Financial Fallout Flips '09 Forecasts

Revised and recent pricing forecasts from analysts and travel management companies project a more favorable environment for business travel buyers in 2009 than previous predictions. The newer outlook follows a reversal of fortune, as business travel demand deteriorates and oil prices moderate.

Before late September's financial fallout, travel management company forecasts suggested domestic fares would grow as much as 12 percent in 2009, while more recent forecasts show more modest increases or even decreases next year.

A National Business Travel Association forecast released this month projects published airfares to rise 7 percent to 10 percent in 2009, bringing the average domestic fare to $354, its highest level since early 2001, according to the U.S. Bureau of Transportation Statistics. NBTA also said average international airfares would near $2,100, with a decline of 7 percentage points on fares of more than $5,000 as a "result of cutbacks on business class spend by corporate accounts."

American Express Business Travel Advisory Services postponed its 2009 Global Business Travel Forecast several weeks, citing September's profound and unexpected Wall Street meltdown. Eventually, Amex predicted base U.S. domestic short-haul fares to range anywhere from 5 percent lower to 5 percent higher than 2008 levels. Amex expected U.S.-point-of-origin international long-haul business fares to increase by 1 percent to 6 percent.

Earlier forecasts, including those from Carlson Wagonlit Travel and BCD Travel's Advito consulting unit, saw base airfares increasing as high as double-digit percentage points over 2008 levels, with domestic airfares bearing the brunt of airline capacity reductions and oil prices well over $100 per barrel. CWT and Advito said they are revising their 2009 forecasts.

The Travel Industry Association late last month said business travel continued to soften throughout 2008, with further declines expected next year. TIA senior vice president of research Suzanne Cook called business travel "the weakest link" in the domestic travel industry, anticipating a 4 percent demand decline this year and an additional 2.7 percent decline next year.

Egencia's forecast of the top 15 domestic and top five business travel markets released this month projects nearly across-the-board airfare decreases. The projections use October supply data, "direct input from field account managers representing about 62 percent of Egencia business" and recent oil prices.

Egencia forecasts several cities, including Atlanta, Dallas, New York and Washington, D.C., to have year-over-year double-digit percentage-point airfare decreases, while others, such as Los Angeles, Phoenix and San Francisco, are expected to experience single-digit percentage-point drops. The survey expects average 2009 fares to drop 4 percent to 8 percent on inbound travel to London, 11 percent to 15 percent to Paris and Toronto, 10 percent to 14 percent to Tokyo and 13 percent to 17 percent to Hong Kong.

While there is an increasing level of optimism for fare decreases in 2009, analysts said fares have yet to abate. JP Morgan airline analyst Jamie Baker in a research note this month said he is "surprised at suggestions that fares are falling. Granted, airlines will logically attempt to convey value in their advertising, but this doesn't necessarily mean one will spend less than one did a year ago."

Rick Seaney, CEO of Farecompare.com, in a research note this month said that although many carriers have dropped or "significantly" reduced fuel surcharges amid jet fuel price drops, those fees have been realigned into the base fare—providing more transparency, but little in the way of price relief.

However, as traffic declines, airlines' revenue forecasts are being drawn down, likely causing carriers to take one of two paths: higher fares at the expense of fewer passengers or lower fares in hopes of stimulating traffic.

British Airways CEO Willie Walsh this month told investors "that we intended to put our prices up to reflect our higher costs. A number of our competitors took the opposite view where they were going to keep their prices down or reduce prices to chase volumes. The issue here is getting the tradeoff between yield and volume. We've demonstrated in the first half that we've got that right. Although our volumes have fallen—and we've accepted that—our yields have improved."

American Airlines vice president of global sales Frank Morogiello said, "There's less wallet out there, and we all have to fight for another point and everyone's recalibrating budgets. The first quarter will be lighter than ever; nobody travels in the next couple of weeks anyway. After the first quarter, we'll see what we all look like when you shake the box upside down."

Continental Airlines senior vice president of worldwide sales Dave Hilfman said that as the overall market shrinks, carriers are charged with growing their corporate revenue through marketshare shifts.

Overall costs per trip are expected to rise due to factors including suppliers' ancillary fees, unfavorable currency conversion rates and high prices in some resilient markets. Amex projects the global average cost of a business trip to increase 2.8 percent to $1,139 domestically and 4.3 percent to $3,556 internationally. In North America, the cost per domestic trip is expected to rise 1.2 percent to $1,002 and per international trip to $3,452, up 3.5 percent.

Meanwhile, forecast revisions from hospitality research firms PricewaterhouseCoopers, Smith Travel Research and PKF Hospitality Research show more of a consensus than airline analysis.

With occupancy rates, at about 60 percent, their lowest levels in decades, all said revenue per available room will decline to some extent next year, though only one, PricewaterhouseCoopers, sees a decline in average daily rates next year.

PricewaterhouseCoopers, which made the most recent forecast of the three, said average daily rate growth in 2008 will be 3 percent, less than half the rate growth levels seen in 2007, and that will be followed by a 2.4 percent decline in average daily rates in 2009.

"The deteriorating outlook for the economy is impacting travel habits and spending, and hotels are expected to experience reduced occupancy levels, and to a lesser degree, some room rate erosion through 2009," PwC principal and leader of the hospitality and leisure practice Scott Berman said in a statement.

Bjorn Hanson, associate professor at New York University's Tisch Center, in October released a trend analysis predicting annual 2009 corporate negotiated hotel rate increases in the 1.5 percent to 2 percent range as negotiating power shifts from sellers to buyers.

Many corporate travel buyers are opening negotiations this year in anticipation of a 2 percent rise, according to Hanson, while others are negotiating for rate reductions of as much as 2 percent. The preliminary indication is for the overall average increase to be in that 1.5 percent to 2 percent range, while large group rates increase by about 2 percent, he said.

Leverage for buyers rests partially with the overall 5 percent average rate increase they saw in 2008 compared with 2007, Hanson said. As the leisure travel market is affected by the economic downturn, those set rates are buoying hotels in the closing months of the year and will be a key contributor to an overall 3.1 percent increase in rates for 2008, he said.

NBTA forecasts average U.S. daily hotel rates to increase by 1 percent to 4 percent to $130.

PKF forecasts New York demand to drop 6.9 percent but still maintain a well-above-average occupancy rate of 77.3 percent. Other cities to see occupancy levels plummet include Atlanta, Chicago, Dallas, Orlando and Washington, D.C.

TIA expects a turning point for business travel within two years. "Business travel will begin to start to recover in 2010 as the economy comes out of recession, which it certainly will," Cook said. "Next year will be tough, but we'll see brighter days."