External travel managers for big corporates are more or less resigned to the idea that their industry will be governed by cycles. The up cycle for them comes when corporates reaffirm their commitment to focus on core activities. When this happens companies willingly outsource travel administration and all the related baggage that comes with having mobile executives.
The downside comes when the FD wakes up to the fact that the corporation is spending large amounts of money on airlines and hotels, and decides to take a personal hand in negotiating rates downward. When this happens, travel management is generally taken back in-house and the organisation starts to devote its own resources to bringing down what is the second or third highest spend in many companies.
The consensus of opinion seems to be that the travel industry has recently been through a down cycle. However, it seems the good times are now returning to the sector. The wheel has turned and, in the eyes of players such as Amex and Carlson Wagonlit, this time the added value that professional travel management can bring to the issue may not be so rapidly dismissed.
Matt Andrews, vice president of corporate services at Amex says the industry is going through some important structural changes. Chief among these, he claims, is the arrival of transaction-based pricing (TBP, a concept that needs a word of explanation), together with the move by major airlines, British Airways being a notable example, to end commission payments to travel agents.
“The offerings from all the major suppliers are becoming multi-layered and more complex. The more complexity you have, the more you need professional advice to ensure that you are getting the best deals. Travel agencies are now providing consultancy advice rather than simply being fulfilment houses. We’ve tried to address the problem of increased complexity by making everything much more transparent to corporates – and the way we’ve done this is to move to transaction-based pricing,” Andrews says.
In brief, TBP introduces the idea of an up-front fee, a single price that encompasses everything to do with a particular transaction. This simplifies costs, since the corporate client then knows exactly what it is paying the agency involved to book a specific flight or hotel.
Jim Tweedie, vice president UK at Carlson Wagonlit Travel, reckons that the shift to up-front management fees for professional travel management services that really add value is a sign that the travel management sector is maturing. “It is leading to an inevitable, and I believe essential, debate on the true cost of travel,” he says.
The debate is not before time. As Amex noted in a recent release (23 April 2001), European corporate T&E (travel and entertainment) expenditure now exceeds $180bn a year. That is serious money in anyone’s terms, so it is high time that travel management companies smartened up their act and sold themselves as a pure value add service, “un-conflicted” by under-the-counter, invisible commissions from suppliers.
Tweedie starts from the perspective that while travel is essential for many organisations, it is only comparatively recently that the management of travel has started to get the attention that it deserves. Agencies that have survived on commission from airline companies are finding that they need to generate an alternative revenue stream fast. Of course, ending a reliance on commissions means restructuring around up-front fees, so that the agency is in a position to pass back to the client any residual commissions that follow from particular bookings.
This is not an easy transition. The specialist business travel houses were created in a world that ran on booking commissions, so their standpoint was to think of the commission structure as normal. In effect though, the commissions meant that travel houses found themselves providing an increasingly sophisticated range of services to their corporate clients at no perceived cost to the client. That was always a bizarre state of affairs.
Everyone knew that the whole thing was being underwritten by commissions paid by whatever airline the travel house presented to the client. What was not so clear to companies was that the commission was not actually “free” to them. It simply sat as an invisible cost layer on the price they paid for their air travel.
However, the airlines were coming under pressure. Increasing competition in international air travel made it imperative for them to look at their sales distribution costs – a large percentage of which went on commissions to agents. As Tweedie puts it, there was always serious doubt about the notion that there was enough commission money in the sector to fund the survival of sophisticated business travel management.
The position is still not clear. There is a steady 4% to 5% average growth rate in terms of numbers of passengers flying. Member airlines of the International Air Transport Association (IATA) reported their fifth straight year of net profitability in 1999, after losing $15.6bn on their international scheduled services from 1990 to 1993. Many argue that, with this sort of growth, the sector can continue to bear the cost of commissions for a long time. We’ll call this the dinosaur view.
While the idea that the suppliers should fund travel management companies to provide advice to corporates might look superficially attractive, there is an obvious down side, as the pensions sector can testify. The corporate client can never be sure that the agent is not routing bookings based on the best commission structure for the agent, not on the best deal for the client.
If you take the view that nothing buys nothing, then it follows that corporates should be happier paying a visible fee, instead of getting “painlessly” stung by an invisible cost structure. In business terms, if advice is worth having, it is generally also worth paying for. Tweedie says that changing from a supplier-pays to a client-pays model was never going to be painless for the travel managers, but ultimately it has to be worth doing.
Bill Stevenson is marketing director at Expotel, which, unlike Amex and Carlton, eschews everything to do with journey bookings in favour of focusing on hotel bookings and conference organisation. He points out that if even travel management houses have to choose their speciality areas, it stands to reason that companies can’t hope to field an in-house team that is best at all aspects of travel. “We place around #250m worth of hotel bookings a year, which is far in excess of even the largest company’s hotel spend.
You have to specialise,” he says.
Stevenson points out that no FD going into a discussion with a hotel is going to command more leverage than Expotel. “There is always the occasional traveller who can find a room that is cheaper than the deal we secure, but our measure is what we achieve for the company as a whole, over a broad time frame,” he says.
What corporates want from a travel management operation is value in the medium to long term, and consolidated buying over the entire company, Stevenson says. “Over a 12-month period we can show the corporate client substantial gains, not only in reducing direct costs, but also in administrative savings,” he says. The added value that Expotel brings to the party is its allocation programmes with the major hotel groups, which give it a dedicated stock of rooms held in its own systems. Again, this kind of leverage is not something a corporate could emulate.
Amex’s Matt Andrews points out that the travel manager’s job is inherently complex. He or she has to try to square two rather different sets of interests.
On the one hand, there is a need to cater for traveller convenience and efficient mobile working, on the other, there is pressure to drive down T&E costs. At the same time, new technology, including online travel services, new pricing structures and constantly changing supplier issues, such as the emergence over the last two years of the global airline alliances (see page 6), have further complicated the picture.
The result is that there is now a demonstrable need for consultancy services and a real “value add” that consultants can provide. Matthews points out that premium air fares, for example, between Europe and the US, have risen by between 40% and 60% on most airlines. At the same time, the range of budget fares and restricted fares is expanding all the time. There are now in excess of 150 fare options available between London and Amsterdam.
Travel to the US costs substantially less from Rome (including the connecting flight) by comparison with flights from Heathrow. A deep knowledge of the various fare permutations are just part of what the travel house can bring to the table for corporate clients.
With all these changes and complexities, expect the travel houses to flourish in the years ahead. The money to pay them always came from the client’s pockets anyway, only in future, it looks as if it will be the client’s hand that dips into that pocket. Which is as it should be.
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