Three Myths About Sourcing Airlines – Part 2

(See Part 1 in this series here)

Why Buying in Bulk Doesn’t Work

Bulk buying (a.k.a. pre-paying) makes sense for many commodities, but not airfares.  Why? Because it’s complex and expensive.

It’s Complex

Let’s say you want to bulk-buy $1 million in airfares from your primary carrier. You write the airline a check – simple. But now:

Which departments in your firm will be charged for their part of the bulk buy?

Do your departments get charged now, or later, on a pay-as-you-go basis?

Is there an expiration date?  If so, what happens to the unused funds?

What kinds of airfares can you buy with your pre-paid fund – any and all, or are you limited to buying higher-margin/higher-price fares?

Can anyone in your firm use the pre-paid fares, or is this limited to specific travelers?  Either way, who manages enrollment access to the pre-paid fares?

How will your travel agency and your T&E system handle the tracking  of who has used the pre-paid fares?

It’s Expensive

Given the issues above, you can see there is a layer of administrative cost to a bulk-buy program.  Then there is the question of the unit price.

You’d think that if you pre-pay your air spend, you’d get a discount on the unit price.  That may – or may not – be the case.  An airline may offer a bulk-buy program aimed at making life easier for VIPs.  In return for guaranteed seats on any flight, the airline will want a premium price.

These VIP-oriented pre-paid fares have run in the range of 45-50 cents per mile – pretty close to an average First Class (domestic US) or a Business Class (ex-US) seat price. Good procurement practices require a careful analysis of the unit price differential between the  pre-paid and spot-buy prices – and this is not an easy task.

Finally, there is the non-trivial issue of credit risk.  By pre-paying your air spend, you are in effect loaning an airline money.  Sure, interest rates are low, but you’d rationally expect to get compensated for taking some risk for becoming an unsecured creditor to an airline.

For most buyers in the U.S., the pre-paid idea is not likely to make sense.  However, keep an eye on JetBlue, American Airlines and Air Canada.  AA has had a long-standing VIP pre-pay program, AAirPass.  The program has met with limited success in the corporate market…seems best suited for firms with a few VIP travelers.

JetBlue offered a special one-month unlimited pass for $599.  It was valid for flights between September 8th and October 8th, 2009 – a traditionally slow period for North American airlines.  The program was well received, and my be brought back again this year. Check out JetBlue’s route system here.

Air Canada has embraced the pre-paid airfare concept.  You can buy pre-paid fares on its website or through your travel agency.  Travel includes trans-border (US<> Canada) and points beyond.  I haven’t crunched the numbers, but at first glance the savings appear modest at best.

Can pre-paid airfares work for some companies?  Yes, but unless your firm has an especially good fit with with an airline, can handle the administrative issues and is convinced of the value, skip this sourcing strategy.

Up next: Part 3 – Leveraging frequent flier miles

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2 Responses to Three Myths About Sourcing Airlines – Part 2

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

  2. Pingback: Forecast for Travel Buying Tools | Gillespie's Guide to Travel+Procurement

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