American Express commercial card and travel business group president Ed Gilligan recently spoke with BTN editors Jessica Kirshner and David Meyer about his outlook on the latest travel management trends and how they influence Amex's direction.BTN: A lot of U.S. companies after the change in domestic airfare structuring said they were going to re-bid their business—
Ed Gilligan: There's certainly been a lot of that activity this year.
BTN: The same level as with commission caps?
Gilligan: Kind of. In any given year, one-third to almost one-half of your business seems to go out to bid. I'm not sure we're going to get to one-half this year as 50 percent of our business is not out to bid, but I'd say it's more than one-third. There's a lot of activity and there's a lot of pricing pressure going on right now. People are a little worried that their airfare discounts have gone down, but in general, there's just a little bit of unease about the economy. Interestingly enough, if you go back to what triggered the drop in T&E spending or travel spending at the end of 2000, it was the technology and telecom companies, so we've been watching that. That sector seems to be holding up to some pluses and minuses. Obviously, the whole pharmaceutical sector in the last 12 months has been under a lot of pressure, and that was one that a couple of years ago never really reduced spending but is now doing it, because of obvious issues going on in that industry. Any time there's some pressure on earnings, there's more focus on travel management. It seems like it's always the leading indicator of what companies do in a given year with their spending and how they're running their businesses. Companies are tightening up and always pounding the travel management companies for a better deal. There's a lot of competition, particularly with the online agencies offering a headline transaction fee that's low.
BTN: Will 2005 be better than 2004?
Gilligan: There's no doubt.
BTN: Will 2006 be even better or flat?
Gilligan: Right now, I'm feeling better. We're going through our whole process now of planning for 2006. The U.S. might be softening a little bit, but it's not going to become any kind of retrenchment or recession. We don't see that. We see slow growth for next year, but we're always cautious about it. Having been around the business for a while, you know that this is a roller-coaster ride and it's not for the faint of heart. As of now, knock on wood, in 2006 I would expect some slow growth over this year. Definitely growth.
BTN: Travel managers seem to be relying heavily on their agencies to navigate the distribution discussion. What pressures are they putting on you?
Gilligan: There are lots of questions, and that's going to be more of a 2006 issue because global distribution system contracts with a lot of the big U.S. airlines are up next year
(see story). They've been gearing up for some of these alternatives the past two or three years. It's not clear how that's going to play out. What do the big airlines do? Do they pull content off of the GDSs or not? The cost of recreating what Sabre, Galileo, Worldspan and Amadeus do is much higher. The airlines are hoping someone's going to step into this void, perhaps one of these new startups, to give them a cheaper alternative. It seems somewhat unlikely because the GDSs do provide useful information at a relatively low cost. Their big mistake in the past was they felt like they had a stranglehold, were raising their fees every year and weren't paying a lot of attention to the major airlines. That really upset most of the airlines. The question is, does somebody do it cheaper or do the GDSs try to find ways to operate profitably with lower revenues? It's going to be very hard to replace a GDS.
BTN: In a way, it would add to your value proposition if they screwed up.
Gilligan: It would, but it's very expensive to replicate what they do. You can absolutely come up with a lower transaction fee, but you're going to have to sink in hundreds of millions of dollars. I don't see a lot of people building the infrastructure to try to do that.
BTN: Are you seeing a rebound in international travel?
Gilligan: More people are traveling, and more people are taking advantage of the weaker pound and euro, which, all of a sudden, is looking more reasonable than it was four or five months ago.
BTN: How quickly is Europe moving to embrace online booking?
Gilligan: If you take any of the major markets, where there are any companies focused on managing travel as a profession—Germany certainly fits that criteria—then online usage is certainly going to be big. Whether it's this year, next year or the year after, it's going to be big. So the question if you're a TMC is, what do you do? Do you embrace it or do you fight it? Embracing it implies fundamental change in how you're doing business. At American Express, we're in the next chapter now. We crossed that bridge many years ago and try to give our customers the best of both worlds of having a global network and the choice as to how to interact with us. TMCs are at a crossroads, either they embrace it or they stall it. You can stall for a year or two, but I don't know what your business will look like five years out if that's your strategy. I do know that there are some huge impacts to your business model by deciding to embrace it. We're going on our tenth anniversary of saying, 'This is going to be a big part of our future, let's embrace it.' We got off to a slow start in the U.S. We had a lot of fanfare, but it didn't really get traction until a few years later, and now the train has left the station, certainly in the U.S. and in other countries. For us, it's an essential part of our value proposition.
BTN: What percentage of your U.S. bookings are made online? Is it still around 35 percent?
Gilligan: It's hovering around that, 35 percent to 40 percent. I wouldn't say it's stalled, but it's not progressing at the rate it did. The adoption rate starts to slow, but it will go further. We said, back at NBTA in 1996, that we expected it to get up to 50 percent. I honestly didn't think it would take 10 years to get there, but it's going to get there soon.
You can basically cut travel management into two halves: one half is about transaction processing and to try to be as efficient as possible, online or offline. You still have to give customers choices. I don't think a pure online offering makes sense, nor do I think a pure call-center approach makes sense. It's rationalizing these two worlds, getting them balanced and making it as efficient and accessible as possible, giving the customer choice and flexibility in how they deal with us, but doing it at a low cost. Then you have a range of other value-added services, or at least we believe they're value-added. Our customers are choosing what they want, from consulting to negotiation support to information to account management. We're going down that road, certainly in a big way in the United States and eventually the rest of the world. You have one price for your transaction processing and a menu of choices for what value-added services you want.
Transaction processing isn't just a commodity, it's more than that, but certainly low cost looms large there, particularly when you're competing with online agencies. You have to be able to offer a transaction at the same cost. Still in many parts of the world, we charge one price that covers everything. Those days are nearing an end because you have to give customers what they want. If they want low-cost transaction processing and that's what the competition's offering, we have to offer that. There are things they can choose from that hopefully stand on their own, whether it's negotiation support for air, hotel or car, meetings, information, benchmarking.
BTN: In your vision of Amex in 2010, what percentage of the business is value-added services versus—
Gilligan: When you say business, do you mean revenue?
BTN: Yes.
Gilligan: It's hard to say, but it's an excellent question because we earn revenue from a variety of activities that we pursue. Today, we don't charge for a lot of the value-added services and that carries a low percent because it's bundled. When you unbundle it, ballpark, it's got to be 50 percent or more of what we do.
BTN: Do you envision it becoming more unbundled over time?
Gilligan: Chunks of it have to be because the online agencies are not offering those kinds of things, so we'd be at a disadvantage if we just bundled everything and competed on price, because we'll never get to as low a price as they can. When we unbundle these services, we feel we can compete with these online agencies very effectively, and we really feel that we are competing effectively with them today. Then, we let customers increasingly choose what they want. I don't want to be just a transaction provider, I want to help clients save money. That's been our whole value proposition at American Express for 20 years, since we created a whole division dedicated to helping companies save money. Transaction processing is critical to that, but that can't be an end unto itself. It's all these other things that we do, that we think our customers really value, that will have to stand alone.
BTN: What percentage of online bookings are agentless through fulfillment?
Gilligan: Well over 90 percent in the U.S., where it's more advanced than almost anywhere else. We've invested a lot in the technology of fulfillment starting five, six years ago to get it well over 90 percent.
BTN: What do you do next?
Gilligan: The rest of the world. Here at American Express, we've been talking about being global for 10 years, but the reality was having a global footprint of offices and capabilities in all the major countries in the world. Then, it was having more of a global back office so you could produce global information. Then, it became more of the mid-office technology and making sure you get the lowest fare. Now, it's global integration of the online and offline and having fewer centers and a follow-the-sun strategy. If we can do that effectively, we should be able to lower our costs fairly dramatically. There's a big transition cost of moving to this kind of globally integrated online/offline world, and we've been investing heavily in technology and consolidation.
BTN: Cisco's one of the leaders in that, right?
Gilligan: Yes, as a client. There's a longer list of companies doing that, but your best customers always push you beyond your capabilities and then you realize more than just one company is asking for this. They happen to be at the forefront of the wave. This is the next chapter of globalization: fully integrating online and offline and going to follow the sun, fewer physical office locations and more automated transactions.
BTN: How many of your clients are following the sun?
Gilligan: It depends. If you took a very strict definition of "follow the sun," it would be in the tens. If it's ones that are getting ready to do it or ones that are doing it partially or want more of it, it's in the hundreds. It's a long journey. It's not just about having offices, then having common pricing and common MIS. Now, it's taking the operations and the whole business model to another level. By doing so, we should be able to do it at a lower cost and offer our customers more flexibility.
BTN: Are small and midmarket companies looking for global capabilities and follow-the-sun strategies?
Gilligan: That's the new wave. It's not just multinationals. It's any company that wants to take advantage of a better way: lower cost, more flexibility.