AA-US Merger Implications for Gov and Biz Travel

This morning I pointed out some new frontiers in managed travel to the Society of Government Travel Professionals.  Things like traveler friction, trip tailoring, edit rights, Managed Travel 2.0 and traveler dashboards, along with their implications for the government travel program. (here’s the full deck)

Then I shared this slide to make the point that airfares will go up after the AA-US merger:

Airline Profit Margins Rise as Competition Falls

Fewer competitors in a market result in higher profit margins for the suppliers. Looks like that basic economic theory holds true in the airline category. (For non-government readers, YCA fares are the U.S. Government’s equivalent of full Y fares – fully refundable, last seat availability in coach.)

The significant implication for the U.S. Government and businesses buying tickets in the affected markets is simple.  As airfares go up, and budgets go down, it puts even more pressure on the procurement folks to squeeze better prices from other travel suppliers.

Better travel procurement can’t be the only answer; demand management has to come into play in a big way to meet shrinking budget goals.

Delta and US Air noted in their Q1 financial results a softening of demand for close-in bookings, presumably due to cuts being made to government travel budgets.  The question for the rest of the travel industry is whether or not those close-in bookings were made farther out, or if they were never taken.

If the former, hotels and rental car suppliers still see those travelers, although likely under more price pressure. If the latter, then the lost revenue impacts everyone in the travel supply chain.

The silver lining for travel buyers?  Such a softening of demand will make it easier for the travel procurement folks to extract the price concessions they’ll need.

Unlike the DL-NW and UA-CO airline mergers, I think this one, given its timing with the impacts of sequestration, make it a much bigger rock thrown in the travel pricing pool.

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This entry was posted in Airlines, Spend Categories, Travel Industry, Travel Procurement, Travel Suppliers and tagged , . Bookmark the permalink.

4 Responses to AA-US Merger Implications for Gov and Biz Travel

  1. Scott –

    I like the way you build your presentations, but of course so much of the detail is in your spoken content that I always have questions. And with this audience, I really wanted to see if the audience engaged with your topic, showed interest, and asked questions. Primarily the travel managers – I know this ends up being a vendor heavy event.

    I didn’t expect traveler friction or Travel 2.0 to generate a huge positive response, but I was curious/hopeful. Since we are so tied to regulation and policy I don’t observe a willingness to back off regulatory restriction, as much as I see a willingness to tighten it further.

    Finally, very interested, you identify existing travel procurement, air (CPP), hotel (FedRooms), and car (DTMO w/GARS) as an area for improvement. I’m very curious what you talked about on that subject. Was your topic the process of negotiation (GSA or DTMO for a Federal wide approach) or the structure of the programs themselves (CPP or FedRooms)? Or something completely different?

  2. Scott Gillespie says:

    Hi Todd,
    My critique of the Car Rental and FedRooms program were made on the basis of their price-capped, non-directed procurement structure. I contrasted the CPP’s use of single city bid awards to a single supplier, with that of using caps and not steering travelers to specific suppliers.

    My point was that from a procurement perspective, without benefit of seeing either program’s data, I suspect there is money left on the table by using this price-capped, non-directed approach.

    However, the DTMO folks shared that their benchmarking of government rates used by travelers and members are about 30% below the average corporate rate…so the programs are clearly adding value.

    Comments from FedRooms stakeholders focused on 1) the inability (as in not having the legal or policy right) to tell travelers where to stay, and 2) the belief that the FedRooms rate was usually, maybe nearly always the lowest rate offered by most hotel properties…so where is the additional savings to be had?

    There was good give and take in the discussion, to the point that I was hoping with all the Department of Defense folks in the room, one might take pity on me and procure a flak jacket!

    • Hmmm, DTMO’s rental car numbers may (or may not) include the Government Administrative Rate Supplement (GARS) fee of $5 per day. I recall once doing an analysis of the rates paid by the government where that fee was a factor. See this: http://www.defensetravel.dod.mil/site/rentalCar.cfm

      Did someone discuss the PENATRATION of Fed Rooms? Even if that program can save % points off the Per Diem rate, you have to use it to save it. It’s low, like under 20% low, depending on how you look at the data. Of course, it’s not mandated, but if your booking tools and travel agents were on the ball about getting them recommended, you could see some use and some savings.

      But Fed Rooms pricing is based on Per Diem. So, your savings available is really based on a comparison to that number. And then you have to compare that number to the prevailing rates. If the best you can do in an area is really Per Diem, or a slight reduction on that through Fed Rooms, then sure, it’s a great deal. If you can beat Per Diem through negotiated programs with a mandate, you can do better than Fed Rooms.

      Since Per Diem is the max you can spend, you can always lower the max, see this article:
      http://www.federaltimes.com/article/20120705/TRAVEL02/307050003/GSA-considering-sharply-lower-per-diem-rates-industry-sources-say

      This did not happen, but I imagine the success of a Per Diem reduction only works if your vendors play along…

  3. Hi Scott,
    Interesting positioning of MT2.0 to a unique market. The ‘edit rights’ for TMC’s is brilliant and will actually increase TMC business/client value, I believe. Also the culture of Per Diem’s makes for a great starting point for gamification and driving spend below those rates – I’m off to read John Nash :)!

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