No Show

How Government Travel Works

• Jeff Borman and Matt Brown

Share episode

This time of year is known as RFP season, the glorious time when corporate America sends their travel planners to conferences like GBTA (Global Business Travel Association) to negotiate prices and with hotels for next year. A time of wonder and mystery!

If it were a company, the federal government would be the largest travel buyer of hotel stays in America, possibly in the world. And not by a little bit, it dwarfs the next highest which is believed to be Deloitte, BY TEN TIMES!

How does all of this work, who benefits, where's it going, and what does the General Services Agency have to do with it? Spoiler: a whole lot.

Matt Brown:

Hi everybody. It's no Show. I'm Matt Brown, joined as always by Jeff Borman. This time of year is often known as RFP season, the time when corporate America sends their travel planners to conferences like GBTA Global Business Travel Association to negotiate prices with hotels for the next year. Corporate travel managers, of course, negotiate with airlines as well and, increasingly, with ground transportation. Last year at GBTA, Jeff was surprised to see that more than a quarter of total travel spend is now on rental cars and ride shares.

Matt Brown:

But corporate travel is not our subject. Today. We are going to talk about the federal government travel program. Even sexier, If it were a company, the federal government would be the largest travel buyer of hotel stays in America and possibly in the world, and not by a little bit. It dwarfs the next highest, which is believed to be Deloitte, by 10 times, and Deloitte, trust me, loves to spend money. Based on smart card analysis, pre-COVID federal travel was estimated at $16 billion annually in total travel. That's $4 to $6 billion in hotel, $6 to $7 in airfare, with the balance in car rentals, food and bev and incidentals.

Jeff Borman:

The US federal government spending on travel is larger than the GDP of some countries, matt, as staggering as these figures are, this doesn't even include the government pretenders. And when you say pretend, what do you mean? Federal contractors often pretend to be government travelers when it suits them. What these could be? Contractors like professional services, software providers, many savvy companies that are pros and doing business with the federal government book government corporate codes. They operate somewhere between playing dumb and being misinformed by their own companies about their legitimacy to use these codes for themselves.

Jeff Borman:

You've also got more sophisticated private companies, especially large defense contractors like Lockheed Martin, raytheon, northrop Grumman. They negotiate corporate prices, but they negotiate them to be tied to the exact government rate as provided by GSA, and this is permitted. When a company like the defense contractors or Boeing negotiates a rate for itself, then it's no longer cheating. Those companies go directly to the hotel and they say this is what I want, they agree and they move on. Defense contractors or Boeing negotiates a rate for itself, then it's no longer cheating. Those companies go directly to the hotel and they say this is what I want, they agree and they move on. It's odd, and they've sort of been grandfathered in to be allowed to price exactly at what the government rates are Right. So it's not good for hotels. It's not really cheating. The cheaters are more of the remora of the industry. They just kind of hang on, pretend to be part of you know, we're part of the federal government, but the fact is they are not government employees and that's who the program's for.

Matt Brown:

Do the hotels know what you're saying? I mean, are they allowing the cheating? Because it sounds like I could call up your Starwood, your Hiltonilton, and say, hey, I'm a federal government guy and I'd like your federal government guy rate please, and you can give it to me right now, and it sounds like I could get away with bloody murder if I wanted to do that.

Jeff Borman:

Yeah, bloody murder. I've seen numbers that show a third of the bookings that come in on government codes are not actually federal employees. You definitely could Matt 100%. It's a huge flaw in hotel operations. The simple answer is that the hotels need to check IDs at the front desk, but these are pretty easily faked and not many front desk clerks, even if they've been trained to look and then take the time to execute checking, not many of them know what a DOE ID is from a DOT ID or a US Senator's ID. The federal government isn't exactly anxious to publish a list of what those different images look like. You get further complicated now with digital check-ins. Using a smartphone as your room key means that people don't even stop by the desk, so it's getting easier and easier to cheat.

Matt Brown:

really, I'm wondering if something like a clear ID airports use clear ID all the time, even though an airport's a very different animal than a private hotel. I wonder if we're headed towards a space where, like, a clear ID system is kind of part of your check-in process, not just for federal government, but just for like anybody who's checking in.

Jeff Borman:

Totally, I think, clear at that time was also moving into stadiums and they were going to put your ID with your ticket right. They were going to move into a direction where that was a part of, and accompanied with and validated you as an individual with your ticket to the event also. So the technology is there and that has to be the future. There needs to be a booking portal, though that identifies a traveler at the time of booking instead of at arrival at a hotel. You could use your company sign in to access the benefits. I think that's very common One thing that if you're going to book a Deloitte since you mentioned them earlier if you're going to book a Deloitte discount, you have to do that by signing into Deloitte with your employee ID and accessing that portal. Right. If you're a Hilton team member traveling on the employee travel program, you have to do that through the Hilton portal with your ID, right.

Jeff Borman:

There's no reason the federal government could not do that, but so far I've chosen not to. It has not been a priority for GSA. They really don't have a vested interest in making sure that the hotel profits are better, so it's just not their priority. There's also state and local government travel and they set their own travel reimbursement policies also. Most of them, however, just follow what GSA has done. They've already done the heavy lifting. Just do what they do. Follow what GSA has done. They've already done the heavy lifting. Just do what they do. But if you're going to put in a program like Clear or any form of digital booking verification, it's not only going to have to hit all the departments that span the federal government, which is daunting, it's also going to have to get down into a state and local level to be effective.

Matt Brown:

Also, you mentioned GSA. The hotel industry, as I've come to learn in this podcast, loves an acronym. So this is a match made in heaven, because the only other entity I can think of that loves acronyms more is the US federal government. What is the GSA?

Jeff Borman:

It stands for General Services Administration. Gsa sets the travel policies for the federal government, mostly setting per diem rates, which are the amounts that government travelers will be reimbursed for their night's stay.

Matt Brown:

So let's say, I just started my new job with the GSA. I sit down at my desk. I now have to start negotiating prices. Do I negotiate with each hotel? Do I negotiate with the hotel chain? Do I negotiate with the city of Philadelphia with zip codes? There's no negotiation at all.

Jeff Borman:

There's no negotiation at all. No, GSA sets a nightly price cap Now.

Matt Brown:

I know it's the government.

Jeff Borman:

They set a cap. What they're doing is they're saying this is the cap by zip code that the federal government traveler will be reimbursed for that night's stay. So they'll publish. Let's say, tonight in Washington DC the per diem is $2.56 per night. A traveler can stay anywhere they want. You can stay at the Four Seasons for $1,000 tonight, but you're only going to be reimbursed $256 when you do your expense report for being in that place.

Matt Brown:

Again, I'm sitting at my desk absorbing this information from you at the GSA. How do I even set these prices? Do I just pull a price from the air? Does the Fed tell me what the price is? How do I even come up with a number?

Jeff Borman:

They have a formula. Precise formula is not shared, but it's pretty well understood that they take from our friends at STR. They take the average rate data for FEMA approved hotels by zip code Uh. They then remove luxury and economy scale hotels from consideration. Uh, they're not putting you know the intent not to be putting their guests into luxury hotels nor forcing them to stay in economy, but something in the middle. And then the basic concept is to take the ADR of the hotels in the consideration set, subtract 5% as a discount for themselves. Seasonality is a part of it. It's determined when there's a 15% difference in pricing that is sustained for a minimum of eight weeks. Gsa announces the per diems in August of every year. The federal budget runs October through September. That's their fiscal year. So every August they'll announce here's the price for every part of the United States Bonus, as they call it.

Matt Brown:

Is federal government travel good business for hotels?

Jeff Borman:

Aside from being just huge, government travel tends to be resilient through economic cycles, right. So post 9-11, government travel was least impacted Post COVID. That's been slower to recover, but it's generally quite reliable and economically resilient. Department of Defense, for example, does whatever it needs to do, regardless of GDP, right. Good times, bad times, military's got to be where it's got to be. It's got to do what it's got to do, so it's pretty resilient in that way.

Jeff Borman:

When there's a natural disaster, FEMA is the first on the scene and they need hotel rooms. Being there is good for local communities in recovery and it can also be very lucrative for hotels. When tourism's at its lowest right, Hurricane goes through New Orleans, tourists aren't going to New Orleans, FEMA is going to New Orleans, so it really helps a community when it's down. So in that way, yeah, government business can be very good. Helps a community when it's down. So in that way, yeah, government business can be very good.

Jeff Borman:

It gets a little weird when you get to markets that are not dynamic, right, Washington DC or Oahu are huge recipients of government travel, but they also have group business, corporate business, leisure travel, so a lot of other segments to mix in. Any place that includes the name fort is probably pretty risky. Military installations like to be remote and so hotels in those places tend to exist solely to serve the government or military traveler or those doing business with that fort in some form. Gsa's price formula can be really brutal in markets like that. It's kind of an autocatalytic formula, if you will, Without other segments to balance it out. If government travel pulls back, then next year's formula will pull back further by another 5%. So markets like Fort Benning places in the middle of nowhere they aren't welcoming a lot of dynamic business to come in those places can be pretty risky because they're so reliant on really just one source to keep them going.

Matt Brown:

Is this process the same for airlines? Of course not.

Jeff Borman:

GSA airline pricing process is totally different. It's called the City Pairs Program, CPP, if you want the acronym, I know you'll use that now. Gsa holds a reverse auction in three phases every March and April, and what they do is they request prices for 12,000 city pairs and an airline can submit their best one-way price for any O&D or origin destination. It's a winner-take-all approach. So lowest bidder gets all the government flyers for that city pairing over the following year. Domestic carriers only, of course, Matt. Several years ago, code shares became eligible for the auction. For example, JetBlue won the Washington DC to Dubai pairing through its code share with Emirates. Total Coup, get ready. Delta won the Honolulu to Seoul through its partnership with Korean Air. But for the most part, GSA only awards contracts to domestic carriers.

Matt Brown:

How does a city like Minneapolis, how do the Twin Cities, handle that when it's like, give me your best rate for the year, when flying to the Twin Cities in January is a different proposition than August.

Jeff Borman:

Yeah, that's a good question. Ultimately, unlike hotels, who are told what the rate will be, the airline gets to price it for what it wants it to be. Airlines can also control capacity better. If Minneapolis former Northwestern hub, now Delta hub if Minneapolis to Detroit I'm trying to think of a city pair, where they dominate both ends of they are probably going to price it so that they cannot lose that business, but they're also going to price it because they've got so much capacity going back and forth that, in your example, detroit to Minneapolis in January, they probably want to fill that plane with every government traveler they can find.

Jeff Borman:

So I think, where you have a lot of supply, you'll probably find that those are indeed the carriers who are getting it. They're bidding the lowest, they're winning the volume. They have what they call in hotel speak. It's LRA, nlra, last room available, non-last room available. Airlines have a version of that called fare codes, yca and underscore CA. So in that way though, matt, they can effectively control inventory, because inventory allocations are not required through GSA. So GSA does not say if you get that city pair, you have to give me 20 seats on every flight. They don't do that, but what GSA will do is measure to ensure that their travelers are getting sufficient availability to match, to be commiserate with the amount of travel they have. And it's kind of an unstated rule that GSA will punish an airline harshly in the next auction if they go really low, win the business and then don't make it available. They'll be kind of disadvantaged intentionally later on.

Matt Brown:

Do airlines have the same issue with cheaters?

Jeff Borman:

No, I saw GSA boasted on an internal document a few years ago. They get a 51% savings compared to commercial fares, but they do not have cheaters. Gsa cares about making sure its own travelers have access to those seats and they make it clear they don't want contractors or anybody else getting in and taking those seats from them. So the city fairs is really tightly reserved for federal contracts and they use the words. Clearly it is a misuse of a federal program, so it's actually criminal. Okay.

Matt Brown:

I've heard of FedRooms, Sato, Omega, Amtrav, DTMO. What are these organizations and what are they doing? Are they setting per diems? Are they giving me prices? What are these things?

Jeff Borman:

So only the GSA will set the per diems. The programs in travel companies you just mentioned. They exist as the way to book right. It's kind of like the bookingcom or the Expedia of government travel is kind of an easier way to think of that. So post-September 11, fedrooms was built as a program. It's not a travel agency. That's what Sato, omega and Amtrak do.

Jeff Borman:

Fedrooms was designed as a federal program to build a booking tool and program for federal travelers and the idea was that by creating a travel management tool for its employees, all the federal travelers would be booked and tracked through a central place. There's also in this world something called duty of care, which means if an employer whether you're talking government or corporate sends its employee out on business, it has a responsibility to that traveler to make sure that they are well taken care of while out on company business. So a lot of TMCs, travel management companies that's one of the services they provide. Federal government needed something like that too. So if there is a 9-11 and everybody goes, okay, planes are out of the sky for five days.

Jeff Borman:

Quickly, where are all my people? Well, you'd have to have a central booking system to be able to answer that and know how to get them back where they need to go. So they created FedRooms. Fedrooms went out and hired Carlson Wagonly, which is a travel management company, to create the booking engine for all these federal travelers. The booking engine is Sato, so FedRooms operates on a platform called Sato, but next year that's going to be turning into Amtrav. For the first time in 15, 20 years, fedrooms is going to use a different booking tool.

Matt Brown:

And they say America doesn't make things anymore. We make complicated systems for everything and I'm glad to see that travel is no different. Just for me to get this straight TMC equals travel management company. The GSA paid this company, carlson, to build it.

Jeff Borman:

GSA brought in Carlson Wagonly, but they didn't pay them for their work, Matt. They created what they called an industrial funding fee of 1.5%, moving up to about 2.5% next year, that each traveler, each hotel pays with each booking. So in perpetuity. It was a great deal for Carlson Wagonley. Instead of getting paid a couple million bucks to build the platform, they get 1% to 3% on every single booking that comes through. It pretty much forever.

Matt Brown:

God, how did they score that deal? What Senator, what happened here? This feels like a very nice arrangement.

Jeff Borman:

Yeah, it's a kickback that hotels are forced to pay.

Matt Brown:

And going back to DTMO, what is DTMO again?

Jeff Borman:

DTMO is the Defense Travel Management. It is essentially, or more colloquially, known as the DOD program. It's about 10 years ago. Dod realized that it had a housing problem on its bases, and it partnered with IHG to create the Privatized Army Lodging Program, an acronym for you PAL. Ihg did a great job improving lodging facilities at Army installations, as you would expect. Still, the hotel rooms, though, were needed off base, so DoD decided that it could leverage its power further and it created this Defense Travel Management Office.

Jeff Borman:

Dod is a sub-program then of GSA's per diem. It operates independently off of it, and it demands an extra 10% discount and other concessions be taken off. Unlike other parts of the federal government, military travelers are highly compliant to the program rules. Right, if the army tells a soldier you're sleeping in a tent, they have to. So you can imagine that when they have to stay at a certain hotel within a certain program, compliance is very high, and in small markets where hotels were built to service military travelers, it's particularly threatening. If hotels do not comply with all the extra kickbacks that DOD require, they are shut out entirely, and it's really an existential threat to the owners of those businesses.

Matt Brown:

Okay, so pop quiz at the end of the episode here. Lessons learned One GSA should take a stance to assist hotels in preventing per diem cheaters, like it does with its airline program or clear. Two GSA must take control of its booking systems, stop the kickbacks if there are any, of course and remove a few lecherous intermediaries. Is there a third lesson here?

Jeff Borman:

I think hotel companies and AHLA for their part, need to get vocal about those two things, and when does GSA announce the next year's per diem rates? They don't provide a published date. They don't announce when they'll announce, but per diems are reliably released every August. The federal fiscal year is October through September, so August gets their travelers and their planners just about six weeks out from that.

Matt Brown:

It's time for the mystery question. Jeff, new president coming in in January, you get a phone call. Love your style, love your organizational mind. You can have any department or agency in the federal government to run. It's yours. Which one would you choose?

Jeff Borman:

to run. It's yours. Which one would you choose? We've already said we don't like to encourage cheating, so I'm not going to pick treasury. Dot seems too natural. Right, there's too many things I would upend. The Fed is very attractive. I don't think technically. Despite the candidates both wanting to have a voice over the Fed, neither has it, so I don't think that's eligible. I want parks man. Give me Department of Interior Matt for 30.

Matt Brown:

So I'm so proud of you. That's what I was hoping you would say.

Jeff Borman:

Yeah, give me the parks.

Matt Brown:

Bureau of Land Management. National Park Service. Yes, please, oh my gosh, what a dream. Can I come work for you? You're?

Jeff Borman:

my number two. I mean in this hypothetical Matt, you put me in charge.

Matt Brown:

I'll see you later.