Travel Policy: a case study to deliver cost savings to
MOD business air travel
G. C. Parry, A. J. Towler & A. Graves
University of Bath
School of Management
Working Paper Series
2008.04
This working paper is produced for discussion purposes only. The papers are expected to be
published in due course, in revised form and should not be quoted without the author’s
permission.
University of Bath School of Management
Working Paper Series
School of Management
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Tel: +44 1225 826742
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http://www.bath.ac.uk/management/research/papers.htm
2008
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Glenn Parry,
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G. C. Parry, A. J.
Towler & A. Graves
Travel Policy: a case study to deliver cost
savings to MOD business air travel
Travel Policy: a case study to deliver cost savings to MOD business air
travel
G. C. PARRY*†, A. J. TOWLER‡, A. GRAVES†.
† University of Bath, School of Management, Bath, BA2 7AY
‡ Defence Travel Team, MOD
Correspondence: *Dr Glenn Parry, Email: [email protected]
Dr Glenn Parry is a Research Fellow at the University of Bath, School of Management. A
member of the Agile Construction Initiative, his work focuses on the strategic application of
lean manufacturing principles at the enterprise level.
Group Captain Andrew Towler is the Team Leader for the Defence Travel Modernisation
team, MOD, London. He has been tasked with modernizing travel across the MOD.
Professor Andrew Graves holds the Chair for the Management of Technology and is the
Director of EPSRC the Innovative Manufacturing Research Centre at the University of Bath,
School of Management.
Key words: Entitlement, expenses, public spending, Ministry of Defence MOD, air travel.
Word count: 6514 excluding references
1
Summary
This study examines the programme of targeted savings of 10% from the annual Ministry of
Defence [MOD] £294 million business travel expenditure. Work focused on the £87 million
air travel budget and presents the financial analysis of air travel policy to the end of 2004.
Future policy scenarios are proposed with the financial implications of enacting each. The
MOD has opted to enact one of the policy scenarios, estimated to bring savings worth £18
million pounds per annum.
2
Travel Policy: a case study to deliver cost savings to MOD
business air travel
Introduction
This paper explores the potential to make savings on the annual Ministry of Defence [MOD]
business travel expenditure of £294 million [Financial Year 2003/04]. It examines the current
MOD travel organization and patterns of travel. The focus of this study is placed on the
financial implication for business air travel policy and investigates the MOD travel patterns
and changes in air travel market products. Companies can derive best value from these
changes through unambiguous travel policy, endorsed at the highest levels. The MOD has not
mandated it’s centrally provided travel service. The authors believe that it is not yet using its
large expenditure to leverage the best deals. The leverage it currently has is further diluted by
the large number of arrangements MOD currently has with different travel providers.
Individual business unit agreements have flourished leading to considerable investment in
separate travel cells and individual procurement arrangements. This suggests that current
policy does not follow best practice and that there is clear scope for the MOD to also make
savings.
Travel Policy
Travel policies dictate how personnel book and travel on company business. An
organization’s travel policy encompasses a number of different requirements and, like any
other policy, the difference between compliance and non-compliance is directly related to the
degree of importance that company personnel perceive senior management places on it. To
be effective, travel policies need to be unambiguous and then well communicated with
endorsement from the highest levels (Atlas Travel International, n.d.). A number of different
3
elements might be addressed in an air travel policy, including: approval and reporting of trips
taken; travel guidelines; booking mechanisms; and cost.
Approval and reporting standards may be drafted in policy, enabling control through the use
of pre-trip authorization. This can be at different levels; for instance, economy travel may
need no approval while premium classes may require authorization. When a traveller exceeds
his limits, then the policy needs to address the action that will be taken. For example, it may
be noted in a monthly exceptions report, the traveller may be informed that approval is
required before the tickets can be delivered or a designated individual in the company may be
contacted.
There are numerous issues that should be considered when writing policy guidelines. It may
be advisable for policy to include direction to prevent certain key personnel travelling by the
same means to reduce the risk to the business should there be a serious accident causing loss
of life (A Phillips 2004, pers. comm., 19 August). Travel guidelines may be established by
position. Some companies have a travel policy entitlement that is linked to certain job
characteristics or grades where there is greater flexibility in the choice of airline class (N
Everett 2004, pers. comm., 26 May). Guidelines may also drive travellers towards certain
deals to make use of corporate discounts. Many businesses have negotiated discounts with
individual airlines; in which case the policy might address the mechanism with which the
agreed number of seat miles are utilised to ensure full utilisation and to protect the future
advantage of negotiated rates (A Phillips 2004, pers. comm., 19 August). A basic guideline
could be distance-based, as some firms require economy travel on domestic trips but allow
business class for international journeys. In the UK such a distinction could be based on travel
over five hours duration which is another way of saying the destination is outside Europe.
4
Booking mechanisms will facilitate policy and guideline adherence. If there is a designated
agency for arranging travel, this should be identified in the policy. One method of achieving
compliance here, to ensure that all reservations are made through that agency, is to only
reimburse expenditure on travel booked through the appointed agency (N Everett 2004, pers.
comm., 26 May). If the majority of travel is arranged through self-booking tools, this will also
ensure the reliability and comprehensive nature of data collection. Thus, through business
rules built into software, travellers can be directed to follow travel policy without having to be
aware of it. This is important, because it has been suggested that although 90% of companies
have travel policies, only 10% of staff are aware of the content of the policy. (J Tucker-Jones
2005, pers. comm., 26 April). Nevertheless, elements of travel policy can be loaded into selfbooking tools to promote adherence.
Cost issues need to be clear as lowest cost may not provide an acceptable business case.
Travel policy should define parameters for the lowest acceptable fare, such as the maximum
additional elapsed time for a connecting flight. Other low fare specifications include: use of
alternate airports, not allowing travellers to specify carrier or flight, or larger time "windows”
for international itineraries. Each additional parameter opens up more options for the agent or
booking tool when searching for the lowest fare (Atlas Travel International, n.d). Whichever
of the above elements the travel policy covers, it should be easily available, unambiguous and
written in plain language. Regular review is required to take account of the dynamic nature of
the travel market.
Travel policy requires endorsement from the highest levels if it is to be successful and gain
company-wide recognition. Different approval mechanisms can be employed to ensure
5
adherence to policy. Within the business travel market, increasing compliance with company
travel policy has evolved as a result of the trend that travel is tending to move away from the
control of travel specialists to procurement managers who have a better handle on costs in the
supply chain (Upton, 2004). Procurement managers are more likely to focus on volume
discounts, as airlines aim to claw back money from firms who do not meet volume targets
(Roper, 2005). In contrast, self-booking can be used to affect savings through encouraging
travel below entitlement by preying upon travellers’ 'self guilt' when they see the costs
incurred to their company when they travel at their correct level of entitlement. At the other
end of the scale, companies such as Warner Music have instructed their Travel Management
Companies [TMC] not to issue tickets which do not conform to the company policy (Upton,
2004).
MOD Motivation for Change
The MOD is running a reform of business processes across the whole Department (Defence
Change Programme, 2005). It has been recognized that senior support is required for this
programme where its strategic aim is to strengthen front line operations, either by freeing-up
resources or by improving outputs (McCartney, 2003). Those projects that have been
identified as the most important across Defence have been gathered into a single, coherent
agenda called the Defence Change Programme. The Change Delivery Group [CDG] was
created to support the Programme's change initiatives and to ensure that the projects are
handled in a co-ordinated manner. The programme has been part-funded by a Defence
Modernization Fund, worth some £600 million over three years, which was agreed in the
2002 Spending Review in addition to exiting allocations. Between this fund and money from
the Defence budget, a total of over £4 billion is to be spent on the modernization programme
in the next few years.
6
The concept 'burning platform' is often used to describe the catalyst for change. It came from
an oil industry analogy of workers resisting jumping from an offshore platform that is in
flames until the fire is at their feet and forces them to jump into the sea at the very last minute
(Langdon & Billet, 2004). The burning platform for MOD is that the Government’s priorities
during the recent period of public expenditure have been areas other than the MOD. (BBC
News 2004). The identification of economies will assist in balancing the books while helping
the MOD continue to meet strategic defence requirements. The Defence Change Programme
has support from the very highest levels in the MOD. The Secretary of State for Defence has
emphasized the importance of delivering reform right across the Services noting that staff at
all levels needed to be motivated to achieve this (MOD Annual Report of Defence Activity,
2001/02; Money, Money, Money, 2003). The Change Delivery Group, chaired by the Second
Permanent Under-Secretary and the Vice-Chief of the Defence Staff [who jointly manage the
MOD’s Head Office] has reviewed in detail the MOD’s Defence Travel Modernisation no
less than four times between February 2004 and November 2005. Moreover, Defence Travel
as part of the MOD SR04 Efficiency, is subject to regular reviews by the Treasury and No 10.
(MOD, 2004b) Motivated stakeholders’ optimism and assurance, communicated to the rest of
the organization, will encourage progress during chaotic or painful periods in the change
effort (The Price Waterhouse Change Integration Team, 1995).
At the 5 February 2004 meeting of the CDG, the Defence Travel Modernisation [DTM]
Programme was accepted into the Defence Change Programme (MOD, 2004a). The Group
recognized the project as one that was focussed on driving out costs and that, with the number
of different arrangements currently embedded within Defence travel practice, it was clear that
the MOD was not making best use of its buying power. The realization of maximum benefit
would probably require streamlining Defence travel policy. A burning platform was given in
7
the shape of financial targets, specifically with a stretch target cost reduction of 20% and a
hard target of 10% by Financial Year [FY] 06/07. The financial baseline for the Defence
Travel project was set against the full year 2003-04 business travel spend figures of £294
million. The DTM Team was directed to seek Defence Modernisation Funding.
The
programme was scoped to include travel policy and mandating. It was agreed, given the
reliance on central authority, a stakeholder engagement and communication strategy would be
developed especially if potentially contentious travel policy changes were to be made
(HM Treasury, 2004). Faced with the burning platform, radical change to the way the MOD
manages travel would be required.
Research Methodology
A literature review was conducted to explore air travel policy. As there is very limited
information available it was necessary to supplement literature with primary data. Ten semistructured interviews, with domain professionals were completed. Further contacts with these
experts validated and corroborated findings.
For this research into contemporary
phenomenon within a real-life context, a case study approach is appropriate (Yin, 2003). An
inductive approach “proceeding from the specific to the general” was employed (Sarantakos,
1998) so, to reach generalized conclusions, more than one case study was required. Smaller
analogous case examples were produced from five very large organizations with which the
authors had close engagement.
The length of relationship and the seniority of the
interviewees provided internal validity and reliability (Yin, 2003). Overall spend analysis data
was collated from records of expenditure for FY 03/04 against contracts that are held by the
Defence Bills Agency [DBA], expense data held by the Government Procurement Card
provider and reimbursement details from the Civilian & Military Expenses system (TCMT,
2004). Neither the DBA nor the Government Procurement Card [Barclaycard] hold detailed
air travel records. British Airways were able to provide data that identifies the dates and
8
numbers of passengers that travel, their routes and their seat costs. They provided 10,261
records from 2003 data, which account for 130,100 trips. We have made assumptions that the
travel patterns drawn from British Airways data are representative of travel models with other
Defence Fares Agreements [DFAs]. The analysis and savings proposed therefore use travel
patterns and financial analysis based on this dataset.
Analysis of current MOD business Travel
From the collated records of expenditure for FY 03/04 data it was possible to break down the
total spend of £294 million on business travel into the following classifications: road 35%, air
30%, hotel 18%, rail 12%, booking fees 3%, and ferry 2%. The DBA holds records of
expense against Unit Identification Numbers [UIN]. The UIN expenditure has been grouped
by business unit, referred to as Top Level Budget [TLBs] by the MOD, and an aggregated
spend profile developed for each TLB. Moreover, Government Procurement Card data can
also be apportioned to TLBs from the UIN breakdown. This precise correlation between bill,
UIN and TLB gives assurance that the spend allocations against individual TLBs is accurate
(TCMT, 2004).
The greatest cost is incurred in Hotel and Road [e.g. costs associated with periodic hire cars]
expenditure. Investigation with individual TLBs to divide this more accurately is part of a
separate current exercise to agree and align spend data. Until this task is complete,
expenditure has been assigned to TLBs in accordance with their proportion of the individual
travel budget (TCMT, 2004). While it is possible to identify expenditure against different
modes, there is limited availability of further information about behaviour within these
categories. The temptation to proceed with diagnosis of information based upon assumptions
and to act on limited data could lead to false conclusions. This can be avoided when it is
possible to develop data through trust with other partners that can be subjected to the rigour of
9
analysis (Bennis, Benne & Chin, 1969). This study is focused on business air travel where,
fortunately, it has been possible to glean more detailed information on travel behaviour from
travel providers.
Examination of FY 2003/04 overall MOD Air Travel expenditure reveals that, of a total spend
of £87 million, 90% of the air travel spending is accounted for by the DBA which represents
expenditure with airlines through DFAs. DFAs are non-contractually binding agreements that
the MOD has with airlines. Spend attributable to the Government Procurement Card
amounted to 9.3%, with 0.5% ascribed to Civilian Expenses. The DTM’s goal is to recognise
a 10% minimum saving on the total travel budget. It was recognised that some areas would
present more scope for generating savings than others and that this would accrue to 10%
across the piece. Air travel presented a viable area for making savings, mainly achieved
through air travel policy change.
MOD Air Travel Policy
The MOD’s policy of air entitlements for Service personnel is laid down by statute for the
RN, RAF, and Reserve Forces and by Royal Warrant for the Army (JSP 356, n.d.). The
policy for civilian air entitlements is documented in MOD Travel Regulations (MOD Civilian
Travel Manual, 2003). An individual’s rank or grade determines their entitlement to choose
air travel at a certain class [First, Business etc.] in line with standards used in the airline
industry. It has not been possible to identify precisely when MOD entitlements for air travel
were last revised and it is likely that they have not changed since before the policy was
disaggregated from Central Government in 1996. The current entitlement to class of travel
for Service and civilian personnel devised around a journey time rule of two and a half flying
hours and by grouping individuals by rank or grades resulting in a complicated matrix of the
different combinations possible, depicted at table 1.
10
Flying Time
Flight Class
4* Service
2/3* Service
Senior Civil
Structure
Officers &
Officers, Senior Service, ML3
available on
above. Civil
Civil Service,
& all other
aircraft
Service Grades
ML 1/2
personnel
1 & 1a
First Economy
Business
2.5 Hours or
Less
Economy
Economy
Economy
Economy
Business
Business
Economy
Business
Business
Economy
First
First
Economy
First
Business
Business
First
Business
Business
First
Business
Economy
First Economy
Business
2.5
more
hours
or
Economy
First
Business
Economy
Table 1 : Current MOD Air Travel Entitlements
DFAs are negotiated by the Defence Transport and Movement Agency [DTMA] on behalf of
the MOD (TCMT, 2004). Traditionally the MOD has managed to secure competitive
agreements with airlines on the basis of fully flexible fares and reimbursement. The
disadvantage of these arrangements is that they allow for flexible timings and are therefore
relatively more expensive than if they were for specific flights where changes could avoid a
fee or are not possible (I Flint 2005, pers. comm., 14 February). The DFAs are also openended without any contractual commitment or guarantee that the MOD will use the agreement
or that the airline will be able to offer the seats at the agreed price. There are twenty eight
agreements at different stages of negotiation (TCMT, 2004). This number of contracts,
although providing flexibility of carrier on the same routes to the MOD business traveller,
11
requires more contracting staff than for a smaller number and, more significantly, it suggests
that the MOD is diluting its procurement power. There are ten main DFAs worth some £52.7
million pounds. For some carriers there are multiple DFAs so in this analysis we have totalled
the expenditure in these multiple contracts within figures for a single carrier. This break down
gives seven major carriers with a share of spend; British Airways PLC 61.6%, British
European Airways 9.8%, Virgin Atlantic Airways Ltd 8.7%, British Midland Airways Ltd
8.5%, Air Canada 6.3%, Lufthansa 3.5% and Gulf Air 2.1%. This analysis demonstrates that
there was a considerable amount of air travel with British Airways in 2003/04, taking 61% of
the £52.7million DFA spend, amongst large carriers, partly because of British Airways’
comprehensive route coverage as well as an historical relationship with the MOD for
ticketing.
Developments in Travel Product Offering
Pressure on companies’ travel budgets has been recognized by airlines that now, as a result,
offer an additional class to what used to be the simple cabin structure of First, Business [Club]
and Economy Class. There is some debate whether EVA or Virgin Atlantic was the first
airline to establish the innovative fourth class, called ‘Premium Economy’ by Virgin, offering
more facilities and services than economy but at a fare below business (Khare, 1997; Airline
Travel News, 2005). Nevertheless, many other airlines have now adopted it. The extra class
was seen to alleviate pressure on travel budgets while providing more space and better
facilities for travellers than those in Economy Class. (Papworth, 2004a).
Airlines have
observed an increased uptake in Premium Economy seats and in December 2004, the 5%
better-than-expected British Airways growth was partly due to increased sales in this class at
6.8% compared with 3.7% for other classes (BBC News, 2005). The 2003 Barclaycard
Annual Travel Survey showed that only 15% saw Business Class as value for money and 22%
of travellers justified its use by saying they were following company policy (Travel in
12
Business Survey 2003/4). Passengers perceive that Premium Economy is good value in
contrast to Business Class where 71% of people believe the service does not match up to the
price (Travel in Business Survey 2004/5). In the 2004 study the number of passengers able to
use travel policy as the reason for adopting this class had reduced to 11% because there was a
migration of passengers out of Business Class to the two lower classes (Travel in Business
Survey 2004/5). Notwithstanding the facilities available in Premium Economy, of those
continuing to fly Business Class, 27% claim more flexibility and better service and 16% claim
better working conditions, while 8% said that their position merited it. Aircraft manufacturers
have recognized the changing demand and Airbus and Boeing offer aircraft specifically
configured with Premium Economy (Papworth, 2004a). Dedicated Airport Lounges offer
business passengers the ability to work and relax in a quieter environment away from other air
travellers who are confined to publicly accessible parts of airports (Papworth, 2004b). While
companies have cut back on their air travel budgets and have moved passengers from
Business to Premium Economy and Economy Classes, access to dedicated airport lounges is
seen as a way of smoothing the ruffled feathers of employees who have to travel at lower
classes. Increased check-in times for security purposes can mean that individuals may have a
couple of hours to spend at airports which could be employed productively away from the
distracting crowds and facilities in the terminal building. Table 2 compares Business Class,
Premium Economy and Economy Class by seat size, spacing and available facilities.
13
Class
Economy
Premium
Economy
Business
Seat Seat
Seat Personal Power
Pitch Width Recline
TV
31"33"
37"40"
42"60"
17.5"18.3"
18"20"
19.5"27"
60-300
Some
110-1070 9
0
111 1800
9
Dedicated
Seat
Lounge Chauffer BroadCheck In Telephone Access Driven car band
Transfers Internet
Av Cost
Heathrow Washington
return1
8
8
8
8
8
8
£917.80
Some
Some
Some
8
8
8
£1,316.80
9
9
9
9
Some
Some
£4,258.80
Table 2. Comparison of Economy Class, Premium Economy and Business Class1
Analogous Company Travel Policy Case Examples
Having detailed current MOD air travel entitlement and air travel products, five analogous
organisations were identified and their travel policy examined to facilitate policy
development.
Case Example 1: UK Central Government
Until 1992, UK Central Government issued travel policy that included entitlement to class of
travel (A Khan 2005, pers. comm., 19 January). This was partly delegated to individual
departments in 1992 and full delegation followed in 1996. Nevertheless, the overarching
instruction is that travel should be by the 'most efficient and economic means’. In practice,
many Government Departments seem to have travel policy that can trace its antecedents to
when Central Government provided direction.
The Office of Government and Commerce, an Executive Agency of the Office of Government
Commerce in the Treasury has appointed OGCbuying.solutions to co-ordinate a cross-
1
Based on a North Atlantic return between Heathrow and Washington, 26 – 28 April 2005, on British Airways
(British Airways, 2005a) and Virgin Atlantic (Virgin Atlantic, 2005a).
14
Government Department initiative based initially upon the Department of Work and Pensions
whose existing travel arrangements end in 2005 (C Poulter 2005, pers. comm., 19 January).
Contracts will be let in an open manner that will allow other Government Departments to
share solutions. OGCbuying.solutions has approached British Airways who have indicated
that a single focus for procurement across some two hundred and fifty Government entities
would enable British Airways to reduce the number of account managers in place to manage
existing business. The benefit to BA is that they will collect a levy of individual departmental
travel spend; departments, especially those too small to justify arranging individual travel
arrangements will have access to better travel arrangements. Nevertheless, airlines could offer
OGCbuying.solutions cheaper tickets if a mandate to use negotiated arrangements were in
place. There is a perception that this might be difficult to achieve because of the myriad of
organisations concerned.
The OGCbuying.solutions approach focussed initially on the procurement of travel and was
not planning address change to class of travel entitlement until later in the programme (C
Poulter 2005, pers. comm., 19 January). However, individual departments are starting to
change and the Cabinet Office has been asked to identify the possibility of delivering best
practise travel policy. This policy could then be used to gain senior buy-in within separate
Departments.
Notwithstanding the fact that many Government Departments have not
changed their travel policy since Cabinet Office disaggregation, there is already some best
practice. For example, government backed institutions such as The British Council and also
many Universities in the UK have moved away from travel by grade to a policy where travel
class is linked to length of journey coupled with business intensity. Both organizations believe
that there is corporate responsibility, a duty of care to individuals and that the cost of travel
needs to be balanced with the effect the selected class of travel will have on the individual’s
arrival condition (J Harrison and K Watts 2005, pers. comm., 19 January).
15
Case Example 2: US Department of Defense
Until May 2004 the US Department of Defense [DoD] travel policy was to use Economy
Class for all travel apart from those journeys exceeding fourteen hours, where Business Class
was permitted. However, in May 2004 this policy was changed so that Economy Class,
referred to as ‘coach’ in the USA, was to be used for all journeys and travellers were to
schedule rest days rather than use premium travel. However, four star officers are able to
sanction Business Class travel, although this may not be delegated below two star rank: nor
may senior officials sanction their own upgrade. All such permission for upgrades is to be
recorded and is subject to auditing and regular reporting. The language used for the policy is
very direct; it leaves no room for ambiguity and has been issued by the Deputy Director for
Defense (DOD Travel Regulations 2005)
Case Example 3: NATO
NATO staffs when travelling on NATO business are required to go by Economy Class.
Exceptionally, three and four star personnel may travel Business Class and the Supreme
Allied Commander Europe may travel First Class [NATO ACE Directive 50-60, 1994].
Case Example 4: ICI
ICI is a global company employing 35,000 personnel and had a turnover of £5.849 billion in
2003. ICI was formed in 1926 by the merger of four UK chemical companies. Since 1997 it
has transformed from a bulk chemical producer to concentrate on global paints and specialist
products that include fragrances, starches, adhesives and lubricants. (ICI Fact Book, 2004).
ICI’s travel policy is linked to the nature and proximity of the activity enabled by travel. The
company uses American Express as a TMC, utilizing the Corporate Travel On-line selfbooking system. A considerable amount of store is put on 'visual guilt' where individuals
16
make responsible decisions when they see the costs involved. Individuals may upgrade to a
higher class if they have to attend a very important meeting shortly after a long-haul aircraft
flight or to avoid a poor connection or carrier. However, the traveller is made accountable
through pre-trip reporting in these instances and a level of justification is required. This is
reinforced in the certain knowledge that reasons for journeys above entitlement will have to
be explained to senior company executives. Mason notes that there remain some variations of
travel policy within today’s company which reflect the large number of acquisition and
mergers over the years. (D Mason and B Aldington 2004, pers. comm., 9 December).
Case Example 5: British Telecom
British Telecom has an £18.5bn turnover with 100,000 employees and provides
communication services. The company started life in public ownership as part of the Post
Office and is now owned by major institutional investors as well as individual shareholders.
BT uses a TMC to provide their travel service. A self-booking tool is available through their
company intranet to make bookings which may also be affected through telephone calls. BT
encourages use of the self-booking tool because Management Information reveals that
booking on-line is 11% cheaper than arrangements made in other ways. They have identified
that this saving is the result of ‘visual guilt’.
BT mandated their travel service eighteen months ago. Senior management were convinced of
a need to mandate not least through the increased leverage that would deliver savings, but also
because it would provide an enhanced duty of care. BT could be knowledgeable of the
whereabouts of individuals in case of an emergency and key personnel can be prevented from
using the same flights, even inadvertently. The on-line booking service was used for 78% of
bookings from April 2004 - March 2005 compared with 71% for the previous year. BT has
17
calculated that they have gained a 15% saving by mandating the travel service through being
able to negotiate better contracts with airlines that can rely confidently on BT’s air volume
predictions.
Passengers are accountable for their travel choices through pre-trip reporting and BT’s travel
policy allows the use of Business Class for international travel. They require justification for
flights that are booked with carriers for whom they have no procurement arrangements.
Although BT has inherited eighteen different travel schemes from previous company
acquisitions, they are in the process of producing a single travel policy. (J Tucker-Jones
2005, pers. comm., 26 April).
Analysis of current MOD air travel patterns
While it is possible to define how much money has been spent on travel types by the MOD
[Road, Rail, Air etc.]; neither, the DBA, nor the Government Procurement Card provider
[Barclaycard] hold actual travel details within their records. The split of DFA expenditure
across the ten largest contracts is covered by seven carriers previously identified. Each of
them was contacted and requested to supply any information they might hold on MOD
bookings. All airlines, bar one, were unable to provide comprehensive data (TCMT, 2004).
The airline that was able to help was British Airways, identified in the analysis as taking over
61% of the DFA spend. Due to the paucity of other available data it was necessary to make
assumptions that the travel patterns drawn from British Airways data are representative of
travel models with other DFAs. British Airways holds comprehensive data about the style of
travel by Corporate Customers, including MOD, for each calendar year. Here another
assumption is made that the data for a calendar year will be broadly similar overall to the
MOD financial data held by accounting year i.e. each set of statistics covers twelve
consecutive months and it is assumed that the patterns of air travel are similar over both
18
periods. The British Airways data identifies the dates and numbers of passengers that travel,
their routes and their seat costs. There are 10,261 records in the 2003 data, which account for
130,100 trips (S Cattell 2004, pers. comm., 22 July).
Destination
First
Business
Premium Economy
Economy
PAX
£ (Mil)
PAX
£ (Mil)
PAX
£ (Mil)
PAX
£ (Mil)
UK-USA
46
£0.15
3,497
£8.13
1,559
£1.15
3,346
£0.88
Intra Europe
-
-
8,468
£3.11
-
-
42,892
£6.68
Domestics
-
-
82
£0.01
-
-
63,056
£8.57
UK-M East
57
£0.10
2,420
£2.86
370
£0.33
577
£0.40
UK-Africa
13
£0.05
841
£1.58
103
£0.13
711
£0.45
UK-SW Pac
29
£0.09
427
£0.93
37
£0.05
168
£0.18
UK-Lacar2
8
£0.03
318
£0.71
54
£0.05
215
£0.16
UK-Canada
3
£0.01
199
£0.35
50
£0.03
116
£0.04
UK-S. Asia
8
£0.02
212
£0.36
19
£0.02
27
£0.02
UK-Japan
4
£0.02
53
£0.13
2
|£1.6k|
18
£0.02
UK-Far East
5
£0.01
45
£0.08
-
-
14
£0.01
Other3
2
|£4.96k|
21
|£7.97k|
-
-
8
|£668|
Total
175
£0.48
16,583
£18.25
2,194
1.76
11,1148
£17.41
Table 3. Movement of personnel and cost per class divided by global sectors with British
Airways.
2
Lacar covers Latin America / Caribbean
3
Other Covers, Abu Dhabi, United Arab Emirates, Muscat and Oman, Rio De Janeiro, Sao Paulo, Brazil, and
Guarulhos Intl, Bahrain, Doha and Qatar.
19
In table 3 the number of passengers carried by British Airways and the cost of these journeys
is examined against the different travel sectors, arranged in cost order. Geographically the
sectors are self-explanatory apart from ‘Lacar’ which covers Latin America / Caribbean. The
'other' sector concerns a relatively small amount of passenger traffic not already catered for
elsewhere. In terms of the number of passengers carried, domestic and Intra Europe sectors
account for 88% of the total volume of travellers and the USA brings this percentage to
94.5%. Such patterns are explained by the fact that the Domestic and Intra Europe sectors are
where the majority of MOD business takes place within NATO and also, that a significant
amount of travel to the USA is indicative of the close relationships between the UK and the
USA. These three sectors account for 75.7% of the total MOD spend with British Airways on
business air travel [£28.67 million]. The dominance of expenditure for these routes, as
opposed to the other nine sectors, echoes the predominance of passengers using Domestic and
European travel and for the longer, more expensive USA flights. It can be seen that the USA
sector is carrying 6.5% of the total passengers while attracting over 27% of air travel
expenditure. This volume to cost relationship balance warrants further analysis through
studying the correlation of passenger numbers by class of travel.
The Domestic and Intra Europe sectors offer only Economy Class and Business Classes and
there is no Premium Economy in the UK-Far East or Other. The table shows the significant
number of passengers carried in Economy for Domestic, Europe and the USA. It can also be
seen that Intra Europe and UK-USA have the largest number of Business Class passengers
and that this last sector attracts the most Premium Economy fares. There was no entitlement
in policy for Premium Economy yet the table shows that passengers are using this class. It
seems that MOD passengers are attracted to the combination of value for money and the
facilities offered by Premium Economy. The large numbers of passengers travelling in
20
Economy in Domestic and Intra Europe sectors attract a proportionate price. However, the
effect of the higher cost per seat of the premium classes can also be seen. The UK-USA, UKM East and UK-Africa sectors show that a relatively small number of passengers are
attracting significant cost, especially in Business Class.
Policy Scenarios and cost implications
It was identified that the MOD entitlement policy was based upon a mixture of entitlement by
rank or grade and length of journey with a demarcation at two and a half hours. Organisations
from the analogous case examples identify differences in entitlement for journeys that exceed
five hours.
In the analysis that follows we will present scenarios to examine the effect of policy change in
entitlements. A split will be used, based upon Domestic and European and long haul air travel
which roughly equates to five hours. The data supplied by British Airways does not identify
MOD passengers by rank or grade, so analysis on this basis is not possible. Therefore
analysis shall concentrate upon different entitlement and pattern of travel options compared
with existing patterns before contrasting their costs.
In earlier analysis it was shown that the balance between spend and passenger numbers were
disproportionate, particularly for the USA sector, and that the current MOD Air Entitlements
policy does not include Premium Economy even though its travellers were using this class.
This section will analyse what would happen if passengers travelled in a variety of different
ways. Three different scenarios are proposed. The first assumes mandation of Economy Class
for less than five hours and Business Class for journeys over five hours. The second assumes
that all journeys over five hours would be Premium Economy on routes where this is
available. For the sectors where this class does not exist, it has been assumed that these
21
journeys will be taken in Business Class based upon an assessment that the Economy Class
seat and facilities are too meagre for journeys lasting over five hours. The third scenario
assumes that all journeys, regardless of their duration, would be undertaken in Economy Class
in line with NATO and DOD policy. The effect of these policy scenarios on British Airways
spend would produce the cost patterns at table 4.
The data for scenario 1 reveals that the greatest differences are between the Domestic,
European and USA sectors which have been ringed. There has been a saving in the Domestic
and Europe market of £1.78 million per annum because flights within these sectors take less
than five hours, therefore Economy Class would be used. Prices have increased in the other
sectors because of the migration to Business Class for journeys over five hours. This has been
particularly marked for the USA where there would be a cost growth of £9.33 million per
annum. The overall difference between costs against flights based upon current entitlements
and switching to the Business Class concession for journeys exceeding five hours would be a
cost growth of £9.68 million per annum. The advantage of adopting this policy would be that
passengers could travel in improved comfort, albeit that there may not be any business
justification. Obviously, the disadvantage is the cost growth.
22
Destination
Passenger
Current
Cost
Scenario 1:
CLUB CLASS
FOR ALL
JOURNEYS
OVER 5
HOURS,
REMAINDER
ECONOMY
£ millions
Numbers
Scenario 3:
ECONOMY
FOR ALL
JOURNEYS
£ millions
Scenario 2:
PREMIUM
ECONOMY
FOR ALL
JOURNEYS
OVER 5
HOURS,
REMAINDER
ECONOMY
£ millions
£ millions
UK-USA
8,448
£10.31
£19.64
£6.25
£2.21
Intra Europe
51,360
£9.78
£8.00
£8.00
£8.00
Domestics
63,138
£8.58
£8.58
£8.58
£8.58
UK-M East
3,424
£3.69
£4.05
£3.01
£2.36
UK-Africa
1,668
£2.20
£3.14
£2.06
£1.05
UK-SW Pac
661
£1.25
£1.44
£0.96
£0.71
UK-Lacar4
595
£0.95
£1.33
£0.52
£0.44
UK-Canada
368
£0.44
£0.65
£0.26
£0.13
UK-S. Asia
266
£0.41
£0.45
£0.22
£0.15
UK-Japan
77
£0.16
£0.18
£0.06
£0.10
UK-Far East
64
£0.11
£0.12
£0.12
£0.07
Other5
31
£0.01
£0.01
|£2,600|
|£2,600|
Totals
130,100
£37.89
£47.58
£30.03
£23.81
Table 4. Total costs for three different policy scenarios for current British Airways spend
4
Lacar covers Latin America / Caribbean
Other Covers, Abu Dhabi, United Arab Emirates, Muscat and Oman, Rio De Janeiro, Sao Paulo, Brazil, and
Guarulhos Intl, Bahrain, Doha and Qatar.
5
23
For Scenario 2, Premium Economy Over Five Hours, as with the previous analysis, there is
the expected saving for both Domestic and European sectors when travel time of under five
hours would be in Economy Class. There have also been financial savings in all other sectors.
Savings on the USA route are particularly marked at over £4 million per annum. Adopting
Premium Economy for air travel over five hours and using Economy Class for other air travel
would deliver savings of £7.86 million per annum. This would amount to an upgrade for some
travellers who currently do not enjoy an enhanced travel class for flights that exceed five
hours. On the other hand, a disadvantage is that there may not be a business justification for
travelling at Premium Economy rather than Economy Class. Moreover, there is a risk that
individuals might attempt to book at the last minute when Premium Economy seats are
unavailable, thereby hoping to attract an upgrade to Business Class. The downside of their
gamble could be that the entitlement policy includes a reversion to Economy Class if
Premium Economy is full. It may be possible to use the MOD’s leverage of spend with
carriers to influence priorities so they upgrade MOD passengers in this instance based at
minimal cost.
Our final analysis is for Scenario 3, Economy Class for All Journeys. From its pattern, it can
be seen that the Domestic and European sectors have a greater proportion of spend compared
to long haul routes. This is because much of the Domestic European travel is already
undertaken at Economy Class. As expected, there is the repeated saving for the Domestic and
European sectors but there have also been economies in all of the others. For instance, heavy
traffic to the USA could attract substantial savings of £8.10 million per annum and, in total,
adopting Economy Class for all air travel could deliver savings of £14.08 million per annum
on British Airways travel. The advantages of cost savings are significant although they may
be outweighed by some of the disadvantages. This policy would assume that all passengers
24
travel Economy Class even though the business justification might warrant travel in better
conditions offered by the more expensive classes.
The savings presented against these three scenarios are based on British Airways spend alone.
It has been identified in this work that 90% of air travel was billed through the DBA and
related DFAs. According to British Airways 2003 data the MOD booked £37.89 million
worth of air travel with them. Assuming that travel patterns for the remaining DFA spend are
similar to the British Airways model, the potential effects of the proposed policy scenarios to
the balance of the £78.32 million per annum air travel expense identified can be calculated.
It has already been noted that the use of Business Class for flights that exceed five hours
would cost the department an additional £9.68 million per annum for the British Airways
spend. When the remaining DFA expenditure is taken into account, there would be a further
outlay to the department of £12.54 million per annum, which brings the total cost of this
option to £22.22 million per annum. This additional cost clearly does not achieve the aims of
a 10% reduction in air travel spending.
Premium Economy for flights over five Hours would save the MOD £7.86 million per annum
against British Airways expenditure. The remaining DFA spend would offer an additional
saving of £10.19 million per annum which together would bring the total saving to £18.06
million per annum. This exceeds the 20% [£17.4 million per annum] stretch goal for savings
on air travel.
Scenario three, Economy Class for all journeys would save £14.08 million per annum on the
British Airways routes and there would be a further £18.26 million per annum of savings for
25
the non British Airways DFAs, the sum being £32.35 million per annum. Mandating this
policy would achieve the 10% goal set for cost reduction from the annual £294 million budget
for all business travel.
In terms of entitlement complexity, all three options would be simpler than current
arrangements. It is envisaged that removal of complexity would lead to savings in time taken
to book and greater adherence to policy leading to even greater saving.
Conclusions
This analysis of optimum patterns for air travel was based upon a demarcation of journeys
lasting five hours, rather than the division within today’s MOD entitlement policy at the two
and a half hours marker. All journeys below five hours have been assumed to be taken in
Economy Class. Assumptions have been made based on the data drawn from British Airways
that travel patterns from this airline are representative of travel models across all other DFAs.
Adopting an entitlement of Business Class for Long Haul could increase costs by £22.22
million per annum. Economy Class Long Haul might deliver an annual saving of £32.35
million and with Premium Economy, the saving would be a forecast £18.05 million per
annum. All of these patterns would simplify air travel entitlements which may release
additional savings through greater policy adherence and reduced time spent on bookings.
Based on these findings, the MOD has opted to make savings based upon an assumed travel
pattern of Premium Economy for Long Haul and Economy Class for journeys less than five
hours duration. Adopting this policy is predicted to achieve the 20% stretch goal for savings
within MOD business air travel.
26
Future work
Future work will detail the process used for booking and also examine the opportunity for
cost savings to be made in this area. The analysis presented here may also be used by other
departments or company’s looking to make cost savings through changes in travel policy
entitlement.
The effects on motivation and morale of travel policy are a factor which has been excluded
from this study. The influences on individual’s motivation have not been captured. This work
has not been commissioned but the authors believe may add significant weight to policy
decisions.
The phenomenon of self-guilt in travel booking would be a useful area of study. This
phenomenon of self-regulation achieved through visibility of cost could be utilised in many
other processes.
An additional piece of work is proposed to measure the impact of enhanced cost savings
through the possibility of travel avoidance – this questions what needs to be in place for
personnel to avoid travelling in the first place, recognised as the ultimate objective to deliver
travel budget savings.
Acknowledgement
The authors would like to acknowledge the support of the Defence Travel Team
at Brampton and Andover, British Airways PLC and all the interviewees.
27
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Glossary of Terms
CDG Change Delivery Group
DBA Defence Bills Agency
DFA
Defence Fare Agreement
DoD
US Department of Defense
DTM Defence Travel Modernisation
DTMA Defence Transport and Movements Agency
FY
Financial Year
MOD Ministry of Defence
TCMT Travel Category Management Team
TLB
Top Level Budget
TMC Travel Management Company
UIN
Unit Identification Number
32
University of Bath School of Management
Working Paper Series
School of Management
Claverton Down
Bath
BA2 7AY
United Kingdom
Tel: +44 1225 826742
Fax: +44 1225 826473
http://www.bath.ac.uk/management/research/papers.htm
2007
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