space, life rafts and a host of other overhead not needed for shorter hops. These factors make it useful to perform a similar calculation to offer information about CO2 production from more efficient single aisle aircraft in use on short hauls and for domestic US flying. In this case, the 189 seat, all coach, 737-800.

CO2 per flight 737

A comparison between the 737 and 777 coach emissions level demonstrate that the smaller aircraft is more than 55% more fuel efficient when using numbers normalized for total seats. When you measure efficiency on a blended basis across all cabins the total difference is higher, that’s why it’s important to have separate tables. These tables offer you a quick resource to answer questions about the carbon footprint your travelers leave behind each trip. For more information about aircraft efficiency and comparisons among different modes of transportation, check out these posts about commercial aircraft fuel economy:

The Secret Behind Airline Fuel Surcharges

Boeing 737 vs. Toyota Prius (this might surprise you)

Aviation Travel Management

The Secret Behind Airline Fuel Surcharges

Travel Management is a tough business – we’re constantly challenged to explain complex systems and interactions among multiple vendors managed through a dozen systems. Vendors don’t make it easy. Airlines benefit when employees search out of policy for the lowest fares and inevitably compare a three day advance purchase against a twenty-one day AP offered on countless websites. Airlines have also monetized many benefits travelers took for granted three or four years ago. Government regulations have forced airlines to offer more transparent pricing which has led to improvements that protect travelers. Comparison shopping is more effective now since most fees and taxes must be disclosed up front.

Airlines suffered from unexpected fuel price spikes beginning in late 2005; since prices have remained volatile consumer awareness about the problem is very high. Airline marketers have learned how to transform their pain at the gas pump into revenue. Fuel prices routinely exceed labor as legacy airlines’ highest expense. Carriers add fuel surcharges aggressively to capture more revenue from each seat, and most travelers have no idea how much fuel their flights consume – this awareness gap has allowed carriers to regain pricing power.

Jet A spot prices

Data from the U.S. Department of Energy.

Fuel surcharges stand out as an especially onerous fee since they are ineligible for corporate discounts and can even exceed the base fare for some flights. Let’s face it, we’ve seen some big fuel surcharges in the past few years.

All of this has me wondering how much of the passenger’s fuel bill does the surcharge cover? Here’s the punchline: in many cases airline fuel surcharges exceed the cost of fuel needed to carry the passenger. That’s right – surcharges don’t just offset the incremental cost of higher fuel prices, they often exceed the total fuel bill. Customers and clients share a widespread belief that surcharges represent a fraction of the gas bill and most are surprised to learn the truth.

Surcharges have been expanding on domestic flights in the US, but are more commonplace on long-haul, International flights. They are usually applied by Origin and Destination without regard for the passenger’s ticketed cabin. The airlines have generally approached these surcharges as “one size fits all.”

Typical charges for Atlantic flights are $200 each way (between New York and London), while Pacific charges are more likely to be $400 per passenger each direction (between Chicago and Hong Kong).

The fee is not arbitrary, but I wanted to determine if coach passengers were being asked to subsidize the higher fuel costs required to move a passenger in Business Class or First Class? Essentially, is each seat carrying a burden relative to its density or floorspace requirement?

The key to this question is to calculate the fuel required for each seat then multiply that result by a particular airline’s average fuel expense (available in their annual reports). Airlines select aircraft for their operating costs and reliability. I’ve selected a Boeing 777-200 for this analysis since they are currently in production and can be found on routes across both the Atlantic and the Pacific. Although not as large as the Airbus A380 or Boeing 747-400, the 777 is much larger than some of the Boeing 767’s and 757’s in the Atlantic market. Next, a review of the interior configuration options at Boeing’s website demonstrates that a business class seat requires about twice as much space as a coach seat, and a first class seat requires double the amount for business class when you consider galleys and lavatories. Boeing reports the 777-200 aircraft could hold 440 seats in a coach class configuration; combined with other performance data I determined this plane can achieve 81 miles per gallon for each passenger in an all coach cabin. For these calculations our model aircraft holds 301 passengers, with 227 in coach, 58 in business class and 16 in first class. Normalizing the results as described above gives us the results displayed in the table below.

Fuel consumed V2

*$2.50 per gallon Jet A

The evidence is clear and I was surprised that fuel surcharges actually covered more than the fuel expense for the seat. Coach passengers may be subsidizing other passengers, but given the competitive fare environment it’s unlikely that $1,000 round trip fares to Asia are covering their fully allocated costs. The real story is that rising fuel expenses threaten to overwhelm carriers, and at least for now, travelers in premium cabins are catching a break from an unpredictable expense. This led to my next question, what do I do with this information?

Travel Managers must be able to plan. For this reason, well-known Industry forecasts are always in high demand and fuel is often featured as the largest unknown variable. Since fuel is a volatile input it makes sense to create a sensitivity table that shows us the per mile fuel expense to provide information that allows us to predict pricing action in a particular market. You can find current fuel price information at the US Department of Energy website. To use the table: 1. find the current fuel price in the left column; 2. select the price per mile rate that corresponds to the cabin your travel policy allows; 3. multiply the O&D distance for a specific market. You can find mileage information in your GDS, or at Flightaware.com. Flightaware is an excellent source for real-time operating statistics about most flights – consider adding it to your bookmarks.

Fuel Price data table v2

At $2.50 per gallon, the fuel expense works out to little more than 3.2¢ per mile for each coach seat, double that for business class and around 13¢ for a seat in first class. Although I ignored the revenue generated by cargo, which would reduce the cost burden on passengers, I also left out a load factor adjustment that would drive the per seat costs higher.

The next time someone asks you about a fuel surcharge, you’ll have everything you need to show them how reasonable the expense is – or isn’t.

If you’re interested about commercial aircraft fuel economy you should read another post from me:

Boeing 737 vs. Toyota Prius (this might surprise you)

Strategic Travel Managers Know Chemistry

Aviation Travel Management

You Won’t Believe This About Southwest Airlines.

You won’t believe this. I didn’t, and I’ve spent more than a decade staring at airline industry data, so maybe I’m the only one who didn’t see it coming. I’m going to show you something that runs counter to conventional wisdom and what we know and hear about at every ACTE conference or GBTA convention.

It’s well known that airlines operate on lean margins. They lose a lot of money during recessions and only break into double digit profits during the more profitable second and third quarters, but rarely on an annual basis. As airlines continue to squeeze more revenue from every seat the average load factors have increased to the point that the summer surge isn’t even noticeable. Airlines combine the 100% achieved on Sunday’s, Mondays, Thursdays, and Friday’s with the low 80’s on Tuesday, Wednesday and Saturday to achieve an 88% load factor for the month. Any hiccup or foul weather leads to hours of delays since there are so few spare seats to accommodate stranded passengers. Strong finance organizations are required to manage the complicated flows of people and capital. Young airlines act as if marketing will be in charge forever, but losses and maturity have a way of sobering investors, and eventually the CFO will take over.

Prior to deregulation in 1978, the Civil Aviation Board (CAB) approved routes, frequencies and pricing. The government intervention created monopolies that allowed airlines to provide the white glove service and fine dining that so many people describe as the golden age of air travel. This was a time when a 50% load factor was profitable and it was acceptable to smoke from takeoff to touchdown.  Filet was served on china and accompanied with real silverware. So which competitor exhibits this kind of pricing power today? Legacy carriers? The “low cost carriers?”

Every time Spirit, Jetblue, Southwest or Virgin America enter a market the local press wave banners announcing that low fares have finally arrived in Madison, Longview, or Springfield. How do they know?

The CAB reporting structure survived deregulation and data is still required monthly to be reported to the Department of Transportation on Form 41.  Every US carrier with scheduled operations and revenue greater than one billion dollars must submit the form.  It contains detailed information about the carrier’s financials and operating statistics.  The data provides a rich view about how the airlines operate their equipment and move passengers and cargo between every city pair they serve.  Here’s a link that describes the available data sets. You can create your own reports here.

A table I found recently was particularly interesting since it contained information about average departure airfares, taxes and fees for passengers departing the top 100 US airports. Since this table doesn’t distinguish between International and Domestic traffic it would be difficult to support meaningful decisions with this – this is not a comprehensive variance analysis, it’s just a back of the envelope look at four or five major airlines, so you should be cautious about using my conclusions to support your decisions. There is one section that contains information that looked meaningful – a comparison between average fares from 2001 and 2011. Out of curiosity I looked at the price changes for American’s hubs. Most showed a decrease – not too surprising given their financial condition. The data is in the table below (all tables are from BTS 3rd quarter 2011 vs 3Q 2001 – click the link above for the most recent values).

Hi contrast AA Hubs

Next I moved on to Delta’s hubs. They have a fortress hub in Atlanta (under pressure from several LCC’s), but their operations in Salt Lake City, Detroit, and Minneapolis are stronger. Overall a mixed result but they’ve demonstrated more staying power than American. How did that compare to United’s operations in Denver, San Francisco, Washington? Little to brag about here; see the charts below for details.

Delta Hubs

Here’s United (includes Continental – Houston and Newark).

United Hubs

It’s remarkable that Houston Bush was up 12% in a city that hosts a Southwest hub. Meanwhile Newark was up 1% in an extremely competitive metro area. Continental should be applauded for holding their own, especially when the Dallas Fort Worth area offers Continental a pure play to compare against (favorably). American hosts their fortress hub at DFW, while Southwest occupies Dallas Love Field, a situation very close to Houston, yet DFW average fares are down 5% while Houston Bush is up 12%. That’s a big difference in a business that counts margin in basis points. Who has pricing power? It’s not American or United in Chicago; and prices in Denver and San Francisco should scare any competitor away.

Southwest. Industry professionals describe them as the quintessential low cost carrier. This is a company that is proud of their small sales force, doesn’t allow seat assignments and only offers one cabin, and they’re pricing champions.

Southwest Hubs

Those are impressive results. The next time someone excludes Southwest from a list of industry leaders, remember, driving revenue is one of only two ways to increase profits (Profit=Revenue-Cost), and Southwest is terrific at growing revenue.

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