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To manage hundreds of millions of dollars in annual global airline expenses, Credit Suisse Group uses familiar analysis and contracting strategies but also applies the new lessons it has learned from an evolving marketplace. Airline contracting is managed jointly by Credit Suisse's travel and procurement departments, according to director of internal client services Mike Molloy, who is based in Singapore.
The Zurich-based financial services giant renegotiates airline contracts every two years. "Given the pace of change, and the pace of development in the airline industry at this time, it may be worthwhile to do it more quickly, but an airline request for proposal is extremely time consuming," Molly told attendees to an Association of Corporate Travel Executives conference here last month.
Before beginning the RFP process, Credit Suisse first measures its "baseline of current costs," Molloy said, suggesting companies can examine absolute total expenditures or metrics for top routes. "We will bring our airline RFP results to the executive board of the Credit Suisse Group. When you are presenting in front of that audience with very limited time, they only have the ability to look at one page."
Another step Credit Suisse takes before plunging into the negotiating cycle is ensuring it has proper data in all relevant markets. "A good case in point for us is India," Molloy explained. "It was extremely difficult given the fragmented purchase process in India to get an idea of how much we were purchasing there. We have now realized, for Asia, it's our fifth largest market and represents a couple million dollars. Two years ago, I wouldn't have had any idea how much it really represented. Places like India and China, where there are not necessarily the best control mechanisms on purchasing, can be a challenge, but it's well worth the effort."
Meanwhile, Molloy noted that actual discount negotiations can be "the easy part," with legal review of all the specific terms and conditions by both buyer and supplier often consuming much more time. As such, "we require that the airlines review and agree to our general terms and conditions prior to participation" in the RFP, he said.
As far as the actual RFP, Molloy suggested companies use a standardized tool to ensure vendors are answering the same questions in the same format. "It takes a little practice to get the right questions and the right structure for an airline RFP," he acknowledged. Credit Suisse, Molloy said, uses the Frictionless tool internally for this purpose, but also employs external consultants to help analyze carrier bids. [SAP acquired e-sourcing service provider Frictionless Commerce in 2006.]
Credit Suisse relies on "five or six key anchor airlines," Molloy explained. "That number is not arbitrary, they just happen to make up about 80 percent of all spend." The company also has "another maybe 12 supplementary contracts." The vast majority of Credit Suisse's global air travel volume, which last September stood around $220 million, is derived from the United States, United Kingdom and Switzerland.
"You don't need an agreement with everybody," he continued. "If you find that an airline is only representing half a percent or quarter of a percent of volume in a given city, it's probably not worth the effort of having that agreement."
Earlier in the decade, Credit Suisse used regional contracts in Asia-Pacific, "and we typically only looked at the travel originating in that region or within that region," Molloy said. "In 2002-2003, we then thought, 'We obviously have a lot of people going from New York, London or Zurich into the region on these carriers, so let's promote these carriers from those points of sale and maximize the overall pie we have with that airline.' " By promising Cathay Pacific "some of this really great, high-yield New York-Hong Kong nonstop" traffic, for example, Credit Suisse was able to secure more favorable pricing on Cathay's "bread and butter" routes between Hong Kong and such destinations as Manila, Singapore and Taipei.
By pursuing such a leverage strategy with Cathay, Qantas and Singapore Airlines, those carriers "now are among our top three or four globally," Molloy said. He admitted that the approach can be challenging: "You may have a market like London where people are traditionally used to flying on British Airways. If a major route is to fly to South Africa, perhaps you can get a very sweet deal on South African Airlines. It may be worth it to explore maximizing that kind of deal."
Like many others, Credit Suisse is careful not to overcommit. "We will look at every single offer by every single route and make sure that if there is a marketshare requirement that it won't add up to over 100 percent," Molly said. "In fact, we make sure that the numbers never add up to over 90 percent, so we will only internally commit to a 90 percent total market share on one, two or three airlines."
Molloy also touched on flat fares, saying, "In an inflationary environment, this can be very beneficial." But in Credit Suisse's most recent round of airline negotiations--completed in the middle of 2008--"airlines were obviously very reluctant to put in place flat fares. We were successful in only one or two instances."
He also suggested that corporate buyers should "negotiate everything," including all the various fees and charges that airlines have been adding. "Some of the surcharges that have come up in the last six to nine months were on the table for discussion, at least, during our most recent round of negotiations, including fuel surcharges," Molloy said. "There is no reason fuel surcharges should be off the table. You can conceivably set maximum caps or limits, and you can benchmark."
Other contracting pointers Molloy offered included out-clauses and provisions for using market fares. On the former, he said that buyers should "build in a line-item veto, where you can get rid of one market, if necessary. Airlines are not always in agreement to do that but try to work that in upfront. It generally benefits both parties." Regarding market fares, he noted that in certain domestic markets around the world--"Australia in particular"--airlines offer published fares that are lower than corporate fares. "What we have found now," Molloy said, "is that in some contracts you can include a provision so that market fares contribute to an overall volume or are counted toward a marketshare percentage."
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