Volvo Drives Compliance Through 'Full-Scheme' Air Discounts - Business Travel News

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Volvo Drives Compliance Through 'Full-Scheme' Air Discounts

November 28, 2012 - 12:15 PM ET

By Jay Boehmer

Eight Airlines Agree To Corporate Pricing For All Fares In All Channels

At one point or another, every travel buyer faces them: those travelers who are certain they can do better than the procurement department, those who wander off the pasture into thickets of web deals, online travel agencies and airline.com sites, those who are eager to graze on better fares than those laid out by the company.

Volvo Group strategic purchasing manager Stephan Hylander has spent the past few years herding such travelers with a unique air sourcing program based on a basic principle: If airlines would discount 100 percent of their inventories—including low-bucket published fares—then the Swedish vehicle manufacturer could persuade travelers to book through approved channels with the promise that they won't find better fares elsewhere.

In addition to returning Volvo travelers to corporate pastures, such a program would steer greater traffic to preferred carriers and deliver greater savings.

Stephan HylanderThe idea was simple enough, but getting there required bargaining and persuasion, senior management support and supplier willingness, and plenty of internal communication and agency coordination. Despite the challenges, Hylander in the past two years secured such "full-scheme discount" programs with eight airlines, primarily multinational European carriers. Though he cited nondisclosure agreements when declining to identify those airlines, he said he expected more to follow.

Overall, he said Volvo's preferred carriers and corporate travelers deem the program a success.

Internal Pattern Analysis 

Hylander several years ago began a lofty pursuit of air agreements that were "so favorable that we minimize or even mitigate the possibility that travelers deviate from the policy," he said. "We thought that if we had a full-scheme discount program, not only on the corporate inventory, but also on the airlines' inventory—which means that whatever the airline proposes on the market through whatever source or distribution channel they use—that Volvo travelers would get something that is at least a little more favorable." The idea was somewhat radical, considering that into even the most stringently negotiated corporate travel programs, the occasional spot-buy published fare finds its way in.

Before approaching airlines, Hylander studied Volvo's air spend and found that about 80 percent of the company's corporate fares were purchased in mid-tier fare bands or, as he said, "in the upper part of the lower half and the lower part of the upper half" of fare categories. In other words, Volvo travelers purchased a relatively small percentage of fares that fell either in the high-yield, last-minute walkup tiers or the lowest, most deeply discounted published tiers.

"We knew a majority of our volumes would end up in that part of the program," Hylander said, so that's where he focused negotiations, "but we also wanted to have a full-scheme program. So among the very low, low fares—which, first of all, are more or less impossible to get because there are only a few seats per flight—we asked for discounts."

Hesitant At First  

Not surprisingly, airlines initially met Hylander's idea with resistance. "The response from the airlines was quite negative," he said. "They're all stuck in their own revenue management structures. Some said, 'good idea,' but once they came back from revenue management—and revenue management is like God in these companies—they didn't dare jeopardize their current structures."

Persistence paid off. Hylander ultimately worked his way within airline organizations to discuss his proposal directly with airline revenue management departments and "managed to convince a couple of airlines to agree on these types of programs," he said.

Among the challenges, Hylander said his idea "was an administratively heavy task" for airlines since "it took an extensive amount of time for airlines to load the fares." Indeed, in seeking discounts on 100 percent of inventory, Volvo proposed a program that included far more discount levels on far more fare types than is typical, he said.

"It took an extensive amount of time for airlines to load the fares—which are special for Volvo," Hylander said. "But we did not ask them to make any modifications to the rules and conditions. Whatever fare we bought we had to stick to the terms and conditions of that specific fare."

In addition to the administrative burden, airlines also shared concerns about being made financially whole. That took some bargaining, Hylander said. While 80 percent of the company's volume was purchased "where we thought, within a limited number of classes in the middle," he said, airlines often are loath to discount already deeply discounted fares.

Still, for low-bucket fares, Hylander proposed "discounts so low that they'll not really impact the airlines' revenues anyway." In exchange, Volvo could even nudge down  some discount levels for higher-bucket fares.

"We had to make sure we had proper discount levels on those classes where the majority of our travel was booked," he said.

"Airlines do not enter a corporate program unless they can see the total revenues increasing," Hylander continued. As it turned out, airlines participating in the program benefited from increased market share, he claimed.

Hylander noted that by mid-2010, Volvo secured contracts with a few airlines to implement his "full-scheme" vision.

SNAPSHOT

Organization: Gothenburg, Sweden-based truck, bus and equipment manufacturer Volvo Group, with sales and production in more than 150 countries and 2011 net sales of $45 billion

Volume: An estimated 2012 global air spend of $150 million

Challenge: Recover lost savings resulting from travelers booking airfares through nonpreferred channels

Approach: Work with airlines on "full-scheme" programs to discount 100 percent of inventory

Solution: Assure travelers that corporate fares can't be beat, reduce average airfare and drive more market share to preferred airlines

Getting Travelers On Board 

No matter how much a company asserts to travelers that it offers the lowest fares, it takes some persuasion of travelers to get them on board. So began Hylander's multi-pronged corporate communications campaign, in which the travel teams took to email and the Volvo Intranet and hosted face-to-face meetings to pound the message.

"We involved our travel agency heavily in this process because they have the most frequent interaction with travelers," Hylander said. "The agency was to help them and guide them through the transaction."

While Hylander called those communication modes the "soft" approach, the company also tightened controls within preferred booking channels, for example by making online booking mandatory for flights between major city pairs and for some simple itineraries. Even if travelers called the agency to book such itineraries, they'd be turned back to the booking tool. "On the online tool, no other airlines are visible apart from the preferred unless they are fully booked or do not operate a route," Hylander said. "Then others will come up."

As Always, Exceptions 

As travelers and carriers grow comfortable with the discount program, Hylander has continued to optimize and refine the approach, which he acknowledged still has some gaps. Though it's called a "full-scheme" program, 100 percent is not always achievable, he noted.

All told, he said roughly 80 percent of the company's volume now is purchased under discount. For the remaining 20 percent, sometimes the preferred carrier is sold out or doesn't serve a particular route. Or, even when a preferred carrier serves a route, sometimes it offers only morning or evening departure when a traveler needs a midday flight.

Some of the eight airline participants "have not reached 100 percent yet," Hylander said. "The major ones are on the 100-percent program. These are very important airlines for us based on our geographic needs."

Even short of full participation, Hylander and Volvo have deemed the program a success, the proof of which lies in steadily declining average fares across the company's program, particularly in top destinations operated by preferred carriers.

This report originally appeared in the November 2012 issue of Travel Procurement. 

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