Published airfares are expected to rise next year by up to 10 percent, though a growing number of travel managers said their companies are curtailing air spending, supporting concerns of weakening domestic demand. Likewise, buyers with managed car rental programs could hold pricing fairly steady. The hotel seller's market, however, remains strong. Buyers again face difficult negotiations, particularly in key cities and with higher-tiered properties.
"We sense a modest tightening of the corporate travel belt," said UBS analyst Kevin Crissey in a report issued last month. "It's not widespread, but the trend is negative. We surveyed travel managers just prior to the subprime crisis and found a higher percentage of firms are starting to restrict air spend."
Of 107 corporate travel buyer respondents, 43 percent said they have taken "significant steps to curtail spending on air travel." While more than half indicated no intentions to do so, Crissey said the number has increased from last October, when a similar survey showed 27 percent of respondents cutting air expenses.
Crissey said travel managers in the midst of limiting spending either were reducing the number of flights or limiting per-flight spending through business class restrictions or advance purchase policies.
Although International Monetary Fund transportation chief Caro Cook expects airfares to grow in 2008, the organization is trying to further rein in travel spending. "We're not expecting more travel, we're expecting the same," Cook said. "It's an indication that we're under more restrictive policy and therefore indiscriminate travel is not appropriate."
The UBS analysis pegged financial services firms as the likeliest to begin scaling back, "as the subprime impact causes increased scrutiny of discretionary spend. Should this occur, we believe the negative impact would be skewed toward legacy carriers." The UBS research said that consumer and retail firms are taking the toughest stance against rising air travel costs, "while few energy-related companies have targeted air travel for cuts. When times are good, limiting air travel spend is generally not a top priority."
Some of these signs also are evident in Business Travel News' Corporate Travel 100 report. This year, 22 percent of more than 60 companies that spend more than $44 million in U.S. booked air said they are seeking air savings by becoming more restrictive in business class policies. Last year, 28 percent did so. No company reported plans to loosen restrictions on business class travel.
American Airlines senior vice president of global sales David Cush, however, said travel demand and corporate spending remain robust this year. "I think less about what people are saying and more about what they're doing. What they're doing is continuing to travel at a very strong level," he said. "Our July figures for corporate travel show no decrease in demand there and forward-looking bookings look very strong, so everything we see points to a robust travel market."
Cush said the airline industry would have to wait to see "the fallout from some of this financial market turmoil," but that international travel remains strong. "These companies have globalized, and they can't just stop traveling internationally if they've made significant investments internationally. International demand is going to remain strong."
According to CT100 figures, respondents estimated their companies would average $5 million more in 2007 U.S. booked air travel on the heels of more travel and higher fares. However, one Corporate Travel 100 company last month said year-to-date air transactions already are down by about 1 percent.
Supporting demand concerns, UBS' Crissey noted that there is a "disconnect between what airlines experienced last month"—full planes, high fares and growing revenue—and how airline stocks are performing. "This suggests the market is concerned about the future and particularly the consumer's appetite for travel," Crissey said in the research note. "We share this concern and foresee air travel demand weakening."
In this year's first-quarter airline earnings reports and conference calls, Several carriers and airline analysts pointed to an approaching decline in domestic demand. The expectations already were manifesting in deeper discounts for corporate travel buyers (BTN, May 7).
Average published airfares next year will rise 6 percent to 10 percent from 2007 levels, including by 3 percent to 5 percent domestically, said Bob Brindley, vice president for the Americas for BCD Travel's consulting subsidiary Advito, in offering some early insights into Advito's industry forecast, which the firm will release later this year. Because of an increase in corporate air discounts, 2008 corporate fare hikes will be closer to 5 percent to 7 percent.
"When fares go up, the airlines tend to give you back some on the discounts," said Pfizer director of global travel Phil Dunphy. "If the airlines raise fares 5 percent, they'll give you back 3 percent, but they still net that additional 2 percent.'
"Fares are going up, and should continue to grow," IMF's Cook said.
"The expectation is they'll have to up that budget for next year," said Phyllis Schumann, travel services product manager at Runzheimer International, which soon plans to publish its corporate travel forecast.
Business Travel Coalition chairman Kevin Mitchell said he expects air spend to grow in 2008 by low-single-digit percentages—but more than the 3 percent estimated for 2007—as carriers have disciplined capacity and as Southwest Airlines sees fuel hedges decline, creating pressure to raise fares. Also, airlines are coming under increasing pressure from pilot unions and face higher labor costs, Mitchell noted.
UBS' Crissey said labor costs would increase modestly next year, but in the longer term, "Labor costs are a concern as unions look to recapture 'lost pay' once their contracts become amendable."
On the hotel side of the travel program, the market for corporate travel buyers is only marginally better than it was last year. Bjorn Hanson, principal of PricewaterhouseCoopers' hospitality and leisure group, said the latest forecast is for domestic corporate rates to increase by 5.7 percent. By comparison, analysts reported an average 6 percent increase in corporate rates following 2006 negotiations.
Hotel volumes in corporate travel programs have risen steadily during the past several years, according to BTN's Corporate Travel 100 benchmarking data. The average volume, including taxes and fees, for CT100 companies was up 20 percent to $54 million in 2006, double the average volume in 2003. The average size of hotel programs also is on the rise, however, with average booked annual domestic room nights up almost 7 percent in 2006.
This year, however, the ability of corporate travel buyers to control their hotel budgets will depend more than usual on the content of a hotel program, PwC's Hanson said. "The rate negotiations this year actually will be very challenging," he said. "We're going to see more variation among price categories and select markets than we've seen in recent years."
In general, buyers with hotel programs that have a high volume of hotels in the higher tiers will see the most drastic increases. Hanson said hoteliers in the deluxe chains would kick off negotiations asking for 8 percent rate increases and end up with increases of 6.5 percent to 7 percent. Similarly, upper upscale hotel chains will as for a 7 percent increase and achieve about a 6 percent increase, he said.
Rate increases in the lower tiers likely will be more modest, Hanson said. Corporate negotiated rates will increase in the 4.5 percent to 5 percent range for upscale hotels, 4 percent to 4.5 percent at midprice with food and beverage hotels and by about 4 percent in the economy tier. The exception is the strengthening midprice without food and beverage tier, which could achieve rate increases of about 6 percent, he said.
Occupancy will change little in 2008, so high-volume cities, particularly New York, Boston and San Francisco, will continue to challenge travel buyers, Hanson said. Companies with global hotel programs could be in for larger increases.
Kevin Iwamoto, former president of the National Business Travel Association, said global buyers should expect hotel rate increases of 8 percent to 9 percent. Such key cities as London, Bangalore and Singapore will be even more expensive, he said. "All those cities are going to be asking for double-digit increases," Iwamoto said. "It's a pretty demand-intensive time, but I'm not expecting it to be as bad as last year."
Analysts said corporate travel buyers also should brace their budgets for a continued push from hoteliers for dynamic pricing, which allows for floating rates rather than fixed negotiated rates. Buyers, however, were successful in avoiding dynamic pricing this year (BTN, May 21),
and analysts said 2008 should be no different.
"It will be mentioned by a number of brands and will be resisted by most corporate travel planners," Hanson said. "My guess is there will be very little movement."
Yet, even though many buyers see dynamic pricing as a bugaboo that complicates budgeting, some high-volume travel buyers have begun trying it. Iwamoto said he's also warming up to the concept, particularly in high-occupancy cities where securing last-room availability is difficult.
"The more I look at it, the more I'm open to it," Iwamoto said. "My advice is to look at the percentage of hotels that are booked at LRA at a preferred hotel."
For example, if LRA bookings were about at the 50 percent range, and considering an extra 20 percent to 30 percent for meeting and event use, that leaves 20 percent to 30 percent of rooms being booked with no discount at all, he said. In those cases, the assured discount from dynamic pricing might be more beneficial, Iwamoto said. "Having 20 percent of your spend not discounted is not acceptable," he said.
Buyers also should be wary of fixating too heavily on rates in their hotel budget planning, PwC's Hanson said. Hotels also are achieving revenue increases through such ancillary fees as fitness center, telephone, parking and meeting room charges, so those certainly should be addressed in negotiations, he said.
The news is better on the car rental front for travel buyers. Although increasing cost pressure from automobile manufacturers have prompted car rental companies to seek rate increases, buyers with well-managed programs have staved off large increases, and that should continue, said David Balfour, car rental senior practice leader for American Express Business Travel Advisory Services.
"Corporate accounts that can direct their business can still achieve a very favorable rate agreement," Balfour said. "The car rental companies are very interested in obtaining marketshare and controlling a piece of corporate business."
BTN CT100 benchmarking data indicates that the average domestic car rental rate has changed little over the years. In 2006, it was $38.90, up only about 2.1 percent compared with 2005 and only about 6.6 percent since 2000.
This rate, of course, is pretax. Municipal and state taxes on car rentals have proliferated heavily in recent years, even surpassing the base rate in some locations (BTN, July 17, 2006).
Balfour said there are about 100 excise taxes on car rental transactions nationwide, but the car rental companies and such industry groups as NBTA have fought their implementation.
Buyers also are seeing a different marketplace for car rentals this year, following Enterprise Rent-A-Car's acquisition of Vanguard Car Rental Group, parent of the National Car Rental and Alamo Rent A Car brands (BTN, April 23).
Although it still is too early to tell the acquisition's impact on pricing, Balfour said it probably would not interfere with current robust competition among leading car rental brands.
"The environment has changed slightly, but from what we have seen," Balfour said, "the market is competitive and continues to be competitive."