Corporate Travel Demand & Macroeconomics in 2016

At a cursory glance, the diagnosis for global corporate travel demand looks healthy. Global air traffic posted its strongest year-over-year growth since the recovery from the 2008 U.S. financial crisis, and hotels in many global regions are seeing record occupancies.

At the same time, threats to that growth loom, and there are murmurs of a global recession on the horizon. While low oil prices can stimulate demand through lower travel costs, they also are causing heavy travel cutbacks from the energy sector. China’s behemoth economy, meanwhile, is teetering toward recession, which would bring global demand repercussions, as could the United Kingdom’s potential exit from the European Union later this year. The Zika virus, too, has emerged as a pandemic threat.

Signs of Strength

For now, chief executives from both airlines and hotels continue to express optimism in their corporate travel demand outlook for 2016, at least relating to clients outside the energy sector. “We’re pretty optimistic relative to what you see on CNBC or in The Wall Street Journal,” Delta Air Lines CEO Richard Anderson said during the carrier’s fourth-quarter earnings call. “We are booked ahead in terms of load factor for each of the months for February, March, April and into early summer. Core demand strength seems very strong in terms of corporate.”

Similarly, American Airlines president Scott Kirby reported “sizable increases” in corporate travel volume during the fourth quarter and said he expected corporate demand to growth this year.

On the hotel side, Marriott International president and CEO Arne Sorenson said room sales from the company’s 300 largest corporate customers rose 4 percent year over year during the fourth quarter. Removing energy and manufacturing companies from the equation, sales increased 7 percent. That growth is continuing this year, he said. “For February, transient revenue on the books is up nearly 4 percent to date. For the full year, special corporate customers tell us they expect to travel at least as much in 2016 as in 2015.”

Signs of Trouble

Some suppliers report less rosy signals. Avis Budget Group, for example, reported that 2015 commercial volume was “weaker than expected.” During the fourth quarter, U.S. commercial volume dipped 2 percent year over year and total commercial volume decreased 3 percent, according to president and CFO David Wyshner. That decline came largely from the energy sector, “but the softness certainly extended beyond just oil and energy,” he said.

American Express, meanwhile, called its corporate card business a “disappointment,” as card-billed business dropped 3 percent year over year during the fourth quarter. It marked the fourth consecutive quarter of year-over-year volume declines, and for the full-year 2015, volume was down 2 percent.

The International Air Transport Association noted that premium air traffic growth, a key indicator of corporate travel demand, also subsided at the end of last year. While premium traffic volume rose 3.7 percent year over year in 2015, most of that occurred during the first half of the year. From July through November, premium traffic rose only 0.2 percent year over year. Relatively strong demand from robust markets, such as transatlantic routes between North America and Europe, have been offset by “slowing growth and even recession” from such emerging markets as China and Brazil, according to IATA.

“Corporate demand tends to be highly correlated with world economic performance, and the last couple of months, markets have been jittery, which is why we’re seeing some shakiness in business travel,” IATA director general and CEO Tony Tyler said at the association’s recent Aviation Day in New York City. “Ultimately, I’m an optimist and believe that the world will work its way through these issues.”

Asia also affected quarterly results for Millennium & Copthorne Hotels, which has a significant presence in that market. There, revenue per available room, a measure that combines the effects of occupancy and rate, declined 9 percent year over year during the fourth quarter. Singapore, in particular, has seen “lower corporate travel demand against a backdrop of a regional economic slowdown,” according to Millennium, and the rest of Asia has seen growing supply and weakening Chinese currency.

“In 2015, global hospitality markets were impacted by falling commodity prices, mounting concern with regard to terrorism, health-advisory travel alerts and uncertainty regarding growth of the Chinese market,” according to Millennium & Copthorne chairman Kwek Leng Beng. “These external factors … are expected to continue in the current year.”

The Bottom Line

Those indicators do not seem to portend the bottom falling out of global corporate travel demand, at least in the short term.

Industry research indicates demand growth on the horizon, albeit at a slower pace than in previous years. UBS surveyed 75 corporate travel buyers in December and January and found that they plan to increase travel spending by 2 percent on average this year. Hotel room nights would rise 4 percent on average, according to the survey.

Even so, 57 percent will increase budgets this year and 18 percent will reduce their travel spending. A survey of budget plans, conducted at the onset of 2015, showed 73 percent of buyers planning for growth and a 3 percent average increase in total travel spend, according to UBS.

The Global Business Travel Association offered a slightly more optimistic projection, expecting U.S. business travel spend to increase 3.2 percent year over year in 2016, followed by a 3.5 percent increase in 2017. But price, not increased travel volume, will be the primary driver of those increases, according to GBTA executive director and COO Michael McCormick.

Business travel in the United States will be an “island of stability in a sea of global volatility,” he said, as macroeconomic conditions in Asia/Pacific, Latin America, the Middle East and Africa drag down overall demand.

And some say the looming threats to the global economy might not be catastrophic to global travel demand. A U.K. exit from the European Union, for example, likely poses “no threat whatsoever, given the amount of traffic that goes back and forth to Britain,” Airlines for America president and CEO Nicholas Calio said at Aviation Day. At the same event, IATA chief economist Brian Pearce said, “We’d have to see a real disaster” in China to stop its growth. “Despite the economic gloom, travel is growing very fast,” he said.

In the bigger picture, even a recent gloomy report from Citigroup citing a higher likelihood of a global recession reveals a slight silver lining: A recession doesn’t have to mean contraction; global economic growth could continue, simply falling below 2 percent. Either way, Citi’s forecast ultimately has the world avoiding recession in 2016.