Travel Procurement Workshop

1. Travel Procurement Workshop Scott Gillespie Author Gillespie’s Guide to Travel+Procurement

2. ModernAirline Sourcing

3. Key Analytical Concepts Fair Market Share (FMS) Airline Supplier Map Fare mix, discounts, and Net Effective Rate (NER); a.k.a. Weighted Average Discount Scenario modeling Program savings and CEO Map Program optimization

4. Fair Market Share (FMS) • A.k.a. QSI, or neutral share, or share of lift • Best estimate of carrier’s market share before pricing and loyalty factors • Very important basis for all modern airline sourcing projects • Drives minimum, maximum and goal share, and the corresponding spend projections • Key variables are connection logic and interline logic

5. Fare Mix, Discounts and NER(Net Effective Rate) 13.0% Net Effective Rate = Fare mix is key to calculating savings Historic fare mix determines the spend-weighted Net Effective Discount

6. Fare Mix Issues • Buyers use historic fare mix data • Airlines may use non-historic fare mixes when bidding • Buyer’s calculation of Net Effective Rate, and savings, will differ from airline’s • No practical way to guarantee inventory availability – or the future fare mix • Standard practice is to use last year’s fare mix • But check with each airline!

7. Airline Supplier Map $3.0 MM Primary, or Tier 1 DL Secondary, or Tier 2 AA UA Spend at Fair Market Share US AC Tertiary, or Tier 3 $0.0 Very Low Very High Ability to Move Share

8. Scenario Modeling is Critical • Basis for modern airline sourcing • Scenarios are “What if” options • Typically involve Tier 1, 2 and 3 airlines • A.k.a. Primary, Secondary and Tertiary • Can have Co-primaries, co-secondaries, etc. • Easy to model alliances • Calculates detailed carrier shares and buyer’s savings for each scenario

9. scenario modeling

10. Scenario Examples • DL as Primary, Star as Secondary • DL/AF/KL as Primary, Star as Secondary • DL + AA as Co-Primaries, then Star • Star as Tier 1, then DL + AA as Tier 2 • Avoid DL: Make FL/AA/UA/US as Tier 1 • Modeling tools test 50-250 scenarios

11. Buyers Focus on Scenario Savings = Scenario Savings Weaknesses: • Uses last year’s published fares and last year’s fare mix • ** Understates savings when fares fall Last year’s net program spend - Scenario’s projected net spend

12. Sample Scenario Results (Illustrated) Last year’s Program Net Spend was $3,000K

13. Scenario Implications DL prefers No. 1 SkyTeam prefers No. 2 Buyer prefers No. 3

14. Hotel Clusters 101

15. How should you group hotels for negotiations? • Distance between hotels matters a lot • You want to group hotels into actionable markets • - Small enough to be create valid competition • - Regardless of artificial boundaries • Artificial boundaries: • State borders • City borders • Zip Codes • “Midtown”, “Downtown” • “Near Airport”

16. Clusters are actionable markets • Clusters are small areas, maybe 1-3 miles in diameter • Clusters are built around your program’s high-stay areas • Artificial boundaries (State, City, Zip Code, etc.) are ignored • Clusters include non-preferred and unused hotels • Clusters create actionable markets, much like city pairs

17. Ignore Orphan Hotels! • Orphans are low-stay hotels outside cluster boundaries • They show up in TMC booking and credit card reports • Ignoring orphans can eliminate 50-70% of booked hotels, 10-20% of Room Nights • In no way weakens negotiations • Significantly streamlines the Hotel RFP process

18. From a Hotel Usage Map… Slide 1 detail (Arial 44)

19. To Hotel Clusters Slide 1 detail (Arial 44)

20. Including Unused Hotels Slide 1 detail (Arial 44)

21. Modern Hotel Sourcing

22. Hotel Sourcing’s Typical Annual Cycle Summer Fall / Winter Winter >>> Data Collection RFP Implement & Manage

23. The Missing Step: Sourcing Strategy Summer Fall / Winter Winter >>> Summer Data Collection Sourcing Strategy RFP Implement & Manage

24. Strategy Study’s Key Deliverables • Estimates the Major Savings Opportunities • Higher compliance to “as is” program • Broader coverage (more preferred hotels) • Less upgrading and/or more rate availability • Better rate negotiations • Realistic tier-down scenarios • Which then drives the Bid List • Depends on management’s appetite for savings and change

25. Socialize with Senior Management =

26. Clusters Create Meaningful Insights Where is there non-compliant spend? Is it a rate problem? Which clusters need more preferred hotels? Which clusters have lower-tier hotels? By how much do rates differ? Which clusters have competitive alternatives?

27. Strategy Study Shapes Your Bid List • Compliance savings > existing preferreds • Coverage savings > add more preferreds • Tier-down savings > bid lower-quality hotels

28. What’s the Total Cost of Stay? Models need: • Prices for room rates - Last Room Avail., Non-LRA - Best Available Rate (or AAA rate) • Ancillary Costs (Internet, breakfast, parking) • Utilization estimates for ancillaries • Volume estimates per property • Quality ratings (3 star, 4 star, etc.)

29. Some Key Metrics $2.0 million (80%) Average Discount x 20% Negotiated Savings $0.4 million Average Booked Rate $143 -22% YoY Average Hotel Quality 3.7 stars -10% YoY Total Hotel Spend $2.5 M -30% YoY Spend Under Contract

30. Drivers of Average Booked Rate Travel Managers are expected to influence most of these factors Quality tier of hotel (5 star vs. 4 star) Preferred vs. non-preferred status Room type Negotiating process Room night volume Room availability Local market conditions

31. Chain Fitting

32. If you had $1 million in spend in these secondary markets… …Which hotel chain gives you the best coverage? Tacoma Tampa Toledo Topeka Tucson Tulsa

33. Scenario Option Risk Score Expected Savings Quality Discount or New Price Policy Mgmt. X Relationship Projected Spend Strategic Value

34. “Well, let’s look at our historic spend by chain”

35. Evaluate chain-wide deals on Neutral Share – not just Actual Share Share of beds in the selected clusters Strong Candidates!

36. Know which chains best fit your program