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International airfares paid by business travelers have skyrocketed this year, according to new industry figures. The trend is expected to continue for the remainder of 2008 and into 2009 as airlines cut capacity to account for weakening demand and offset higher jet fuel costs. Though crude oil prices in recent weeks have declined sharply from the record highs seen earlier this year, they remain significantly higher than last year's levels and continue to pressure airlines.
Though airline pricing traditionally impacts business travel demand less than leisure travel demand, many corporations expect their travel budgets to remain flat or even decrease amid economic uncertainty. For many organizations, that translates to booking cheaper tickets (i.e., buying further in advance and/or choosing economy seats over premium seats). For others, reduced budgets portend fewer trips.
One indicator of global business travel demand is bookings made through global distribution systems--the primary channel used by travel management companies to serve their clients. Travelport GDS last month reported a 9 percent year-over-year drop in second-quarter booked segments. In the first half of 2008, the firm's Galileo and Worldspan GDSs together handled 21 million fewer segments than a year earlier. The decline in bookings became more pronounced in August--reaching double-digit percentages--according to Travelport CEO and president Jeff Clarke.
Clarke also noted that unlike in the first quarter, when such markets as Asia continued to show GDS segment growth, Travelport encountered recent double-digit declines in "all geographies."
Meanwhile, the International Air Transport Association this week said global airline traffic growth in July was 1.9 percent, "the lowest in five years." The association was "surprised" by the 0.5 percent drop in passenger demand for Asia-Pacific carriers, "showing that economic weakness is spreading to previously robust economies." IATA deepened its global airline industry loss estimate for 2008, to $5.2 billion, owing to high oil prices and "falling demand." The association's first 2009 industry projection is a $4.1 billion loss.
While fuel prices and macroeconomic challenges are out of airlines' control, pricing isn't--especially on intercontinental routes where low-cost competition is minimal. According to American Express Business Travel, the actual international one-way fare paid by its corporate clients in the second quarter was $1,980. That marked an 11 percent year-over-year increase and the highest level since Amex began tracking such figures in 1999.
Amex last month also reported that second-quarter published airfares throughout the Asia-Pacific region on average rose by 9 percent year over year. Increases were most pronounced for full-fare first- and business-class tickets, including prices to and from Taiwan (19 percent for first class, 17 percent for business class), India (16 percent and 19 percent), China (15 percent and 10 percent), Hong Kong (14 percent and 9 percent), Japan (12 percent and 17 percent) and Singapore (11 percent and 9 percent).
Auditing firm Topaz International also has charted a clear trend, finding that actual international roundtrip fares booked by corporate travel programs and travel management companies soared by at least 17 percent year over year in each month from April through July. In July, the increase topped 50 percent, pushing the average fare above $4,000.
In a third-quarter report, Carlson Wagonlit Travel said international ticket prices jumped 14 percent to 16 percent between January 2007 and August 2008. The travel management company expects even more dramatic increases for 2009, between 16 percent and 20 percent (with U.S. domestic airfares predicted to rise between 8 percent and 12 percent).
Distinct from the U.S. domestic market, "the international market has significantly more flexibility to follow a more aggressive pricing strategy and, therefore, buyers should look for the international markets to again experience significant price inflation over the next year," according to CWT.
Both Amex and CWT suggested travel managers focus on travel policies and compliance to mitigate the impact of higher airfares.
American Express also highlighted advance bookings and a trend toward more lower-class tickets. "The percentage of international business-class tickets purchased was at the lowest level since the third quarter of 2004, at 49 percent," according to Amex. "Increases in the percentage of tickets purchased in other classes of service show that companies are employing strategies to encourage travelers to trade down to other classes of service."
IATA reported that global premium airline traffic (first- and business-class travel) in June declined 0.4 percent year over year, "continuing the deteriorating trend" that began late last year. "Prospects are for further weakness in business and premium travel during the second half of this year, as economic growth continues to slow and key financial market activities, such as M&A, remain depressed," IATA said. The association noted that the "weakest premium market" was intra-Europe, showing a 7.8 percent drop "as business passengers continue to switch to the back of the aircraft or onto economy-only services." Premium traffic across the North Atlantic rose by a modest 1.7 percent.
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