Services

Power Airline Analytics for the Buyer

An alternative sourcing approach for savvy buyers.

Industry Overview: Since the start of commercial airline deregulation, corporate buyers have been trying to master the art of negotiating airline agreements. While much has changed in the commercial airline industry, not much has changed for the buyer. For example, the buyer is still at an information disadvantage as the airlines and other travel providers control data. Airline agreements still provide limited pricing and service guarantees. During negotiations, the buyer is still required to disclose its ticket activity on all other carriers. And, finally, the buyer is still contending with the same market share - contract modeling formulas and processes of the airlines to evaluate and negotiate its airline agreements. Sure, it’s more automated now and there’s better standardization to some unit measurements, but it’s still the same old modeling and supplier centric metrics just with better packaging and delivered through upgraded reporting technologies.

The contract modeling and market share formulas used by the major airlines is a flawed modeling process for most buyers and even for the airlines because it requires five assumptions to always be true,

“A buyer’s historical travel patterns will remain consistent in the future and if there is a shift in city pair activity it will not have a material impact on the airline or buyer.”
“An airline’s historical scheduling and capacity will remain consistent during the life of the new agreement, and if there is a shift it will not have a material impact on the airline or buyer.”
“The number and type of airline fare classes (H, Q, B, etc,) and the categorization, capacity and pricing of these different fare classes will remain consistent in the future.”
“A buyer’s preferred airline partner always has a seat available on every flight.”
“A buyer’s preferred airline is always competitively priced when it has a seat available.”

It’s extremely rare when any one of these assumptions is true in an airline/buyer business relationship. However, everyday major airlines and buyers negotiate agreements based on this modeling, while Prism evaluates the performance of each airline-buyer agreement using this same modeling. Buyers typically look to their travel provider (TMC and TMC Consulting Division) and other industry vendors (TRX/Travel Analytics, etc) for help. These travel entities all provide valuable services to format and report ticket and segment level activity. Some even provide proprietary software to calculate impressive “what if” modeling scenarios. Unfortunately, all of these services are rooted in the same airline modeling ideology, so the five assumptions above are buried in their pricing, revenue and savings projections.

From the very first day of signing a new airline agreement, the original projections that drove the negotiations begin to lose integrity as one or more assumptions become false. Within the first year, many buyers are left holding an agreement that is declining in market value (with or without their knowledge) or scrambling to defend the agreement as the airline threatens to lower the discount or pull the agreement if they don’t shift more market share. With an average contract term of 3 - 5 years, this is not a very productive sourcing practice for the buyer, much less the airlines.

The airlines’ market share modeling formulas, projections and related industry services only benefit a Preferred Buyer. A Preferred Buyer for this discussion is a company who spends at least 40M annually on air travel and meets at least two or more of the criteria below, and then potentially any other company, regardless of air volume, whose travel program meets at least three or more of the following criteria.

Purchase a high volume of business and first class tickets on international flights, and/or first class tickets on domestic flights.
High competition of low cost carriers in the top 3 - 5 travel markets.
Over 50% of ticket purchases (original and exchanges) are booked twenty one days or more in advance.
Mandated company airline policy that requires the booking of a preferred carrier, regardless of price.
Over 65% of your ticket activity does not include travel to/from a hub airport of your preferred carrier.
Can shift double digit market share without creating a cost or service shift to your travelers and program.

By any conservative estimate, less than 20% of all corporate travel buyers fall under the Preferred Buyer status above. Most buyers spend between 5M – 20M annually in air travel. Even if a buyer purchases over 40M they may still need to align with two or more of the criteria above to benefit as a Preferred Buyer, depending on the luck of their top city pairs.

So let’s review, the major airlines and Prism rely on a modeling process that mutually benefits less than 20% of their corporate customers. TMC’s and other travel providers promote and sell reporting and modeling services built around this same ideology. It’s then all packaged and promoted to the buyer as a required “best practice”. This means that eighty percent of buyers are buying data modeling services and deploying processes that apply to the other twenty percent, or they’re reluctantly accepting it as their only option or solution.

Power Airline Analytics for the Buyer is an alternative sourcing approach for the other 80% (Non-Preferred Buyers), offering the buyer the combination of new buyer centric analytics and a training program driven by seven principals;

The market share and contract modeling processes and formulas of the major airlines and Prism do not accurately reflect the true performance or profitability of a customer, or provide a buyer with the information they really need to make sound sourcing decisions.
The buyer, not the airlines or Prism, should be in control of the analytics that drive its final sourcing decisions.
A buyer should possess equal or greater knowledge than the airline representative sitting across the table.
Every buyer should know the true market value and risks, not just market share variables, in any negotiation or agreement.
Implementing a quarterly sourcing process to measure and renegotiate an existing agreement is required to defend or improve a buyer’s original negotiated pricing and terms.
Airline negotiations should be fair to all parties (airline and buyer).
Airline negotiations and sourcing processes should be fun for the buyer!

Buyer Centric Analytics: The central focus of Power Airline Analytics for the Buyer is to help the buyer implement new buyer-centric analytics to replace the unreliable statistical measurements of segment market share metrics. Any statistical metrics, like segment market share performances, are subject to the Simpson Paradox that basically states that statistical numbers don’t lie but they can certainly mislead. A good example of how the Simpson Paradox works on statistical numbers is in the major league baseball industry.

Example One (Baseball player batting average)
A ballplayer with a .300 batting average is traditionally considered more valuable than a ballplayer with a .275 batting average. A ballplayer awarded a salary based on a historical or projected batting average of .300, but later produces a .275 average is automatically considered overpaid or underperforming. Sound familiar to the travel industry? For over fifty years the owners of baseball teams would use the seasonal batting average to evaluate and negotiate salary contracts with its players. Ballplayers eventually hired agents to help asses their market value and negotiate higher salaries. Then one day a third party came in and determined that while the season batting average was an important metric, it was not the best metric to determine the true value or performance of a player. As an alternative, this party recommended that the team owner and/or agent separate the batting average into two categories. The first category was “high-risk” at bats, which included all the at bats when there were runners on base and/or when it was a critical time in an important game. The second category was “low-risk” at bats, which were at bats that were less meaningful because there were no runners on base, or the team had a comfortable lead.

Bally Players

High Risk Batting Average

Low Risk Batting Average

Season/Annual Batting Average

Player “A”

.260

.325

.300

Player “B”

.290

.260

.275

Relying on the original standard practices, Player “A” is the more valuable ballplayer, due to his .300 season batting average. However, smart team owners and agents know that Player “B” is the more valuable player, due to his .290 High Risk batting average.

Example Two (Year-over-year batting average)
The seasonal batting averages of two players were tracked in back-to-back years or seasons. In each season Player “A” had a higher batting average than Player “B”. Relying solely on the standard industry formula (seasonal batting average), most would automatically conclude that Player “A” was the top performer during this two year period. However, if you combine the two seasons into one extended season, the overall performance of the two players is equal.

Category	* Batting Average		# Hits		# At Bats
Category	*Player “A”*	*Player “B”*	*Player “A”*	*Player “B”*	*Player “A”*	*Player “B”*
Season One	.311	.306	81	118	260	385
Season Two	.287	.282	106	70	369	248
Combined	.297	.297	187	188	629	633

* Batting Average equals # Hits divided by # At Bats.

These two examples offer a good analogy to the corporate travel industry because the ballplayers could easily be the buyer. The team owner could easily be the airline and the TMC could be the player’s agent. These examples also provide a good illustration on how standard, accepted statistics can mislead you.

Corporate Travel Buyer Resources (CTBR) has performed a 360 degree review of the market share formulas, metrics and projections of the major airlines and Prism to determine their failure points and charted the performance measurement factors in each. From this analysis, CTBR has developed two sets of analytics that can be easily incorporated into the sourcing processes of any managed corporate travel program.

The first set of analytics is “buyer centric metrics”for market share performance. The application of these metrics is when a buyer’s reported market share performance is below the airline’s required level. In this scenario an airline will always assume it has the leverage, based on their default belief that the cause is the buyer’s inability to manage its program (shift more market share). Typically, the buyer is at risk with its existing agreement in this circumstance and/or will have less leverage to negotiate or renegotiate better value. But, what if the cause is due to external factors such as scheduling or capacity restraints by the airlines, or even pricing? How would you know? Even if you suspected one or both factors, how would you track or identify the impact? Sure, some buyers and their TMC implement timely and expensive manual processes to code each and every reservation. This is certainly not a productive sourcing process for any buyer. First of all, any manual coding process by a TMC is never accurate. Secondly, this practice will seldom accomplish anything except buy additional time. In addition, it puts the buyer in a defensive position not at an equal or proactive position with the airline. “Buyer Centric Metrics for market share performance essentially charts three performance measurement factors to quickly determine whether your market share performance is due to internal or external factors. If it’s external factors you will be able to focus on targeted criteria, instead of micromanaging every single reservation. Even if you’re meeting your targeted market share goals, these metrics will help you determine if there are any external factors preventing you from increasing your market share even further, which could provide additional leverage in your current position.

The second set of analytics is “risk/leverage metrics” that define a buyer’s true risks and leverage, regardless of what their market share or contract performance reflects. Essentially, it’s an analytical approach that moves the buyer’s away from the flawed market share statistics and into a new set of metrics based on unit based formulas used to evaluate other company suppliers and vendors, and perhaps even your company’s own customers. Over the past several years, Corporate Travel Buyer Resources has developed ten Risk/Leverage metrics that every buyer should know when evaluating or negotiating airline agreements. Whether you are underperforming, meeting or exceeding the airlines’ target market share goals, these Risk/Leverage metrics will help you determine if you are a more valuable/profitable customer, or perhaps a less valuable/profitable customer than what the airlines or Prism data is reflecting. This is powerful information that every buyer should know prior to any quarterly review of an existing agreement and any new contract negotiation or renegotiation. The best part about these metrics is they’re not reliant on market share performance or impacted by the five false assumptions discussed above. In addition, the buyer is no longer dependent on the airline, Prism or its travel provider to define all of its analytics. Imagine how much leverage and fun you will experience when you have the power to accurately and objectively challenge airline or Prism data to defend or improve your position.

Both sets of metrics (Buyer Centric for market share and Risk/Leverage Metrics) are easily calculated from standard data provided by the buyer’s TMC, airline or Prism, so they can be incorporated and leveraged by any managed travel program. Through Power Airline Analytics for The Buyer, each buyer will receive sample templates of all analytics and a one-to-one webinar training session to review each metric and how to leverage this new powerful information. In addition, each buyer will receive an additional training session providing the following valuable training,

Airline Contract Negotiations: Learn the top common mistakes of a buyer when negotiating a new airline agreement. Learn the pros and cons of negotiating an individual airline agreement, versus a national or global alliance agreement. Learn when to deploy a formal RFP process to leverage the best agreement and when to skip the formal RFP process and negotiate one-to-one with individual carrier(s). Learn how to leverage soft dollar versus hard dollar savings and ancillary fees. Learn how to softly incorporate minimum service level agreements (SLA) that the airlines typically prohibit in any agreement.

TMC and Third Party Data/Modeling Services: Learn what airline data reports and airline contract modeling services you should negotiate with your TMC or their consulting division and at what price. Learn when you should consider using a third party data/sourcing service (i.e., TRX/Travel Analytics) versus your TMC for your airline data and contract modeling services.

Quarterly Airline Review: Learn why the quarterly review process with an airline for an existing agreement is as important to improving your pricing position, as the original contract negotiations. Learn why most buyers are at a competitive disadvantage in the quarterly review meeting. Learn how to leverage your new buyer analytics and three other key practices that will help you level the playing in your quarterly reviews.

Summary of Services: Power Airline Analytics for the Buyer is a powerful airline sourcing service offering each corporate buyer the following services and benefits.

A new set of powerful Buyer Centric and Risk/Leverage metrics with sample templates and a webinar training session.
Two webinar training sessions providing valuable industry information and tactics to leverage the best airline agreements.

Cost: $937.00

Not ready to buy today? Sign up for our free webinar “Introduction to Airline Sourcing and Buyer Centric Analytics” (click here for information to register for the webinar).

Have a question, need to pay by check or require additional information on this or other services at CTBR? You can email us at sales@ctbrtravel.com or contact Donald L. Swartz, Principal, Corporate Travel Buyer Resources at 561.694.6743.

Terms & Conditions: This service is intended for corporate travel buyers only. Corporate Travel Buyer Resources (CTBR) reserves the right to approve or decline any purchase request at its sole discretion. Approved purchase orders are non-refundable once any information has been submitted to Customer. All information entitled to Customer under this purchase will be sent electronically within two business days of approving your purchase request via the email provided in the purchase request, including instructions for scheduling webinar training sessions. Customer acknowledges; that it is employed by the company listed on the purchase request form; has the authority to make this purchase on behalf of its employer; and is not employed by a travel entity or any company providing competing services of CTBR. All information provided to Customer under this purchase is confidential and proprietary information (“Confidential Information”) of Corporate Travel Buyer Resources. Customer is prohibited from; (i) sharing or distributing this information to any individual who is not a full time employee of the company listed on the purchase request order; and (ii) repackaging, marketing and/or re-selling any information.