Scott Gillespie (pictured), managing partner of travel analytics specialist T Clara, outlines his views on creating a savvy and effective approach to airline sourcing
THE MOST SUCCESSFUL AIRLINE category buyers I’ve known have two elements in common. First, they make credible promises and credible threats regarding their ability to move travellers to or away from an airline. Second, they achieve trust-based relationships with their airline counterparts.
While the two go hand-in-hand, this article covers a few advanced techniques for giving a buyer a rich, fact-based perspective about one’s options. This is the foundation for offering carrots and sticks, and for building a reputation for being a well-informed negotiator.
STRONG FACT FOUNDATIONS
Buyers must understand how their programme appears to the airline. The essential data comes from two sources: first, the travel management company (TMC); and second, current global flight schedules.
The first task is to parse the TMC’s booking data into this widely-used format, where the key field is: point of sale – city pair – airline – booking class; for example, UK-LHRSFO-BA-J.
The data to be grouped by this key field is spend and one-way-equivalent (OWE) sectors. One-way equivalent means that the itinerary has been parsed into logical destinations, where each logical destination counts as one OWE sector, regardless of the number of connections that may have been used to get the passenger to their destination.
Once the data is in hand, the next step is to incorporate fair market share (FMS) for each airline in each city pair. FMS is the airline’s schedule-based expected share of a city pair’s volume, before price or brand loyalty is considered. FMS is the baseline share against which the current programme will be measured by most major airlines.
Note that there is no single source for FMS data, nor the formula used to create it. Airlines may calculate their own FMS or buy it from aviation data firms or global distribution systems; buyers typically acquire FMS via their airline sourcing consultants.
Buyers compare the recent market share they’ve given to each airline with the airline’s FMS to derive the share differential. This reveals how grateful – or hungry – the airline should be toward the buyer in any market.
NEGOTIATION ECONOMICS
Few buyers understand the primary basis for an airline’s negotiated offer. Two factors drive it: first, the buyer’s ability to shift market share to or from the airline; and second, the displacement price of the seats in question. Displacement prices are an airline’s estimate of what the seats would sell for if not sold to the buyer.
Procurement professionals should note that the buyer’s size of spend is not a primary factor, unless regulatory conditions prevent an airline from using market share as the basis for a deal. Buyers who have stronger ability to shift market share, and who buy higher-priced tickets, will receive far better offers than those made to buyers with little ability to shift share or who purchase inexpensive seats.
Rather than relying on irrelevant price or discount benchmarks, buyers should seek to understand how the airline’s offer would change, based on the buyer’s ability to move share. At the same time, buyers should have an open and honest conversation with the airline about the buyer’s ‘skill and will’ – the means and efforts by which the buyer can realistically drive share to or from the airline. This dialogue benefits both sides by illuminating the credible boundaries of a deal.
RISK-REWARD OPTIONS
Once a buyer has received offers from its set of airline bidders, he or she must model the offers and the realistic range of options. The goal is to understand the trade-offs available to the buyer from the array of offers, and to leverage that insight into a stronger, fact-based negotiating position.
The most advanced form of deal modelling uses scenarios and a risk-reward map. Scenarios are ‘what if?’ combinations of airline deals, modelled to project the financial impact of each scenario on the buyer, and to each airline.
Risk score is a measure that typically represents two types of related risks – the buyer’s risk of not meeting the volume or share goals required in each tender, and the travellers’ likely degree of resistance to using the airlines in the scenario. Risk scores may be subjectively assigned by the buying team.
The power of this approach is twofold. First, it gives the buyer a strong fact-based position from which to approach negotiations. Using the example illustrated below, one would expect the buyer to explain to British Airways its choices: “BA, you may keep your bid as is, but we will likely choose one of your competitors, and your net spend will drop significantly, or you may sweeten your offer by at least £150,000 and likely improve your net revenue from us by at least £300,000. Which do you prefer?”
Second, this approach makes for a very effective way to present options to senior management. Simply plot each scenario by its projected savings on the horizontal axis, and its risk score on the vertical axis.
The resulting risk-reward chart (see below) serves as an effective means of showing senior management the most viable options: “The sourcing team at this point would recommend scenario two, but if you, in senior management, want the most savings, we’ll need your support to mitigate the higher risk of Scenario three.”
CONCLUSION
Successful sourcing of the airline category is, and should be, an analytically intense exercise for most buyers. Those who use these advanced techniques will likely ensure they achieve the best available deals along with a reputation for being tough but fair negotiators.
CV
Scott Gillespie is the managing partner of T Clara. He is the author of a US patent covering airline bid analysis, and featured in Buying Business Travel’s 2013 Hotlist of 30 top influencers.
He writes the Gillespie’s Guide to Travel+Procurement blog, and speaks at industry conferences around the world. Scott is running one-day workshops on airline sourcing, with the GBTA Academy:
- November 14, 2013 – Crowne Plaza Chicago O’Hare, Rosemont, Illinois
- December 10, 2013 – Southwest Corporate Headquarters, Dallas, Texas
- Details at gbta.org/education
- Gillespie is also presenting a session on airline sourcing at the 2014 ITM annual conference, May 12-14. Details at itm.org.uk