Industry analysts this week told travel management professionals that domestic airfares likely would remain relatively flat in 2007 while hotel rates would continue to climb. Meanwhile, American Express last week issued 2006 business travel pricing trends and suggested ways in which companies could counterbalance rising rates.
Speaking here at the National Business Travel Association's inaugural Financial Forum, Darryl Jenkins, director of the Aviation Institute at Ohio State University, noted that last year by this time there had been "a lot" of fare increases, with no fare sales. By contrast, this year there have been no significant fare hikes--beyond $5 here or there--while there already have been "a ton" of fare sales, he said.
"There will be fewer fare increases this year," Jenkins told the forum's 230 participants. "Domestically, fares will probably be flat. Fares will stay high even as the economy softens, as long as we are around 2.5 percent to 3 percent [air traffic] growth."
These predictions follow a string of fare hikes last year. American Express last week said the average price paid by its business travel clients in 2006 increased $15 from 2005 to $231, a three-year high (though still well below the $259 average recorded at the beginning of the decade).
Despite such year-over-year increases, "in a historic context, fares are declining," said David Lee, director of economic research for the Air Transport Association of America. He noted that the average one-way domestic fare in last year's third quarter, as measured by ATA, was $148, compared with $155 in the third quarter of 2000. Had fare increases matched inflation since 2000, Lee said, the average third-quarter 2006 fare would have been $173.
On the other hand, Lee continued, taxes and fees levied on airline tickets have increased during the same six-year time period--from $21 to $24 on a one-way ticket--even as base fares declined.
According to the Amex Business Travel Monitor, total average fare paid by corporate clients reversed course in last year's fourth quarter, dropping to $216, the lowest quarterly average since early 2005.
"During the last quarter of 2006, our data shows that clients had greater usage of discount coach fares and purchased more tickets in advance," according to a statement from American Express Business Travel Advisory Services vice president Mike Streit. "These are some of the strategies we encourage clients to use to help avert rising costs."
Jenkins also suggested to attendees that "there will be more negotiating power if you consolidate the number of airlines you have."
In international markets, both capacity and airfares are rising more quickly than in the domestic market. Amex said the average international airfare paid by clients during 2006 increased to "its highest level since the Business Travel Monitor was first published in 1999." The average fare paid of $1,707 rose nearly 6 percent from 2005 and 13 percent since 2004.
"If I were a travel manager, international is where I would be out scouting for the best deals," Jenkins said, noting how international fares likely will increase further during 2007. "The area where you will have the most wiggle room is in business class fares."
He also suggested to attendees that while travel management professionals "do a reasonably good job negotiating airfares," they could "do much better" in building relationships with global airline alliances.
Meanwhile, Phillip Baggaley, managing director of corporate ratings at Standard & Poor's, told attendees that airline industry consolidation--should it occur--would be "bad news for you in the audience" with respect to airfares. "The fewer big airline industry participants you have, the fewer spoilers you have to not go along with a fare increase," he explained.
"Another Two Years" of Hotel Rate Growth
On the lodging front, companies are facing another year of rising hotel rates, and "it appears that there is no end in sight" for the strengthening hotel market, according to Amanda Bryant, senior research analyst at Merrill Lynch.
Bryant explained how a typical lodging industry cycle--"from trough to peak"--is 10 years, and the industry today still is in the "growth phase ... demand for hotel room nights continues to outpace supply." She also noted that average daily rate growth "has been far more aggressive in this cycle than the last."
The "bad news," Bryant continued, is that hotel pricing likely will increase further amid tight supply (impacted in cities like New York by condo and timeshare conversions); higher costs incurred by hotel companies; more sophisticated pricing strategies; and the oligopolistic nature of the luxury, upper-upscale and upscale segments typically used by business travelers. "That makes it harder for you guys to negotiate," she told attendees.
Bryant predicted "another two years of mid- to high-single-digit rate increases," with even higher increases in Chicago, New York, San Francisco and other key markets. "Assuming this cycle lasts as long as prior ones, you have another few years ahead of you," she warned.
Smith Travel Research senior vice president Bobby Bowers presented fresh industry statistics that showed average daily rates rose more than 7 percent during the 12 months through Feb. 2007. He predicted 6.5 percent ADR growth for full-year 2007.
Bowers mentioned that one strategy some employ to lessen the impact of rising rates is placing travelers just outside major markets, such as hotels in Newark for visits to New York City. He also suggested that buyers should consider purchasing hotel stays further in advance, while one audience member said companies may increasingly favor day trips over overnight stays, where possible.
According to the Amex Business Travel Monitor, fourth quarter domestic room rates in the upscale and mid-price segments rose to $189 from $173 and $172, respectively, year-over-year. Average deluxe segment rates increased to $233 from $213. The average economy rate increased to $164 from $150, while budget rates jumped the most (19 percent) to $179 from $150. Overall, average hotel rates increased 9 percent to $200.
"Budget hotel rates increased to such high levels because they are trying to attract more of the business travel market," Streit said. "They are heavily investing in capital improvements such as room renovations and adding in-room amenities, in order to better position themselves competitively as occupancy rates remain high and companies start to trade down to lower-cost alternatives within their hotel program."
American Express Business Travel Advisory Services hotel senior practice leader Priscilla Campbell last week told reporters that budget brands "don't just want corporate travelers for the short term. They want to keep that business."