Endangered Species- Evolving Economics

Article Published in Business Travel Executive, July 1, 1999

"Every smart executive knows that when products become commodities, smart customers buy solely on the basis of price ... and thanks to deregulation, widespread competition, and the power of the Internet, many services are now turning into commodities." While the statement is directed at business in general, it is particularly applicable to the airline industry and the evolving economics confronting travel managers as the new millennium approaches.

What is a commodity product? Webster's identifies a commodity as "basic items or staple products". The airline seat that enables the corporate traveler to visit prospective customers or vendors, participate in training or marketing programs, etc., is exactly that ... a staple commodity necessary for a company to conduct business. This is as true of small business as it is of big business.

For most corporate travel managers, the premise of an airline seat as a commodity is different. Airline seats have been marketed and purchased as a value-added "service" for the better part of the past 30 years. But the reality of the changing product can be seen in the airplane purchasing trends and the type of new start-up carriers entering the market. Examples abound.

  1. American Eagle will launch direct Dallas-Grand Rapids nonstop service in August using 50-seat ERJ-145 regional jet aircraft on the 930-mile route, bypassing American's Chicago hub.
  2. United Airlines plans to add 30 nonstop flights at Los Angeles beginning in September including Santa Barbara, Medford, Reno, San Diego, and Palm Springs, among other destinations.
  3. All Nippon Airlines has laid out a restructuring plan that includes creation of a new low-cost airline operating domestic and international service.
  4. The Canadair CRJ700 Regional Jet, a 70-seat jet has attracted 96 firm orders from six airlines and 140 options.

Important in the four examples above is the size of jets being used to serve direct markets and the bypassing of traditional "hubs" to serve smaller point-to-point markets. Southwest, a major air carrier, and their counterpart, ProAir, a small start-up out of Detroit, already thrive on the delivery of commodity seats in point-to-point markets. But even the traditional airlines are "stepping up to the plate". Increasingly, the airline seat is a commodity seat just like a bus or taxi seat.

While many claim airline deregulation has spawned competition, it is the author's view that the real driver behind the current evolution is high speed access to current information and ready access to timely two-way communication. This information/communication function is "lumped" in the realm of Internet ... which is certainly a contributor, but not the necessarily the only resource.

Technology now gives corporate managers the ability to get real-time buying information ... even pre-travel buying. Technology enables consolidation of information about buying patterns that can and should be related to corporate strategic initiatives as well as applied business practices. Technology enables travel managers to "manage" corporate cash float in ways that were never possible in the past. Clearly, most of these capabilities are not "Internet" related ... and some are not even e-commerce. But they all center on communication of information.

This begets the question ... how does the travel manager better use the information at hand? Without exception, every travel manager the author has talked with believes that he/she is obtaining and using the most contemporary information available to him or her through their particular resources. But the reality of this answer may lie, not in the tools that they use, but rather, on how the tools are used.

Consider the conventional distribution channel portrayed in Figure 1. A commodity product is "manufactured" or "grown". It is then resold to a wholesaler ... who, in turn, typically resells the commodity to a repackager. The repackager "adds value" and resells to a retail outlet ... who, in turn, sells the repackaged product to the consumer or buyer. There are two aspects of this diagram to consider. First, at each level of the distribution process, the new "owner" assumes risk. Second, at each level of the distribution process, there is a financial settlement with the prior "owner". This process of distributed risk proportional to the value added contribution - and shifted risk at each tier of distribution - helps to insure a wide spectrum of product choice from the same commodity.

Figure 1
(omitted from magazine due to space constraint)

Now consider the primary distribution channel of the airline systems as depicted in Figure 2. The airline seat is "distributed" via the GDS/CRSs to agents. Agents represent the airlines in the sale of the seat(s) to the buyer/consumer - and effect financial settlement through ARC. In the airline model, there is no distributed risk as is seen in more conventional commodity distribution. The GDS/CRSs do not take "ownership" of the airline seats. The travel agent is an "agent" of the airline. Not even the buyer of the ticket actually owns the seat. Rather, the buyer obtains an "entitlement" to travel between two points. If the buyer "no shows", the entitlement remains good for a later date. Throughout the process, the "risk" of an empty seat remains with the airline. Even the ARC financial settlement process is holistically contained within the airline distribution process.

Figure 2.
(omitted from magazine due to space constraint)

With added access to information, and the ability to turn that information into knowledge appropriate to the needs of a company or individual, the holistic airline model of distribution is beginning to break down. This type of information, when turned to applied knowledge, enabled two major automobile manufactures to commit in advance to buy a large enough volume of seats from ProAir to insure the viability of that startup carrier for three to four years. It led a computer company to take a major equity position in Raleigh based Midway Airlines. It permits a major electronics firm to buy a fixed quantity of seats from Lufthansa Airlines in specific markets.

In each of the noted cases, what has happened? The buyer, in order to obtain better prices from the commodity producer, has assumed risk - limited and controlled by the applied use of the information as knowledge about what and how much to buy. Equally important, in the acquisition of that risk, a separate independent financial transaction has taken place - in each case, outside the currently conventional ARC process. The net effect is that the travel industry is beginning to see the tiered distribution shared risk channels that exist in the distribution of virtually all other commodity products.

"Ah, you say, but these are all BIG companies". In one sense, that is true. But consider the economic reality. The software or electronic firms that must compete with these innovators must find some comparable way to lower their cost of buying the same economic staple ... in this case, commodity air travel. Failure to lower these travel costs will bring about the demise of each competitor. If you are a travel manager for one of their competitors - what must you do?

The answer lies in your specific information. As a travel manager, you must understand what travel you buy ... and from whom. You must understand why. Not the "surface" why (i.e., because our employees go there) - but the core strategic and customer service reasons. Knowing what other companies travel in similar patterns will enable travel managers to band together - to consolidate their buying power in specific markets to enable the risk-taking leverage of the big bulk buyers.

Travel agency selection will not be based on the traditional "rebates" that exist in the present distribution structure. Rather, the choice of a travel agency will ride on who best understands the buying needs of the company, what agency affiliations enable the company to buy consolidated bulk risk seats in specific markets, or which agency provides the best real time on-line information management audit and control tools fully integrate to the company's internal purchasing system.

Travel managers that remain tied to the traditional travel distribution model will do their companies and themselves a disservice. Few will remain in management roles for more than three to four years. New travel managers will evolve that understand the airline seat as a price sensitive commodity - which in some markets requires varying degrees of assimilated risk, in others, risk that can be shared, and for low volume markets - opportunities to buy from second and third level risk-takers that serve those markets.

Travel managers can expect to see increasing tiers of travel product outlets. At each tier, some different aspect of "value added" will be included with the commodity seat. Travel managers should look for opportunities to "package" their own travel needs (i.e., air, hotel, and car) with the same kind of buying leverage that other departments within the company have and use. Travel managers might look for joint-buying opportunities with other co-located companies with similar travel needs.

Using the traditional travel reporting tools in the traditional ways is tantamount to abdicating the responsibilities that come with being a travel manager ... because these tools are tied to the traditional distribution channel's needs. The challenge for most travel managers will be the transition from these old methods and processes to new, more relevant, information gathering and processing solutions. In hand, the opportunities derived from managing information are unlimited.

Are you prepared for this evolution? Figure 3 reflects eight questions that address different issues and views of how travel distribution will evolve and how travel managers might be asked to cope with these changes. Score yourself. There is not right or wrong score - but rather, a reflection of your views of where the industry is headed.

The questions in Figure 3 are posed to generate thought about the issues - not imply that these questions accurately represent the future. While the author's views are reflected in this essay, those views must be taken with some degree of subjectivity. No one can predict the future with 100% accuracy. The questions reflect the evolution of existing trends. Other, newer, trends may evolve. For example, the auction dynamic as currently emerging via Priceline.Com, may spread to corporate travel buying. Only by continually watching the evolving trends and challenging the viability of each, can a travel manager begin to predict the needs they must evolve to satisfy the strategies of there own corporation's goals.

Figure 3

Score yourself for each question below, as indicated. In question 1, if you do not get market pair reports, score yourself a zero (0). If you get daily market pair reports on pre-booked travel patterns that allow you to manage future buying, score yourself five (5). Do the same for each subsequent question.

1. How current are your market pair corporate traveler reports?
<0 - No Reports
1 - Annual
2 - Monthly
3 - Weekly
4 - Daily
5 - Pre-Booked Daily at least a week in advance of travel
2. How is Travel Buying Reconciled with actual Traveler Expense Reports? 0 - No reconciliation
1 - Manual Audits of Suspected Offenders
2 - Manual Periodic Random Audits
3 - Manual Audit Monthly
4 - Interactively after Expense report is filed
5 - Interactively against Approved Travel Plan/Expense form
3. How is your Travel Agency compensated for its services? 0 - Commission only
1 - Commission plus costs for specific regular reports
2 - Fees plus commission for activities or services performed for corporation
3 - Fees less commissions based on activities or services performed for corporation
4 - Fee based on time spent in servicing corporation
5 - Fee based on transformation of travel function to meet corporate strategies
4. What level of Strategic Travel Knowledge do you access or monitor? 0 - Not your responsibility
1 - Travel requests and reason's for travel are approved departmentally
2 - Operations and training travel is planned and audited, while executive, marketing and/or sales travel are approved departmentally against budgets
3 - Travel requests are audited against travel planning with exceptions noted
4 - #3 above plus traveler's reason for travel is captured and used for next planning cycle
5 - Traveler's reason for travel is captured interactively, measured against plan, and information is used to plan/respond to anticipated needs in short term and/or next planning cycle
5. Your company currently ... 0 - Pays for travel by reimbursement for travel via traveler expense report
1 - Pays for more than 50% of travel with corporate credit card(s)
2 - Pays for 90% of travel through corporate travel agency(s) using corporate credit card(s)
3 - Has some direct purchase agreements that are settled monthly by check (i.e., non-credit card)
4 - Has implemented Electronic Funds Settlement (EFT) monthly payment solutions with non-travel vendors
5 - Has implemented automated EFT direct settlement at time of service delivery with some travel or non-travel vendors
6. You personally ... 0 - Have no computer literacy skills ... that's what "staff" are for
1 - Can use a computer for routine office skills and/or access to a GDS/CRS
2 - Use a computer to access Internet and do interactive fare searches at different web sites
3 - #2 and are involved in the strategic planning of the network that serves your travel department
4 - #3 and understand the capabilities of data mining computer systems
5 - #4 and understand how to structure an SQL query to convert information stored in a data inventory system to knowledge useful to meet your company's strategic objectives
7. Do you identify, today, in your travel agency reports (i.e., not from credit card companies), air travel credit card charges? 0 - Have not thought about it
1 - Have thought about it, but agency reporting system cannot capture the date
2 - Get data historically from accounting department
3 - Capture credit card expenses at time of ticketing via back-office reports
4 - Capture expected credit card billing via pre-travel reporting
5 - #4 and interactively audit GDS/CRS data against expense reports filed by traveler
8. Your personal view for the future of travel product distribution is ... 0 - The existing distribution model will remain the same for the next five years
1 - While I can see the change taking place, my corporate management is so structured in the way they do business that the company will not allow change leadership in travel
2 - As the GDS/CRSs and ARC will modify the way they do business enough to serve my company's needs
3 - Even if the GDS/CRS and ARC adapt their processes, there will be an increasing need to effect bookings, settlement, and other travel transactions via Internet and other e-commerce tools
4 - Corporations will buy 10% to 20% of their air travel needs directly from airlines via e-commerce transactions within five years
5 - New risk taking "players" will evolve in the distribution channel to effect better buying, settlement, and travel solutions for corporate buyers, few of whom will be available via the traditional travel distribution channel.

Where did you score on the scale of 0 to 40? If you scored a 0, you are among those that believe that little, if any , change confronts the industry. If you scored a 40, you may be anticipating the future a little too much. Clearly, the higher you score, the more forward looking you are.

These questions reflect some of the author's views of where travel product distribution is headed. Nobody can predict the future. But these questions represent only a few of the trends that are in the early stages of development - today. Virtually all of the questions are extracted from talks or articles given or written by the author over the past six months. The trend basis for each question can be documented through existing examples. If you have questions about the questions, please feel free to e-mail the author at << reastman@eastmangroup.com >>.