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welcome to the latest edition of our at Carney procurement and analytics Solutions the wave of the future podcast series I'm Theresa Dale and I'm joined today by Patrick Hoffman and Scott Gillespie by way of introduction I'd like to provide a little background on our speakers Patrick Hoffman is a senior sourcing manager with our procurement and analytic Solutions practice and is based out of Chicago he has over 10 years of Consulting experience covering a range of areas from consumer packaged Goods to travel and Transportation Scott Gillespie joins us from Cleveland Ohio Scott is co-founder and managing partner of T cla a company that helps travel and procurement managers build more valuable travel programs Scott knows the travel industry extremely well he founded travel analytics and was one of at carne's Travel sourcing subject matter experts Scott is also the author of Gillespie's guide to travel procurement blog welcome Patrick and Scott to our latest podast podcast today we're talking about sourcing travel and it's such a large category to cover we're concentrating on airline contract management we'll be complementing this with another podcast covering travel policies and shared savings later in our podcast Series so stay tuned I'd like to start with my first question for you Scott the airline industry is continuing to consolidate for example we've recently seen the merger of US Airways and American Airlines what impact are these mergers joint ventures and strategic alliances having on the management of Airline contracts from a procurement perspective thanks Teresa um probably the biggest impact that they're having is uh creating concern among the buyers that the reduction in competitors is going to result in higher prices and while that generally is true supply and demand is um you know always at work the reality is that it may actually work to the benefit of of the buyers in the sense that through stronger cooperation amongst the joint venture Partners particularly the buyers have a bit of an easier time negotiating the contracts and then managing the contracts and uh there is some hope that when Industries consolidate toward typically three strong viable competitors that the result for the buyers is better service more profitable industry creates better products more innovation generally can be viewed as better for the buyer although the buyer may end up paying a little bit higher price I've read recently that Airline profits are up but the profits are coming mostly from ancillary fees rather than the actual air fars so Travelers are now having to pay for things that used to be free such as checking and baggage so Scott what are the challenges of dealing with ancillary fees should they be incorporated into the negotiations process without a doubt I'm sure all buyers would love to include the amount of money they're spending on these ancillary fees but the reality is it's really hard to do that from a Contracting perspective one is because even the airlines don't know how much a corporate set of Travelers may be buying baggage fees or onboard preferred seating or lounge passes any of these things that have been unbundled lately so it makes it really difficult to get credible data brought to the table so that's the first difficulty second is that the airlines are really resistant to the idea of discounting any of those ancillary fees U they're they're holding pretty firm uh on that line and and it's I think it's going to be very hard for most any buyer to uh to really challenge them to to bring those prices down and so Patrick I understand you have a success story to share with us well Teresa there's currently only one success uh example in the industry to share roughly two years ago uh with Airlines having aggressively aggressively implemented anary fees to help restore profitability Oracle actually started having some serious conversations uh with the company contracted Airlines uh on basically on about how to obtain proper reporting and receive some credit for such expenses but uh to Scott's point point earlier it's extremely difficult to really track the data and to really start the conversations with the carriers the key is to collaborate with carriers towards creating transparency making them understand what data is needed and then also working with other companies that provide other data sources maybe such as credit card companies to really get a better understanding on how much is spent on ancillary fees to basically try to get the transparency and to potentially include it into uh the negotiations with the with the airlines but Airlines on the other side don't really have a model built for that either yet but uh the demand is there and uh travel groups are pushing to to gain further visibility so overall I wouldn't be surprised if more companies especially the ones with really large spend will further push in this direction to gain a similar benefit as the example of Oracle thank you Patrick and just another question for you turning to fixed fairs what role do these play in negotiations and how widespread are they and are they on the increase we don't really see them playing a strong part in negotiations uh with most of the Legacy carriers Teresa while rfps often still provided sections for carriers to propose them especially for high volume routes the trend is more to reflect offers as a disc discount percentage however it depends on the carrier we just recently had like one case where we saw an opportunity and benefit to negotiate fixed Fest on a select range of routes uh it was actually with one of the gulf carriers and yeah I think that the the result was positive uh we we laid out the advantages and and created the right award scenario that yielded the best Advantage for the client and collaborated successfully with the carriers and they were willing to to um Express their offer as a as a flat fair but uh in general I wouldn't say that we see a trend of companies seeking flat faes neither do we see carriers trying to offer them more often so another question back to you Scott we live in a globalized world but there are times when Global isn't the answer to everything when it comes to negotiating contracts with Airlines what's the best approach to secure the optimal deal is it best to negotiate globally or to adopt more Regional approach I think the best answer really in almost all cases is a combination of the two perhaps not surprisingly certainly for most American companies uh that have early experience in this area if they take the typical American approach of dictating terms in terms of how the RFP is going to be managed and how the negotiations are going to be conducted and whose data is going to be used and who's going to make the decisions it's a pretty good prescription for a poor outcome um on the other hand you can't have a lot of very decentralized deals being uh papered over not in today's you know more sophisticated procurement environment so I think a really good model that companies have successfully used is to reach out to the local contacts the local buyer representative from the company and understand the strength of his or her relationship with the local salesperson from typically the local or national carrier and make sure that those views are considered and taken into account and that there has to be an agreement throughout the buying organization that the default assumption will be that you know Central the central procurement contract uh will be given the most Credence but in some cases where the local deal can be cut better the centralized procurement Contracting organiz ation needs to appreciate that and and give the local folks some Runway and Patrick do you have an example that you can share with us yes absolutely Theresa I think I certainly agree with Scott's point and that's exactly the observations that we made uh in the market as well we just recently just to give you one example you know we just recently helped one of our clients to uh negotiate their contract deals with uh you know some some of the Chinese carriers like China is China Southern and high n Airlines as well and I think like here some really good examples where you would say like it's really critical to to uh establish the relationship to the local offices from where the deals are basically created and um you know while certainly like the language barrier was like a little bit of a of an issue as well um so there was definitely an advantage to condu the negotiations at a local level and again like while some of specifically coming back to this example some of the Chinese carriers obviously have representative offices uh not only in North America but also in some of the other regions we uh definitely saw a benefit from you know really driving the negotiations at the local level and setting up the the the contract at a um at the at the origin country itself so to Scott's point I think it's probably like an approach um you know kind of taking a good mix of a global approach while still um also playing the local local role and I think uh you know those two examples that are just provided show that uh you know you really need to understand the market you really need to understand like how the carriers also function and uh who can give you like the better opportunity to to to U provide the the better contract deal okay so you've both mentioned it but I want to talk about the actual rfps that are sent out so Scott do you think that these are fundamentally too complex and if so how can they be simplified that's a really good and time question Teresa um in fact Patrick and I were both at an event in New York month or two ago where this topic was raised in a workshop uh a lot of buyers in the room uh some Airline folks in the room and the question was asked can we simplify not only the RFP contract but also the proposal terms and the pricing terms can we just make this simpler and it was really interesting to me I didn't expect the the response that that the room gave to the question and it was basically we're not sure we want a simpler contract or a simpler pricing structure because the concern was that if we had too simple uh a contract or too simple of proposal or too simple of pricing terms there would be missed opportunities because there are clearly in almost every buyer's travel footprint there are going to be markets that can be priced very aggressively for any number of reasons and there's some fear that without the ability to customize pricing to these particular markets that the buyers would be short changed so I think that yes they're complex and generally we don't like complexity but I think it serves both the buyers and the sellers pretty well so if I were to vote on this today I'd say I think we're I think we need the complexity um as much as we may dislike it talking about complexity and simplicity leads nicely into my next question about prism which as you know is a reporting system that has become the industry standard for a lines prism enables Airlines to really understand their market share bringing transparency into this complex set of data so Scott what are prism's goals and how is this Reporting System changing the marketplace well I think prism's goals are pretty clear in that they want to serve the airline industry with the best available view of market share data and that's important to many airlines that market share emphasis on share but some Airlines still today prefer simply revenue or segments as their measure of success so they don't need this relative issue of how much market share they're getting but most of the certainly the North American and uh major European airlines and many other major airlines around the world have gravitated to this uh this market share basis for measuring contract performance so that means prism is uh is in a really good position to consolidate lots and lots of corporate ticket data and they're going to provide that data back to the airlines in ways that make the airlines much more aware of which companies are performing against their contracted commitments and what this really does for the buyers is actually a good thing in the sense that it it clearly identifies buyers that are meeting or exceeding their goals and therefore are worth even better discounts and at the same time it identifies those corporations that are not meeting their contracted performance uh requirements and therefore probably should have their discounts reduced or removed which then means that there's more more discount dollars available to those companies that can perform so in know in a very short answer prism serves the market by enforcing and recognizing good contracted behavior and it helps the airlines to reward those types of companies do you have any additional thoughts on prism from your perspective Patrick I certainly agree with uh what Scott just stated I think prism is here to stay there's a there's a definitely a benefit of using prism uh especially for the for the carriers they need to find a way on how to identify additional opportunities to propose to their to their clients and um I think one asked from the companies to really like obtain Tain the the prism data directly ultimately it's it's their data it's data that has been provided by their tmc's to prism that they basically just set up in a way for for the airlines to use and I think like there's a there's a clear ask from the companies as well like to obtain the data uh for their own analysis but I think like in general um you know it is basically setting up a structure that is that is uh important for the overall purchasing effort and um just like in general I think like as as most of the listeners probably have experienced as well like you really need to start the process early you need to send out the edras to the carriers very quickly you need to make make sure that you're involved with tmc's at an early stage spe specifically the tmc's in other regions outside of the core regions like North America or even Europe we see on a very regular basis that and coming back to Scott's point that prison data is is more used in in Asia for example nowadays as well or even in Latin America to a certain degree is wherever this uh prism data flow hasn't been established yet your your overall RFP timeline for the airline is definitely being delayed I think that's huge and that needs to be planned in advance and uh you know whenever you take a new TMC on or you switch TMC just make sure to set up the um the data flow right away so that you don't experience any delays when you go to market thanks Patrick so no podcast on airline contract management would be complete without a question about frequent flyer programs so Scott I'd like to ask you your thoughts on these programs do you think that they make any difference to travel programs and Airline negotiations thanks Teresa I think the issue is um not yet clear from an from a fact or evidence point of view but I know that many travel managers are concerned that the uh the new emphasis by the airlines in terms of how they're structuring their frequent flyer programs may lead travelers to want to book more expensive fairs when you look at the thresholds though inside these programs kind of the minimum thresholds it doesn't strike me that it's going to have a big consequence on most corporate travel programs so I think generally we can expect to be relaxed about this but I do understand why corporate travel managers may be concerned about the alignment that the airlines are creating between frequent flyer programs and purchasing more expensive fairs but overall I don't think it's going to be a major issue so before we close Patrick do you have any final or closing thoughts that you'd like to share absolutely Teresa I think the economy now favors the airlines which means travel buyers must pay more attention to managing the airline contracts the market share commitments are measured closely and newly negotiated discounts are not as attractive as they were two years ago overall Savvy travel managers are trying to create a broader picture of their Airline spend by including ancillary fees and SE charges as we have heard before in order to negotiate a bit better and to count any contract shortfalls they may have caused corporate travel is further increasing with demand likely to grow more quickly in 2015 however the industry is not expecting airf to rise too sharply actually in many regions especially in Asia and Europe competition is also growing largely from lowcost carriers on short Hall routes and Middle Eastern the gulf carriers in the L haul markets the US markets on the other side is one major exception in this regard consolidation has reduced competition and is already pushing up airs in some of the markets unlike in some of the other regions the low cost carriers are suffering from rising costs in the US mostly discouraging them from entering any price Wars with some of the Legacy carriers with few of these uh disruptors left in the markets fairs could rise sharply over the next couple of years however even in the US Airlines fear damaging Demand with excessively High airfare increases possibly risking the record profits they're already making at this current time us buyers will need to use even more detailed data than in the past to identify opportunities in negotiations and when going through the contract performance reviews the buyers should be able to achieve discounts as long as they make sure to engage with their Travelers about booking smarter thank you very much for that thank you both too for joining today this has been a very interesting podcast and I just want to remind everyone again that this is the first of two podcasts covering the travel category stay tuned for our next travel podcast when Scott and Patrick will be back to discuss modern travel Management on that note I'd like to thank Patrick Hoffman and Scott Gillespie for being my guest today I'd also like to thank our production engineer Tom Klein thank you for listening to this edition of the wave of the future if you have any comments on this podcast or have suggestions for podcast topics please share your thoughts via Twitter our Twitter handle is atkp this has been an at Carney procurement and analytic Solutions podcast production join us again soon for our next wave of the future [Music] podcast [Applause] [Music]