Facts & Forecasts: Erratic Demand Trends, Economic Jitters Complicate 2013 Forecasting

Data from travel management companies is mixed. Some in recent months have reported sustained or stronger corporate travel activity, while the likes of American Express and Hogg Robinson Group for their second quarters reported weaker activity. Sabre, meanwhile, described as strong the global growth in its global distribution system segments, but noted that U.S. growth lags that of the rest of the world.

Taken together, no trend from the past year is evident. Perhaps one of the better indicators of corporate travel demand is the growth (or decline) in the total number of transactions processed through ARC by mega travel agencies. But that metric has been rollercoastering throughout 2012, with as many down months as up months. The trend line hasn't experienced more than two consecutive months in either direction since the first quarter of 2011. Including American Express, BCD Travel, Carlson Wagonlit Travel, Egencia, HRG and Omega World Travel, mega agencies in August had an aggregate transaction volume decrease of 0.7 percent, slightly more than the 0.15 percent decline that ARC reported for all U.S. agencies.

Describing that trend line as a seismograph, GDSX vice president Tom Wilkinson during The Beat Quarterly webinar conducted in September by The BTN Group said, "If you paid attention to economic indicators over the past two years, it kind of feels right. Every month we are getting some great news on interest rates, or housing or whatever, all which drives the economy, but then Europe goes into crisis, and then things stabilize. The markets do respond to that. Travel is one of the great leading indicators of business, certainly in the United States and Europe."

Many industry observers and constituents don't expect business travel activity to pick up much more steam through the end of 2012 and into next year. Some anticipate an outright decline, though such projections depend heavily on geography and many other factors.

Among 63 companies surveyed by BTN with annual U.S.-booked air volumes of at least $30 million, average total T&E spending this year is expected to be $234 million, down from $242 million in 2011.

BCD Travel consultancy Advito in its 2013 forecast wrote that global economic jitters will "slow growth in travel for the rest of this year and 2013."

North America Pricing Forecasts 

Forecasting corporate travel demand is even more difficult than tracking it as it happens. Forecasting prices is more difficult still.

"Anybody who has been in the business travel industry for a while has learned to be pretty skeptical of some of these predictions," Wilkinson said. In noting expectations for oil prices specifically and global economic performance generally he added that "the odds of all those predictions coming true are pretty remote." Throw in unforeseen natural disasters, epidemics and civil unrest, and forecasts simply "cannot account for volatility in the market." Instead, he suggested travel managers "ought to be thinking about a price-demand curve sort of like what is indicated on the ARC chart."

However, should unforeseen events with wide impact be few, assumptions on global economies generally be accurate and the U.S. economy grow at about 1.5 percent next year, as it has this year, then price forecasts, Wilkinson said, may prove to be close to the mark.

Carlson Wagonlit Travel in July was the first of the usual bunch to publish a 2013 corporate travel pricing forecast. It expected modest global growth next year for most corporate travel prices, with demand growth—despite hesitancy by some companies—outpacing very limited airline and hotel supply growth.

A more recent forecast by Advito, issued in September, also projected moderate corporate demand growth next year. It too expected airfares and hotel rates next year paid by corporate travelers to rise generally by low-to-mid single-digit percentages around the world, "either in line with or a little faster than inflation."

North American airfares on average will rise between 3 percent and 5 percent, according to Advito, as airlines "have kept the number of seats they sell under tighter control than at any time in living memory. They are quick to reduce or cancel underperforming services and cautious about launching new ones. Disciplined capacity management in the United States in particular has led to several domestic fare increases in 2012." The consultancy noted that carriers aggressively are managing fare buckets, which often shuts out late-booking business travelers from lower-priced inventory.

But Advito added that companies "may be approaching the limit of what they are prepared to pay before opting to cut travel instead."

Meanwhile, the consultancy calculated that a $10 increase in the price of a barrel of oil translates to a 3 percent increase in airline ticket prices. But while noting that The Economist Intelligence Unit expects oil prices to drop in 2013, and therefore fuel surcharges levied by airlines shouldn't increase, Advito cautioned buyers not to "hold your breath: Airlines have proved much slower to bring surcharges down than to put them up."

A 'Silver Lining' For Hotel Rate Negotiations? 

Increases in hotel rates, according to Advito, will be more varied than projected airfare hikes, ranging from just a few percentage points in Europe to double-digit percentages in Latin America. In North America, the firm's forecast called for a 6 percent to 7 percent jump in the average daily rate paid by corporate travelers, explaining that "there is little sign of significant numbers of hotel openings."

Corporate buyers, of course, are angling for smaller hotel rate hikes, setting the stage for negotiations that Advito expects to be "the toughest for many years."

But its forecast noted that "demand is still not as robust as suppliers would like. If there is a silver lining to the recent cloud of bad economic news, it is that the figures are appearing at just the right time to frighten hoteliers as they head into negotiations for 2013."

Consulting firm Elizabeth Neumann Co. vice president of client services Nicole Hackett, who negotiates hotel programs for several companies, during The Beat Quarterly webinar said that buyers expect 2013 rate increases, but suggested "some great opportunities for new builds that have come in. Though growth of new builds has been slow, there are definitely new properties, and the rebranding of properties and more consistency among some of the larger chain brands.

"Although we are comfortable seeing, let's say, a 4 percent increase in some markets, overall we are still looking for cost savings because the demand is just not strong enough," Hackett continued. "It all comes down to whether hotels are willing to walk away from the business, and especially hotels that have had a relationship with our clients for several years. The market is not strong enough for them to walk away."

Other Spending Categories 

In terms of meetings, Advito cited "growing demand and stable supply" in predicting that 2013 rates would rise faster than they did in this year. "Once again, rate growth will be highest in major cities like New York, and also in luxury destinations," it concluded.

Meanwhile, amid "fierce competition" in the car rental sector, the Advito forecast called for stable pricing, a continuation of an ongoing trend. "Long-term, the effective completion of consolidation of the marketplace following the Hertz/Dollar Thrifty deal could put upward pressure on corporate rates," the firm added, though acknowledging that Dollar Thrifty has been a minor player in that market segment.

Advito's 2013 forecast also explored corporate travel expenses related to dining, mobile roaming and data fees and ground transportation (other than car rentals). It estimated that those categories together account for about 18 percent of U.S. corporate travel spending. It also estimated that companies can shave as much as 25 percent from those costs by leveraging new technologies, examining new options and using "new methods for influencing travelers.

This report originally appeared in the Oct. 8, 2012, edition of Business Travel News.