1 NBTA Convention & Exposition | August 8-11, 2010 Houston, Texas Travel Procurement Workshop Scott Gillespie Author Gillespie’s Guide to Travel+Procurement NBTA Convention & Exposition | August 8-11, 2010

2 MODERN AIRLINE 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) Fare mix is key to calculating savings Historic fare mix determines the spend-weighted Net Effective Discount Share of Spend Booked Fare Class DiscountNet Eff. Rate 10%J30%3.0% 20%Y 4.0% 40%M15%6.0% 30%T0%0.0% 13.0% Net Effective Rate =

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

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 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 scenarios

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

12 Sample Scenario Results (Illustrated) Scenario Scenario Total Net Spend Scenario Savings ($000s) DL’s Net Spend ($000s) 1. DL, then Star2, DL/AF/KL, then Star2, DL+AA, then UA+AC2, Star, then DL+AA2, Avoid DL2, Last year’s Program Net Spend was $3,000K

13 Scenario Implications Scenario Scenario Total Net Spend Scenario Savings ($000s) DL’s Net Spend ($000s) 1. DL, then Star2, DL/AF/KL, then Star2, DL+AA, then UA+AC2, Star, then DL+AA2, Avoid DL2, Buyer prefers No. 3 DL prefers No. 1 SkyTeam prefers No. 2

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” NBTA Convention & Exposition | August 8-11, 2010

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 NBTA Convention & Exposition | August 8-11, 2010 Houston, Texas Slide 1 detail (Arial 44) From a Hotel Usage Map…

19 NBTA Convention & Exposition | August 8-11, 2010 Houston, Texas Slide 1 detail (Arial 44) To Hotel Clusters

20 NBTA Convention & Exposition | August 8-11, 2010 Houston, Texas Slide 1 detail (Arial 44) Including Unused Hotels

21 NBTA Convention & Exposition | August 8-11, 2010 Modern Hotel Sourcing

22 Hotel Sourcing’s Typical Annual Cycle NBTA Convention & Exposition | August 8-11, 2010 Data Collection RFP Implement & Manage SummerFall / WinterWinter >>>

23 The Missing Step: Sourcing Strategy NBTA Convention & Exposition | August 8-11, 2010 Data Collection RFP Implement & Manage SummerFall / WinterWinter >>> Sourcing Strategy Summer

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

27 Strategy Study Shapes Your Bid List Compliance savings > existing preferreds Coverage savings > add more preferreds Tier-down savings > bid lower-quality hotels NBTA Convention & Exposition | August 8-11, 2010

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.) NBTA Convention & Exposition | August 8-11, 2010

29 Some Key Metrics Spend Under Contract $2.0 million (80%) $0.4 millionNegotiated Savings Average Discountx 20% Average Hotel Quality3.7 stars -10% YoY Average Booked Rate$ % YoY Total Hotel Spend$2.5 M -30% YoY

30 Drivers of Average Booked Rate 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 Travel Managers are expected to influence most of these factors

31 Chain Fitting

32 If you had $1 million in spend in these secondary markets… Tacoma Tampa Toledo Topeka Tucson Tulsa NBTA Convention & Exposition | August 8-11, 2010 …Which hotel chain gives you the best coverage?

33 NBTA Convention & Exposition | August 8-11, 2010 Scenario Option Risk Score Expected Savings Quality Policy Mgmt. Relationship Strategic Value Discount or New Price Projected Spend X

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

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

36 NBTA Convention & Exposition | August 8-11, 2010 Know which chains best fit your program