Caterpillar Outsources Frequent Flyer Mile Collection

<B> Caterpillar Outsources Frequent Flyer Mile Collection</B>

By Amon Cohen

<I>Peoria, Ill.</I> - Construction and mining equipment manufacturer Caterpillar has found an effective way to automate what for many travel managers is the worst possible nightmare: appropriating travelers' frequent flyer miles and using them to buy air tickets for others.

To achieve this success, Caterpillar is using TravelWare, a third-party company based in Salt Lake City that specializes in tracking and optimizing mileage for corporate clients. While TravelWare operates only in the United States, it is running a less sophisticated system for Caterpillar in Europe, where mileage-burning opportunities are much more difficult, and it is still saving an estimated 4 percent on airfares.

The company has calculated that it is saving 10 percent on its air bill by obtaining tickets with mileage rather than cash, with some parts of the business reaping even higher rewards.

"One facility, which is being very aggressive about the need to reduce its travel budget, has cut air costs by 25 percent," said corporate travel services manager Dean Hudson.

In its mission to collect travelers' points, Caterpillar is clearly bucking the trend in travel management. According to the American Express Survey of Business Travel Management, the number of companies taking frequent flyer miles from their travelers fell from 9 percent in 1994 to 4 percent in 1996, and Amex did not include the issue at all in its 1998 survey. Most companies neither want the administrative headache of tracking miles nor the disincentive that taking them away might represent to employees.

But Caterpillar management has the power of history on its side, with a long-standing policy to which its employees have grown accustomed. It has mandated that employees hand over their mileage ever since frequent flyer programs were invented, and all employees sign a power of attorney agreement enabling the company to use the miles as it sees fit.

Under the TravelWare deal, every flight booked with the company's U.S. agency, Rosenbluth International, is automatically queued to TravelWare, which scans its database to see if anyone in the traveler's business unit has enough points to pay for the flight. If so, TravelWare attempts to buy the ticket with mileage.

Hudson said one in five of these attempts is successful for a total of 20 flights per day. To further optimize its resources, Caterpillar only uses mileage on more expensive flights, which tend to cost fewer points per real mile.

Runzheimer International senior consultant Rolfe Shellenberger agreed that a 25 percent savings is the maximum possible from retaining frequent flyer miles. He noted that Runzheimer's recommendation on the issue is that instead of taking travelers' points, companies ask them to use their miles to upgrade from coach to business class--allowing the company to pay the cheaper fare and reimburse the traveler for the difference.

There are many occasions when flights cannot be purchased with mileage because of their lack of flexibility. "If our employees have a lot of changes to their itinerary, then we don't require them to use mileage," said Hudson. "We have troubleshooters who have to go out to sites on short notice and they don't know how long the job is going to take."

Another disadvantage of appropriation is that it can damage the morale of travelers who feel their out-of-hours flying entitles them to a reward. Hudson acknowledged that "we have a little of that," though he claimed there is "less than at other companies because it has always been policy here." When a new company is acquired, travelers "are content with the arrangement once they see the business value of it," Hudson said.

TravelWare president Steve Petersen (no relation to loyalty program guru Randy Petersen) said the company assesses the likely impact on morale when performing evaluations for prospective clients and warns that anyone considering this strategy most likely will have to deal with personnel problems. "We almost try to talk some companies out of this to see if they are really up for it," he said.

The evaluation costs $2,500, including a review of one year's flying data from which TravelWare attempts to forecast how much the prospective customer would save using the system. TravelWare takes a 20 to 35 percent cut of the savings it achieves as payment. In some cases, Petersen said, "companies will save several hundred thousand dollars per month," usually 8 to 12 percent of their air spend.

Greg Moore, director of travel management consultancy Integrated Travel Research, agreed that "the range of savings to a corporation that decides to collect its travelers' mileage is 10 to 20 percent of its total travel and entertainment budget. Half of that is through using miles instead of dollars to buy tickets. The other half is through eliminating the invention of spurious trips to generate extra mileage and also by getting better compliance with policy. If travelers cannot earn miles with their favorite program, there is no point in their going to a non-preferred supplier."

But Moore has seen no marked increase recently in mileage appropriation by employers. "What I do see," he said, "is that companies are at least looking at what impact there would be and whether it would be worth doing." Petersen estimated that only 5 percent of U.S. corporations take their travelers' mileage.

Again, the collateral damage to personnel relations is the most probable inhibiting factor, but Moore said this can be overcome. "The effect on morale is directly related to how well the strategy is communicated," he said. "If you put out a statement saying all miles have to be handed over from Monday morning, you are going to have a problem. If you go out with the full story, explaining what the profit and loss line looks like, what the trend line looks like, what the cost-saving options are and how taking mileage is the least of the evils, then it shows that at least you thought about it. Ask employees whether they would rather you did something about frequent flyer mileage, which probably only affects 5 percent of them, or cut back on health care benefits, which affects 100 percent of them."

While Eastman Chemical Co. of Kingsport, Tenn., recognizes the benefits of such a program, it doesn't plan to entertain the idea anytime soon. Frequent travelers often use their mileage points to upgrade from coach or business class and "in a roundabout way that does help the company," said director of corporate travel and meeting services Lana Scott. "For people who are frequently flying, it makes them a little more comfortable when they arrive at their destination than if they are cramped between the middle seat."

Before Eastman would turn to taking away frequent flyer benefits, it would "look at all the other alternatives and exhaust those," Scott said.

When it comes to Europe, additional problems are presented by the greater difficulty in booking suitable flights. European itineraries usually are more complex and routes tend to have lower frequencies, which means carriers can be more parsimonious in the number of seats they allocate for mileage users. Nevertheless Caterpillar's Geneva-based international operation, Caterpillar Overseas, has the same appropriation policy as its U.S. parent. To get a reasonable percentage of the flights it wants, it mandates that all trips be booked at least three weeks in advance, and follows up with travelers about their reasons for booking later.

"We were told by Swissair that to obtain the tickets we want with mileage, we should book a minimum of two weeks in advance," said Caterpillar Overseas accounting manager Hans Burge. "We play safe by making it three weeks, which also helps us to buy cheap advance purchase tickets."

The mechanics for redeeming mileage have become more complicated. Originally, Swissair, its principal air supplier, issued transferable certificates, but that now has changed to a frequent flyer banking system, which is harder to trace. Now, its agency, Carlson Wagonlit Travel, has responsibility for tracking mileage and using it to purchase tickets whenever it can. While the system is not as sophisticated as that operated by TravelWare, it still cuts 4 percent off the annual air bill.

Another Carlson Wagonlit client in Switzerland has taken a different approach. The World Health Organization has not mandated the use of miles for business trips, but "strongly encourages" employees to do so, said head of travel and transportation services Sharon Stoler. Using a strategy of persuasion rather than compulsion means there are no administrative costs involved and the morale issue is neatly side-stepped. Stoler said WHO "has saved several hundred thousand Swiss francs as a result."

The voluntary sacrifice of WHO employees can be attributed partly to the humanitarian nature of their work, though Stoler said she knows of only one other public organization doing the same thing. The other motivational factor is that the mileage is used to enable trips that otherwise simply would not happen. "When your boss asks where the money is going to be found for the trip, there is no need to be conscientious about giving up miles--it is the only answer," she said.

Whatever method is judged best, Caterpillar's Hudson would like to see frequent flyer programs destroyed once and for all. Universally, around 40 to 50 percent of mileage is never redeemed, whereas companies that take miles eventually burn nearly all of them. If enough companies followed this path, Hudson argued, the raised redemption levels would make the frequent flyer programs too expensive for the airlines to run.

Furthermore, appropriation removes the raison d'etre of the programs, which is to encourage travelers to deviate from corporate policy. "I really think that if enough companies got on board," Hudson said, "the airlines might scrap their programs and give us much better discounts instead.