Here's how not to leave money on the table in supplier negotiations for 2009
By Susan Avery -- Purchasing, 11/13/2008 2:00:00 AM EST
It's shaping up to be an important year for travel buyers to do a very good job on negotiations, says Frank Schnur, vice president of innovation, Global Advisory Services at American Express Business Travel in New York. He sums up views of travel industry experts offering advice for buyers negotiating contracts with airlines and hoteliers for 2009.
"One challenge companies face is that they are struggling with their bottom line and may be tempted to cut back on rigor they put in their airline and hotel negotiations," says Schnur. "This is exactly the wrong thing to do. This is the year that companies that do the best job on negotiation can create a competitive cost advantage versus other companies that may shortcut the process."
As travel buyers know, market conditions for both hotels and airlines have changed dramatically in the past few months.
The airlines have been dealing with record high fuel prices, and are looking for ways to add revenue. They also are reducing capacity and raising rates. All this is starting to impact demand. So, surprisingly, some fares to some cities still may be competitive, perhaps more so than travel managers may think.
For hotels, the seller's market of recent years is shifting to the buyer. While room rates in some popular destinations in North America like New York and emerging markets like China and India remain high and are expected to continue to rise in 2009, prices in other cities are becoming more competitive.
A powerful tool for buyers in negotiations is a thorough understanding of what is happening in the industry as well as what is occurring within their own companies, says Kevin Maguire, president and CEO of the National Business Travel Association in Alexandria, Va. "Buyers need to know their travel programs very well before they go into negotiations. If not, their leverage is diminished tremendously."
For their part, the airlines and hotel are prepared and have information on their customers' spending patterns at hand. Industry experts agree that suppliers will be more willing to negotiate if travel buyers also have data that show their companies are good partners and can deliver on promised volumes. Here is a closer look at what else they say about how to get a good deal for 2009:
Fewer seats. In response to higher fuel prices, airlines in the third and fourth quarter eliminated service to some cities, retired aircraft and started to charge fees for baggage, food and preferential seating. They also are eliminating guaranteed fares and lowering discounts on fares for companies not meeting volumes travel buyers promised in contracts.
While travel management companies (TMCs) forecast increases that average 10% for domestic fares next year, travel buyers now are beginning to see falling prices for premium (first class) and one- and two-day advance purchase tickets. "The airlines are preparing for corporations to cut back on spending," says DeAnne Dale, vice president for strategic account management and consulting services for Travelocity Business in Dallas. "One way corporations are doing this is by asking travelers to book lowest available fares" effectively increasing supply of, and lowering prices on, premium tickets.
As airlines reduce capacity (travelers will see less service to certain cities), travel buyers should approach them and ask to adjust down goals in their contracts, she advises. And, to be successful at this, buyers must be able to show they've been performing to contract.
"We also recommend a clause in new contracts that gives the buyer the right to adjust goals based on market conditions and capacity," says Dale. "As a good partner, the airline should be willing to do this. But if it's not in the contract, it may not happen."
The airlines also are phasing out guaranteed fares (that are negotiated for a 12-month period.) Still, certain markets, especially to some international destinations, will continue to be competitive, and if a travel buyer has the volume, it will be possible to negotiate a guaranteed fare for 2009.
Dale and executives at other TMCs remind travel buyers that airlines look at customer performance and could approach them at the end of a quarter or at mid year to adjust the discounts. For this, the airlines use data available through Prism Group, Albuquerque, N.M.
"The airlines are going to push to make sure corporate programs generate a return for them," says Bob Brindley, vice president at Advito in Dallas. Advito is the BCD Travel company that provides consulting services. "They're going to be strict, requiring buyers fulfill market share requirements or revenue production targets as part of the contract. And, in some cases, even when the client performs well, the carrier will use the opportunity to push for a greater share of their business."
As with sourcing any category of spending, travel buyers' best bet is to consolidate the supply base, moving more volume to fewer airlines. And when they meet with the carriers, "have that marketing message of why they are a good partner," says Dale Eastlund, senior director, CWT Solutions Group Americas in Minneapolis. "They have to help the airline understand they have executive support and a strong policy. And they have to show quality revenue" from purchasing first-class and business-class tickets.
More rooms. Reductions in capacity by the airlines coupled with new properties opening are helping stabilize hotel pricing. Exceptions are some "gateway" cities like New York that still will see an influx of international travelers and destinations in some emerging markets. Rooms in these locations will continue to experience double-digit price hikes next year.
By November, many travel buyers are in the midst of negotiations with hotels for 2009. Typically, the "season" begins in late summer to determine room rates for the following year. "What we see from the first round of negotiations are increases that are lower than last year," says Schnur at American Express. "As negotiations go on, we expect that in some markets, we will see year-over-year decreases."
Travel buyers may see some of these decreases in rates for full-service hotels. As one way to keep costs in check, more travelers have been staying at mid-tier hotels. "So, now, in some cases, hotels are competing with themselves for business travelers," says Dale at Travelocity Business, suggesting buyers compare properties and negotiate using "cost of stay" figures that include fees for Internet access and parking rather than room rate alone.
Another negotiation tactic buyers can use similar to one recommended for use with airlines is to rationalize the supply base. "Consolidating the number of properties in a city like mid-town Manhattan from, say, 20, down to two or three or even one is a very powerful tool," says Noah Tratt, vice president of supplier strategy for Egencia in Bellevue, Wash.
And, again, as with the airlines, it is important for travel buyers to show historical performance to the hotels during negotiations, he adds. Still, gathering this data can be a challenge because many companies do not mandate programs. Mark Williams, vice president of business development for Advito, recommends buyers mine data from their TMCs, corporate cards and expense reporting tools.
Yet another tact for travel buyers to keep in mind is that they can use data from meetings and events at hotel properties with which they are negotiating. "We tell our clients that a dollar spent is a dollar spent," says Neysa Silver, director of hotel consulting at CWT Solutions Group. "It is important to say to the hotels, we may be only able to give you x amount of transient room nights but we spend x dollars on meetings in your hotel. You are an important partner to us. We need you to come down by x in order for us to consider you for both."
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