Scott Gillespie of tClara continues his tradition of challenging industry norms with an iteration of his recent thinking on corporate travel value, policies and sustainability. What do you think? Comment below.
Four years have passed since the Covid-19 tremors began earthquaking the travel industry, forcing The Great Zoom Experiment onto the workplace. Meanwhile, corporate concerns about the climate are crystalizing into action, in part due to looming regulatory reporting requirements.
Executive views about business travel are changing, with big implications for how travel must be managed in 2024 and beyond. Classic cost control will take a backseat to travel stewardship.
Cost-Focused Travel Policies
For over 30 years, travel policies have focused on reducing travel costs. These include well-worn policy planks such as prohibiting flights in premium cabins and stays in high-quality hotels, requiring nonrefundable tickets purchased weeks in advance of departure, using preferred (read: discounted) suppliers, and pushing travelers to the lowest “logical” fare.
These cost-focused policies have served many companies well if well means paying lower prices for business trips. But the pat-on-the-back satisfaction of paying lower prices for business trips has long cloaked two high costs, neither of which will be acceptable in 2024 and the years to come.
Low-Value Trips
The first cloaked cost of low travel prices is the enablement of low-value trips.
Imagine if every domestic business trip suddenly cost just $200 instead of $1,200. How many more trips would be requested – and approved? The answer isn’t small. Now ask yourself, how many of those newly approved trips would be considered a low priority, or in more judgy terms, low-value? Again, the answer isn’t small.
According to my research, 25 percent to 30 percent of U.S.-based trips taken in the last part of 2022 were indeed low-value — as in, not adding any expected financial value to the organizations.
Why are companies striving to save 10 percent or 15 percent on trip prices when they could be saving 100 percent of the spend on these low-value trips by not taking them?
Let’s agree that low travel prices enable low-value trips. Not all low-priced trips are low-value, of course, but the point stands — low prices make it a whole lot easier to approve trips that would get a clear, “No, you can’t go,” if the trip price was $1,000 higher.
Raise the trip cost significantly and you’ll weed out any number of low-value trips. Cost-focused travel policies work against, not toward, this goal.
Excessive Carbon Emissions
The second cloaked cost of low travel prices is excessive carbon emissions. The laws of supply and demand are simple. Lower prices mean higher quantities will be bought.
Given the aforementioned point, we can see that lower prices cause more, not fewer, low-value trips. The emissions from these cheap, low-value trips are not helping any company reach its carbon reduction goal.
Let’s consider the cloaked emission cost of low-cost policies in the economy cabin.
| Airfare | CO2 | |
|---|---|---|
| Last-minute, no discount | $800 | 53% |
| Last-minute w/discount | $725 | 59% |
| 3-day advance | $600 | 71% |
| Base case: 7-day advance | $425 | 100% |
| 14-day advance | $300 | 142% |
| Lowest logical w/connection | $200 | 239% |
The table shows illustrative economy-cabin ticket prices associated with several common air travel policies.
The more restrictive the travel policy, the lower the ticket price, as expected. Low ticket prices achieve the old-school goal of affording more trips from the same budget. You’ll buy four times as many tickets at $200 than you will if they cost $800.
The carbon implications are made clear.
The table also shows the percentage of the base case’s emissions from using a travel budget, e.g., $1 million, entirely by purchasing fares under a given travel policy, everything else being equal. In this illustrative example, were a company to spend all of its air spend on $200 lowest-logical fares, it would emit nearly 240 percent of the carbon associated with the base case’s $425 average fare.
Cost-focused travel policies are no friend of the climate.
A Stark Choice
Senior management will soon see that they have a stark choice: Stick with old-school, cost-focused travel policies, continue to claim “savings” and ignore the cost and carbon associated with low-value trips, or pursue higher returns and lower carbon intensity on travel spend by embracing the benefits of higher travel prices for justified, climate-conscious trips.
Buyers and their airline suppliers will need to work toward significantly reducing travel’s carbon intensity, measured in kilograms of CO2 per $100 of travel spend. Imagine making this mutually desired goal the new basis for airline contracts. Give up discounts, use higher fares to take more higher-quality and fewer low-value trips, and emit less carbon. That’s stewardship with a capital S.
I see no middle ground here. Keeping status quo, cost-focused travel policies will prove to be short-sighted.
Long-Sighted Travel Policies
Today’s managed travel programs need long-sighted travel policies designed for the dark clouds on the climate horizon and a growing intolerance for low-value trips. I recommend these three long-sighted travel policies.
- Require pre-trip assessments of the need for every trip. Ask for the criteria by which the trip’s success should be judged. Link every trip to its main business goal, e.g., “win revenue” or “improve our workforce.” Then require travelers or their managers to later grade the impact of their trips. This isn’t 100 percent sunlight for the low-value trip problem, but it is a good start.
- Eliminate all – yes, all — cost-focused travel policies for non-essential or non-government-related travel. Help managers make more disciplined decisions about using their travel budgets. Replace all savings goals with new goals focused on reducing travel’s carbon intensity.
- Implement a carbon intensity cap on all trips, where intensity is defined as the amount of CO2 in kilograms per $100 of travel spend, e.g., a cap of 300 kg per every $1,000 spent on a trip. This would allow a $1,000 trip to emit 300 kg of CO2 for air, car, and hotel. Need more CO2 for your premium seat? No problem, so long as the fare paid keeps the trip’s overall carbon intensity under the cap of 30 kg per $100. Fair warning: Doing so means paying a higher price for that seat, which forces the low-value question back into the sunlight.
Cost-focused travel policies are short-sighted. They are bugs, not features, in tomorrow’s well-managed, stewardship-first travel program. Replace them with long-sighted travel policies like those above.
Additional info: Economy class domestic U.S. ticket price data shown in the table above is fictional. To simplify, a discount factor was not applied to the four lowest-priced fare categories. Emissions data is based on tClara’s model using CO2 amounts roughly equivalent to those of a roundtrip in economy class between New York and San Francisco, per Google Flights, with additional CO2 added to calculations for lowest logical fares with connections to account for an additional take-off.
This Op Ed was created in collaboration with The Company Dime‘s Editorial Board of travel managers.
Scott, same goal but different paths to get there.
The best way to cut emissions and guarantee that only the most valuable trips are taken is to cut budgets. When you see employees volunteering to pay for their business trips out of pocket, you know you have cut too far.
The best way to increase cost is not to move up to a more expensive seat or hotel but to implement a carbon tax. I would recommend a minimum of $100 per metric ton of CO2 ($250 for a West Coast to Europe coach flight) but $400 is going to get you closer to the cost of actual SAF required to offset.
Side note: Any policy over two pages is just creating opportunity for travelers to game the system to their personal preferences regardless of cost.
I’m with you on the goal, Eric, for sure, but agin’ ya on one of your methods.
Budget cuts are a knee-jerk reaction to cost or P&L pressures. There’s no thought put into how those budget cuts will affect the ROI or carbon intensity of the remaining travel spend.
The smaller the budget, the more desperate travelers are to book low-cost trips. One can hope that the approver will be looking hard at the trip’s expected value, but since that’s hard (for most) to quantify, the approver is more likely swayed by the trip’s price, as in “Cheap is good, so you can go.”
Contrast that with a trip request priced a thousand dollars higher, and the approver is bound to think harder about the value of the trip. High prices weed out low-value trips – on this, I think we agree.
So yes, a carbon tax is helpful. The US EPA has established the social cost of carbon at $190 per metric ton of CO2. If SAF’s cost is twice that, then I’d have to ask if buying SAF is the most rational way to spend money on the global decarbonization challenge…but that’s another debate.
I normally agree with you Scott but on this one I have to say I am not seeing it. Based on your logic of making the trip more expensive to avoid travel, then corporations should do the same on all they buy, not just travel. Increase the cost of a new PC then the user will use the old one longer, increase the cost of office supplies and users won’t use so much, etc. Anything a company purchases down to the smallest item should be necessary. This is just good business. Saying people travel more simply because it is cheaper does not make sense. I know many people that travel and I don’t know one of them that does it just because they can. Any approver that does not scrutinize every trip regardless of cost is not doing their job. Making things more expensive simply to get users to cut back is a badly run business. Travel managers and procurement do a great job of trying to keep costs as low as possible whenever a trip is necessary. A business needs to optimize the price paid and the value received for everything they purchase. Not obtaining the lowest prices does not solve the value received for the trip. They are two separate items that need to be considered separately.
John, you’re not alone in questioning this approach. I offer these comments in an effort to move you and many others a bit closer to this line of thinking.
There should always be a cost versus value trade-off made before any purchase. Mobile phones and PCs are good examples where many buyers are willing to pay significant premiums to get more perceived value. So price alone is not enough to make a good decision; we must (and do) make the cost vs value tradeoff on any purchase decision.
By itself, a sufficiently higher price will (hopefully) make the buyer think twice about buying a new PC, mobile phone, or business trip, exactly as management would want. The thing about a business trip is that it can’t be reused or kept in service. Instead, the question becomes one of substitution. Should I take this higher-priced trip or replace it with a virtual substitute?
This forces the value dimension back into play, more specifically, the marginal value gained by showing up in person. If there was some but not much marginal value to be gained by meeting in person, a significantly higher price to travel will likely mean, “OK, now this trip isn’t worth it.”
So higher travel prices become a forcing factor that makes trips harder to approve. Note that the reason for the higher prices doesn’t matter – inflation, fuel costs, carbon taxes, revenue management…the question remains, is this trip still worth taking?
I agree that procurement and travel managers have done a good job keeping travel prices low. They’ve done what management has asked – focus on keeping costs down. This is a timeless business strategy for essential costs, such as the direct and indirect materials and services that go into a company’s end products.
But discretionary travel is being seen in a new light, largely due to the Covid and climate factors.
There’s growing scrutiny around the need for these trips. As there should be, given my research shows that 25% to 30% of business trips taken in late 2022 were low-value.
Absent a more disciplined approach to evaluating the need for a business trip, higher prices are a pretty darned good device to force more clarity around this question. Imagine if an approvable trip at a cost of $1,500 now costs $2,000 – and the approver says, “Sorry, it’s now not worth it.”
Shouldn’t that tell us that the trip’s inherent value wasn’t much to begin with? Or perhaps that the approver sees much better uses for that $2,000 in their travel budget?
Either way, the effect is the same…a low-value trip is avoided, its emissions are never created, and the approver stands to get a better ROI on their travel budget.
To your point, I’m not sure if this approach would be good for other spend categories. But travel, specifically discretionary air travel, is a great fit for this strategy because it is so carbon-intensive.
In 2021 the payments, brokerage, and software industry had a very low carbon intensity of about 3 kg CO2 per $100 revenue. The entire US GDP used about 24 kg CO2 per $100. The US airline industry came in at about 124 kg. I’ve found economy-class fares in the US with carbon intensities above 150 kg per $100. Business-class fares can come in around 60 kg per $100.
Air travel’s high carbon intensity makes it a red cape for the sustainability bulls out there. The fastest and, by far, most effective way to reduce airline emissions is to eliminate trips. If you buy that much, you should then agree that we need to start by eliminating the least-valuable trips. Higher prices are a quick, easy, and effective solution.
John, thanks for letting me respond to your critique. Have I moved you any closer? Can you prescribe a better approach?
Determining the “ROI/payback/value creation” generated by a corporate business trip, to Scott’s point, is a technology problem; back to this in a minute. Costs matter; just ask any public company CEO. I ran a public company for five+ years, and you simply have to have “good” numbers. You have to separate controls and value creation. Hammering on costs is controls, creating value is all bout creativity, listening to your customers, etc., and that is not cheap.
The best-laid corporate plans set you on the road to hell if there is no cash flow to fund them. Managing cash flow everyone in their own way, but what is being done to compute the “ROI/payback/value creation” of travel? “Talking” down travel is never going to work; it is too expensive from a human resources point of view. We quoted one company that buys 300,000 air tickets a year. It simply cannot be done “talking” down travel; the process has to be automated.
Traditional BI models cannot provide the answers. They simply cannot handle the number of variables you need in a model to provide best-in-class answers. The solution is AI. That sounds super self-serving since I run an AI company, but that is the bottom line, no matter who says it.
Corporate travel “ROI/payback/value creation” is all about understanding the customer. There are other good reasons to travel, but let’s focus on the best reason – impacting a customer’s decision to buy our products – job one in most companies.
We have done extensive modeling in customer experience ( CX ); one model for an F50 company included 1,900 variables to start with for 5M customers to understand customer churn and what next best actions ( NBAs ) were needed to reduce it. You could easily see that travel might be a very good answer.
To eliminate low-value travel and optimize your travel program, you will first have to invest in new technology; from the work we have done in both CX and corporate travel, we know this will work. You can take that to the bank!