Economies of Scale and Corporate Travel Procurement

The concept of economies of scale is one of the primary tenets of microeconomics and refers to decreasing average cost with increased output or purchasing volume. The principle of economies of scale has significant application within corporate travel procurement, whereby large organisations are able to negotiate improved pricing and better contractual terms with airlines, hotels and transportation providers through the consolidation and centralisation of their travel spend. Technology has accelerated this transition through the development of modern business travel platforms that allow organisations to consolidate travel data, standardise the booking process and improve procurement efficiencies throughout the entire organisation.

Traditionally, corporate travel was often disjointed. Individual employees booked their own flights through various travel agencies and submitted receipts for reimbursement. This led to inefficiencies and inhibited a company’s ability to take advantage of their total purchasing volume as it was not fully taking advantage of economies of scale. The action of utilising different suppliers separately limited companies from realising the savings benefits of economies of scale.

Modern travel platforms have since altered this landscape by providing for consolidated booking across an entire organisation’s travel spend. As travel spend is consolidated within a travel expense management solution, organisations will now have access to relevant data that collectively identifies the total amount spent with specific airlines, hotels and car rental companies on a yearly basis. This consolidated view of total travel spend with each respective supplier provides organisations with increased leverage during negotiations for discounted pricing, loyalty benefits and preferred agreements.

The recovery of the global economy from the coronavirus pandemic has resulted in another spike in the amount of money spent on business travel. Prior to COVID, annually the worldwide amount spent on business travel was over $1.4 trillion. The amount that corporations are spending on the travel of their employees continues to rise as international travel resumes.

Large corporations spend millions of dollars each year, thus making procurement as efficient as possible will provide a company with a dramatic financial influence, especially when percentage savings are very small.

For example, many corporations may spend $20 million on corporate travel each year. By negotiating preferred carrier agreements through an organised procurement strategy, that corporation could yield several million dollars in airfare savings through negotiated rates. A typical 10% reduction in airfare pricing would yield several million dollars for a corporation annually. This clearly shows that economies of scale work such that when dollar amounts increase in procurement, the average price per transaction decreases.

Data analytics also plays a critical role in providing maximum economic benefit from business travel. Companies now can use travel websites and other online tools to evaluate the behaviours of their travel purchases, identify specific areas of inefficiency related to their travel, and enforce their travel policies to increase overall operational efficiency and reduce travel related expenses. Corporations can easily identify the most expensive routes, last-minute bookings, and how their travel suppliers perform in relation to the routes they serve.

When companies centralize their data, it helps with both budget and compliance because before centralizing data, companies that use multiple reimbursement methods and manually report may not be able to get a full picture of what their travel costs would be. Having a modern travel management company provides visibility for companies to be able to forecast costs better enabling finance departments to negotiate with suppliers.

A real-life example of how economies of scale can affect the travel industry is corporate hotel contracts. A corporation with a large commitment level (volume of anticipated bookings) can typically negotiate lower rates with the hotel brands that they do business with compared to a small company that is not going to provide 500-750 nights per year at the same hotel.

Airline loyalty and route concentration provide another way that economies of scale can effect travel. When companies centralize their travel reservation process, they can direct a large portion of their travel through one airline alliance and, therefore, can offer discounted fares, upgrade opportunities and other premium services. While smaller companies or individual travelers do not generally have enough business volume to take advantage of significant discounts.

The influence of larger corporations is larger than just these companies. By centralizing procurement functions and taking a strong negotiation stance with suppliers, many suppliers rely heavily upon business accounts from large corporations. This enhances the market share of large firms compared to smaller firms that may not be able to sustain travel volume on par with larger corporate giants.

Travel platforms benefit as well through the advantages of large-scale operations. When many companies utilize the services of a common modern travel platform, a travel provider can spread system infrastructure and technology costs over a greater number of customers. As a result, as travel providers have increased collaboration with other travel platforms, travel providers are able to develop greater value by enhancing the features of the travel platform through automated expense management, tax reporting, travel policy compliance, and maintaining price competitiveness.

The emergence of digital procurement systems represents one broader business trend toward operational efficiency. Companies view their travel accounts not merely as administrative functions; rather, they view travel as a strategic category of spending that can be managed and controlled like any other category of supply chain expenditure.

As business travel continues to recover from the pandemic and more international expansion by global corporations continues, economies of scale will remain integral to how corporate travel markets continue to function. Changes to travel management brought about by centralised procurement, consolidation of data, and enhanced supplier negotiation have all contributed to the evolution of travel management as being a sophisticated economic function, where both the purchasing strength and the efficiency associated with these two areas ultimately drive the total cost of operating an organisation and its competitiveness.