Measuring the Contribution of Business Travel to Corporate

Performance

Presented by:Kenneth McGill

Executive Vice President, ResearchVantage Strategy, Inc

Ken.mcgill@vantagestrategy.comO: 202 449-9708 M: 610 213-2558

Crowne Plaza, Hollywood FloridaJune 11th, 2010

Presenter • Kenneth McGill, EVP Vantage Strategy, Inc. & Lead Research Consultant for National Business Travel Association (NBTA)

• Fifteen yrs at IHS Global Insight and its predecessors, most recently as EVP of Global Travel & Tourism Practice

• 20+yrs as an economist & market researcher

• Extensive experience in travel market analysis, forecasting, policy evaluation, & economic impact

• Recently completed landmark study of business travel ROI –how T&E contributes to corporate performance

• Kenneth McGill, EVP Vantage Strategy, Inc. & Lead Research Consultant for National Business Travel Association (NBTA)

• Fifteen yrs at IHS Global Insight and its predecessors, most recently as EVP of Global Travel & Tourism Practice

• 20+yrs as an economist & market researcher

• Extensive experience in travel market analysis, forecasting, policy evaluation, & economic impact

• Recently completed landmark study of business travel ROI –how T&E contributes to corporate performance

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2009 NBTA Research:What is Value of Business Travel?

•• Global business travel topped $929B in 2008Global business travel topped $929B in 2008

•• US biz travel, @$261B, is 28% of the world totalUS biz travel, @$261B, is 28% of the world total

•• China, currently #2 ($94B) will add T&E at a rate 8 times China, currently #2 ($94B) will add T&E at a rate 8 times faster than the US over the next 5 yearsfaster than the US over the next 5 years

•• On average, US businesses spend about 1On average, US businesses spend about 1¢¢ of every sales of every sales dollar on biz traveldollar on biz travel

Sources: 2009 NBTA Business Travel Market Metrics• A Global Analysis of Business Travel Activity (sponsored by Egencia)

• Are We Investing Enough on Business Travel? (sponsored by American Express)• Valuing the Contribution of Travel Management (sponsored by American Express)

2009 NBTA Research:What is Value of Business Travel?

•• Biz Travel supports over 4M US jobs and generates $80B in Biz Travel supports over 4M US jobs and generates $80B in tax receipts tax receipts ––it is our 13it is our 13thth largest largest ““industryindustry””

•• Most US businesses currently Most US businesses currently underspendunderspend on biz travel. on biz travel. Investing $1 more would yield about $16 more in gross profitInvesting $1 more would yield about $16 more in gross profit

•• Strategic Travel Management (STM) saved US companies Strategic Travel Management (STM) saved US companies about $7.5B in 2008 about $7.5B in 2008 ––about $14 per itineraryabout $14 per itinerary

•• Mfg companies with STM have an operating margin that is 3% Mfg companies with STM have an operating margin that is 3% higher than those that higher than those that ““wingwing”” itit

Sources: 2009 NBTA Business Travel Market Metrics• A Global Analysis of Business Travel Activity (sponsored by Egencia)

• Are We Investing Enough on Business Travel? (sponsored by American Express)• Valuing the Contribution of Travel Management (sponsored by American Express)

AgendaValuing Business TravelValuing Business Travel

2009 NBTA Research Initiative: 2009 NBTA Research Initiative: DYK?DYK?

Business Travel Spend in Business Travel Spend in Financial ContextFinancial Context

The ROI of Business TravelThe ROI of Business Travel

2010 ROI of Business Travel: 2010 ROI of Business Travel: Deeper DiveDeeper Dive

Q&AQ&A

Measuring ROI…

• Easy to describe, difficult to execute• Typically left up to managerial intuition,

experience, feel• Its about cause (and cost) and effect (conversion)

There are generally four approaches: a. Management Opinion Surveys –measure awareness, priority,

present trade-offsb. Meeting / Trip Goal Attainment Audit – pre-state objectives,

then follow up post-trip to assess successc. Individual Conversion Studies -good for specific campaign

measurement but difficult to apply to all travel activityd. Elasticity Analysis – better for measuring overall ROI but

finding adequate data can prove difficult and costly

There are generally four approaches: a. Management Opinion Surveys –measure awareness, priority,

present trade-offsb. Meeting / Trip Goal Attainment Audit – pre-state objectives,

then follow up post-trip to assess successc. Individual Conversion Studies -good for specific campaign

measurement but difficult to apply to all travel activityd. Elasticity Analysis – better for measuring overall ROI but

finding adequate data can prove difficult and costly

2009 ROI of Business Travel• In 2009, NBTA & American Express Business Travel sponsored a

landmark study of the size, growth, & contribution of business travel

• Objective: Is there a correlation between business travel & corporate performance? And if so, can we determine the optimal level of business travel? Corollary: how far can we cut before real damage is inflicted?

• Approach: Using data for 15 U.S. industries over the period 1998-2008, we examined the correlation between changes in business travel spend and changes in corporate sales & profits.

• Key Finding: While it varies by industry, on average there is 16:1 return on investment for each additional dollar spent on business travel

• Key Finding: While it varies by industry, on average there is 16:1 return on investment for each additional dollar spent on business travel

U.S Business Travel in Financial Context

U.S. Business Travel Spending & Travel-IntensityTop 20 Industries Ranked on Travel Spend

• Total US Business Travel Spend in 2008 was $261B

• Businesses spend about 1¢ of every sales dollar on business travel

• High? Equipment rental & leasing @ 4¢

• Business Services -1.3¢

• Low? Mining at < a tenth of a cent

Source: IHS Global Insight, US Bureau of Economic Analysis –National Input/Output Accounts

Industry Profit & Loss AnalysisUS Economy US Economy ––All IndustriesAll Industries

Business Travel Expenses in PerspectiveBusiness Travel Expenses in Perspective

(Millions of $) 1998 2003 2007 2008 %5-year CAGR

10-year CAGR

Sales 14,505,111$ 17,890,895$ 23,407,509$ 24,086,545$ 2.9% 6.1% 5.2%

Cost of Goods SoldLabor Cost 4,190,188$ 5,245,850$ 6,484,017$ 6,676,055$ 3.0% 4.9% 4.8%Material & Service Purchases 6,698,946$ 8,111,543$ 11,072,796$ 11,339,429$ 2.4% 6.9% 5.4%

Business Travel 213,206$ 215,499$ 268,629$ 261,362$ -2.7% 3.9% 2.1%Other Costs & Expenses 627,828$ 792,395$ 1,000,945$ 1,027,515$ 2.7% 5.3% 5.0%Total Cost 11,516,961$ 14,149,787$ 18,557,758$ 19,042,999$ 2.6% 6.1% 5.2%

Gross Operating Profit 2,988,150$ 3,741,108$ 4,849,751$ 5,043,546$ 4.0% 6.2% 5.4%Gross Margin% 20.6% 20.9% 20.7% 20.9%

1.47% 1.20% 1.15% 1.09%

3.18% 2.66% 2.43% 2.30%

7.14% 5.76% 5.54% 5.18%

B-Travel as a Percentage of Material & Service Costs

Business Travel as a Percentage of Sales

Business Travel as a Percentage of Profits

Industry Profit & Loss AnalysisUS Manufacturing SectorUS Manufacturing Sector

(Millions of $) 1998 2003 2007 2008 %5-year CAGR

10-year CAGR

Sales 4,054,468$ 4,201,111$ 5,339,571$ 5,362,765$ 0.4% 5.0% 2.8%

Cost of Goods SoldLabor Cost 870,035$ 943,261$ 1,028,272$ 1,022,119$ -0.6% 1.6% 1.6%Material & Service Purchases 2,637,829$ 2,758,142$ 3,624,576$ 3,640,320$ 0.4% 5.7% 3.3%

Business Travel 39,119$ 38,445$ 43,968$ 43,414$ -1.3% 2.5% 1.0%Other Costs & Expenses 39,206$ 49,236$ 60,650$ 60,913$ 0.4% 4.3% 4.5%Total Cost 3,547,070$ 3,750,639$ 4,713,497$ 4,723,352$ 0.2% 4.7% 2.9%

Gross Operating Profit 507,398$ 450,472$ 626,074$ 639,412$ 2.1% 7.3% 2.3%Gross Margin% 12.5% 10.7% 11.7% 11.9%

0.96% 0.92% 0.82% 0.81%

1.48% 1.39% 1.21% 1.19%

7.71% 8.53% 7.02% 6.79%

Business Travel as a Percentage of Sales

B-Travel as a Percentage of Material & Service Costs

Business Travel as a Percentage of Profits

Business Travel Expenses in PerspectiveBusiness Travel Expenses in Perspective

Business Travel Productivity Has Risen MarkedlyBusiness Travel Productivity Has Risen Markedly1.47%

1.43%

1.32%1.28%

1.20% 1.19%

1.13% 1.13% 1.15%1.12%

1.00%

1.10%

1.20%

1.30%

1.40%

1.50%

1998 1999 2001 2002 2003 2004 2005 2006 2007 2008

Travel Spend as a Percent of SalesAll US Industries

Travel Spend as a Percent of SalesTravel Spend as a Percent of SalesAll US Industries

More efficient, more “dense” tripsRising penetration and effectiveness of managed travel programsTravel prices rising more slowly than other costsGrowing technological alternatives to more marginal travel

The ROI of Business Travel

Methodology: Can we find a correlation between T&E and sales/profits?

Business TravelBusiness Travel’’s Contribution to the Bottom Lines Contribution to the Bottom Line

Econometric approach that isolated the statistical relationship between travel spend & sales/profit

10 yrs of data for 15 industries…

Travel spend, sales, labor & other costs, operating profit,

inflation, and industry demand drivers

10 yrs of data for 15 industries…

Travel spend, sales, labor & other costs, operating profit,

inflation, and industry demand drivers

Model helped compare the cost of increased travel spend with resulting increases in sales to calculate the optimal level of business travel for each industry

Industry sales was regressed against travel spend, demand factors, & supply variables in order to isolate the influence of each driver

Modeled using a quadratic functional form –increases in

travel spend will increase sales but the payoff diminishes

Modeled using a quadratic functional form –increases in

travel spend will increase sales but the payoff diminishes

Most, but not all, industries were

below their optimal levels in 2008

Most, but not all, industries were

below their optimal levels in 2008

Business TravelBusiness Travel’’s Contribution to the Bottom Lines Contribution to the Bottom Line

For the statisticians and economists in the audience…

Model attempts to explain the variation in sales over time as a function of key drivers:

industry affiliationproduct/service demandcost and inflationbusiness travel spendbusiness travel spend2

other unspecified drivers

Model attempts to explain the variation in sales over time as a function of key drivers:

industry affiliationproduct/service demandcost and inflationbusiness travel spendbusiness travel spend2

other unspecified drivers

Model Specification:

Elasticity Effect of Business Travel on Sales

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

00.0

90.1

80.2

70.3

60.4

50.5

40.6

30.7

20.8

1 0.9 0.99

1.08

1.17

1.26

1.35

1.44

1.53

1.62

1.71 1.8 1.89

1.98

2.07

Percent Increase in Travel Expenditures

Perc

ent I

ncre

ase

in S

ales

Strong initial gains in sales from increasing business travel

The return on travel slows, indicating a diminishing marginal effect

Additional travel fails to yield additional gains in sales

All figures are inflation-adjusted

Business Travel is Associated With Increased SalesBusiness Travel is Associated With Increased Sales

All figures are inflation-adjusted

Where is the Optimal Level of Travel Spend?Where is the Optimal Level of Travel Spend?

Incremental Yield to Promotional Spending

Incremental Cost of Promotional Spend

Some Sectors Have Ample RoomSome Sectors Have Ample Roomto Raise Travel Spend Profitablyto Raise Travel Spend Profitably……

While Others are Already Near Their Optimal LevelWhile Others are Already Near Their Optimal Level……

Travel Spend Maximization Point by US IndustryTravel Spend Maximization Point by US Industry

Incremental Real Percent Changes

Maximization Point by US Industry

Source: NBTA, American Express

Source: IHS Global Insight, Compustat, US Bureau of Economic Analysis –National Input/Output Accounts, American Express* Numbers do not sum due to double counting

Is There Room for US BusinessesIs There Room for US Businessesto Grow Sales (Profitably) by Traveling More?to Grow Sales (Profitably) by Traveling More?

• Finding1: Business Travel Productivity is rising

ROI of Business Travel: Findings

• Finding2: Increases in travel spend do lead to incremental sales & profits, albeit at a diminishing rate

• Finding3a: Most U.S. industries are currently underspending on business travel…

ROI of Business Travel: Findings

ROI of Business Travel: Findings (cont.)

Finding3b: Some industries are at/near optimal

Finding4: If all sectors were to reach their optimum, U.S. travel spend would increase by $14B (+2.2%), resulting in a $900B (+3.7%) increase in sales, a $224B (+4.4%) rise in profits, and a 0.2% uptick in gross margin.

Finding4: If all sectors were to reach their optimum, U.S. travel spend If all sectors were to reach their optimum, U.S. travel spend would increase by $14B would increase by $14B (+2.2%)(+2.2%), resulting in a $900B , resulting in a $900B (+3.7%)(+3.7%) increase increase in sales, a $224B in sales, a $224B (+4.4%)(+4.4%) rise in profits, and a 0.2% rise in profits, and a 0.2% uptickuptick in gross in gross margin.margin.

ROI of Business Travel? …about 16-to-1

in Millions of Current $ 2008

After Maximizing Sales from

Additional Business Travel Difference

Sales 24,086,545$ 24,981,252$ 894,707$

Cost of Goods SoldLabor Cost 6,676,055$ 6,875,974$ 199,919$ Material & Service Costs 11,339,429$ 11,776,559$ 437,130$

Business Travel Expenses 261,362$ 275,318$ 13,956$ Other Costs & Expenses 1,027,515$ 1,060,740$ 33,225$

Total Costs 19,042,999$ 19,713,273$ 670,274$

Gross Operating Profits 5,043,546$ 5,267,979$ 224,433$ Operating Margin % 20.9% 21.1% 0.2%

What Does This Imply For Management of T&E?

• Travel spend is expanded by $220k for our $500m manufacturing company• Accounting for inflation and input productivity trends, the yield is +$20m in sales and +$2.9m in Operating Profit. Margin improves by 0.1%• ROI of additional travel spend is about 13 to 1

• Travel spend is expanded by $220k for our $500m manufacturing company• Accounting for inflation and input productivity trends, the yield is +$20m in sales and +$2.9m in Operating Profit. Margin improves by 0.1%• ROI of additional travel spend is about 13 to 1

(Millions of $) 2008

Max Sales from

Business Travel Difference

Sales 500.00$ 519.73$ 19.73$

Cost of Goods SoldLabor Cost 95.30$ 96.51$ 1.22$ Material & Service Purchase 339.41$ 354.87$ 15.46$

Business Travel 4.05$ 4.27$ 0.22$ Other Costs & Expenses 5.68$ 5.87$ 0.19$ Total Cost 440.38$ 457.26$ 16.87$

Gross Operating Profit 59.62$ 62.48$ 2.86$ Gross Margin% 11.9% 12.0%

Hypothetical US MFG Company

2009 ROI of Business Travel Research• Unique Proposition of the NBTA/AEBT Research:

– Econometric model of sector (15) sales accounted for all critical sales drivers including…travel spend

– This allowed us to isolate the incremental impact of travel spend– And apply a defensible number to the question of ROI

• Caveat: Findings are exciting, but optimal sector averages are not easily applied to individual companies. Why? Simply belonging to a sector is not enough information to determine a true company optimal

• Solution: 2010 ROI Deeper Dive –Company Level Analysis of T&E, Sales, and Profit

2010 ROI Deeper Dive –Company Level Analysis*

* Sponsored by NBTA and American Express Business Travel

• Will the inclusion of 2009 results materially alter the original industry-level findings? How do recessions change the ROI picture?

• Will the application of this approach on company-level numbers reveal a similar story?

• Can we also include other critical company attributes –size, number of locations, global-v-local reach, sub-sector, corporate hierarchy…?

• Can we incorporate a way for individual companies to compare their metrics to an applicable theoretical optimal?

• End Game: A Benchmarking Tool to Assist Corporate & Travel Managers

2010 ROI Deeper Dive –Company Level Analysis*

• Currently in process. Top line results to be presented at NBTA International Convention in Houston (Aug 2010)

• Based on data for 850+ public companies across a broad array of sectors and representing all size classes

* Sponsored by NBTA and American Express Business Travel

Note: Air Spend Only

Kenneth McGillPhone: (202) 449-9708Fax: (202) 449-1370Mobile: (610) 213-2558Email:ken.mcgill@vantagestrategy.com93 Main Street, Suite 200Annapolis, MD 21401www.vantagestrategy.com

R E S E A R C H

Thank You!