In my last column I wrote about suppliers attempting to humour Gen Y travellers. News arrives of another example of this trend. Etihad Airways is to give passengers a second in-seat video screen to gawp at so that, we are told, “they can play games… while watching a movie”.
Speaking as someone who needs to concentrate very hard just to accomplish single-tasking with any degree of success, let me take you back to a time when humans also played games and watched films – but not at the same time. If you are of this generation, you may recall that, around a decade ago, both American Express and HRG ran campaigns urging travel managers to focus on reducing the 95 per cent-plus of their spend that was direct with suppliers instead of beating up their travel management company (TMC) over the 5 per cent or less accounted for by indirect costs.
It seemed a fair point at the time, and I guess the proportion of indirect costs may even have fallen since then thanks to a continuing shift to online bookings pushing down average transaction fees. Online now accounts for 50 per cent of all bookings by HRG UK clients, up from 43 per cent a year ago.
However, I do wonder if the momentum may be about to move back the other way? I foresee two potential causes of indirect travel management costs for companies in the near future. One is New Distribution Capability (NDC), the XML-based standards being introduced by the International Air Transport Association (IATA) to help airlines sell airline seats more effectively through TMCs and other intermediaries.
NDC: The reality
Thanks to provisional regulatory approval in the US and various other developments, NDC looks increasingly likely to become reality. If it does, one of many consequences could be that new, lower-cost distribution channels will emerge in competition with the big global distribution systems (GDSs). If that happens, then airlines may finally achieve their long-held ambition of forcing down the fees charged by GDSs – and if that happens, GDSs would have to reduce or eliminate the financial incentives they pay TMCs to use their systems. Since GDS kickbacks are the difference between profit and loss for many TMCs, it is entirely plausible that they would have to raise their fees to their corporate clients.
The second indirect price rise could be in the cost of running a corporate card programme. Back in April, the European Parliament made a surprise last-minute decision to include commercial cards in a cap on interchange fees at 0.3 per cent.
An interchange fee is what the acquiring bank used by the merchant (such as a hotel or restaurant) pays the issuer of travellers’ cards to accept a transaction. A typical Visa or Mastercard commercial card interchange fee today is 1.5 per cent, so if the cap becomes law (the European Parliament’s decision needs to be agreed by the EU member states), card companies will suddenly have far less revenue sloshing into their coffers. They have already warned likely consequences would be the ending of rebates to larger corporate clients and no more waivers on annual cardholder fees. There could also be additional fees for important services such as provision of management information.
Cost ratios
Neither of the two scenarios I have outlined above will definitely happen, but they are strong possibilities. If they do become reality, perhaps that 95:5 ratio of direct to indirect costs would become 90:10 (don’t take that figure literally – it’s just an example). What is a buyer to do about it?
The obvious answer is that it would be time for a fundamental revaluation of the return on investment you receive from your service providers. For example, would it make sense to switch to direct invoicing with some of your travel suppliers instead of using corporate payments?
I suspect the answer is no, since the better providers offer a wide range of benefits – from traveller convenience to efficient reconciliation and powerful reporting – that would be expensive and inefficient to replace.
But it would at least make sense to assess whether you are extracting every conceivable benefit from your service providers to help you attack the direct costs that remain the overwhelming share of – as procurement folk like to say – your total cost of ownership.