Three Myths About Sourcing Airlines – Part 1

Given that air travel is typically a large spend item for most companies, it makes sense for procurement folks to attack it with extra energy and creativity.  Here are three ideas that often come up:

  1. Consolidate air spend across a few firms to get better negotiating leverage
  2. Buy air travel in bulk
  3. Leverage frequent flier miles by stripping them out of the fare price, or by pooling them for corporate use.

Unless you’re the type that likes to take long walks in the hot sun, you can forget about using any of these methods – they just don’t work.  Here’s why:

The Problems with Consortia Buying

Airlines hate the idea of companies pooling their spend to get better discounts.  It’s too slippery a slope – where would it stop?  But that’s not the real problem – governance is.  By governance, I mean the ability of multiple unrelated firms to make a group purchase contract work for both the buyers and the suppliers.

The first problem is conflicting footprints.  No two companies have the same air travel footprint (the set of origination-destination city pairs and the corresponding spend volumes).  Imagine one firm based in Atlanta (a Delta stronghold) pooling its spend with a firm based in Houston (a Continental stronghold).  By picking either DL or CO as the consortia’s primary carrier, the deal guarantees to make travelers from the “losing” firm really unhappy.

This leads to the second problem with consortias – the dilution of policy compliance.  Airlines are willing to give discounts in return for increased market share (or volume in some markets).  They will rationally ask how a group of companies will be able to achieve higher compliance, as a consortia, than they could individually.

Given that some of the consortia firms will have unhappy travelers, there needs to be a very strong penalty clause in the consortia agreement to make sure the market share goals are met.  Negotiating such a clause between consortia members is very difficult and time-consuming.  Enforcing it is even more painful and will be met with any number of excuses.

Finally, if companies are really able to deliver the market share sought by an airline, they will very likely get the same (or nearly the same) discount on their own.  The size of a buyer’s airline spend is not the biggest driver of discounts. Much more important are the strength of the buyer’s travel policy and its fare mix (a proxy for profit margin).

So if you can get nearly the same discounts on your own, why would you want to go through the hassle of trying to buy via a consortia? You wouldn’t and shouldn’t.

Up next: Buying airfare in bulk

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5 Responses to Three Myths About Sourcing Airlines – Part 1

  1. Barry Rogers says:

    Scott,

    A good, concise write-up on the issue. One that still comes up frequently — typically generated by management that aren’t familiar with the intricacies of airline sourcing.

    I have to say, though, that I can’t believe you actually added an “s” to consortia to make it plural :) (One consortium, two consortia)

    Barry

    • Scott Gillespie says:

      Thanks, Barry. Apologies for the spelling error – I didn’t have that datum in my mental dictionary – ha!

  2. If your company has heavy traffic between a particular city pair, an idea to explore might be corporate shuttle service from a aircraft charter operator or even single charters as they come along. Prepaying can often discount your the rate for your trip, which can be set at times you dictate. Depending on your travelers, this could remove the need for overnight stays and meals. Even thought the per seat cost may be a little higher, more productive office time and decreased hotel and meal costs could even up the bottom line. And that’s before you even factor in using alternate airports closer to final destinations and removing the need to arrive at the airport hours in advance of departure. The savings in time, soft and hard costs can be substantial.

    • Scott Gillespie says:

      Jon Anne brings up an interesting point – the role of charter aircraft on high-volume city pairs. This can make a lot of sense, so much so that some companies in-source the business by deploying their own fleet. Buyers definitely have more options than just the flights from scheduled airlines.

      Many

  3. Pingback: Most Popular Reads of 2009 « Gillespie's Guide to Travel Procurement

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