Corporate executives during the past year continually have sliced and diced their businesses and budgets to better position themselves against the relentless economic conditions and their suppliers' own survival tactics, upending the traditional use of historical expenditure data for travel budgeting. Without knowing how much market share they can commit, travel purchasers are finding it extremely difficult to forecast next year's travel budgets and are facing a murky negotiating environment as a result.
"It's been very, very challenging," said Ellina Arakelova, manager of travel operations for Santa Clara, Calif.-based Align Technology. "With airlines reducing capacity, raising rates, adding fuel surcharges and baggage fees, and car rental companies introducing new surcharges at the airports--there are so many components that we didn't have to tackle before. You never know what is going to happen next week. It's hard to commit to volumes and contracts.
"Companies have to closely manage travel expenditures this year and maybe even review the entire approach to creating the travel budget, such as being more flexible with the travel policy," Arakelova continued. "A flexible travel policy allows corporations to quickly adjust to an unsteady travel market and adopt lowest logical fares and rates. Supported by visibility of choices through online booking applications, visual guilt and managerial oversight ensures travelers are keeping costs down."
For example, Arakelova said, a company could mandate "one particular car company, or even three of five," but at some point "while reviewing the numbers and metrics" they realize "that sticking to that doesn't bring cost reduction compared to other low-cost, non-contract options."
Align isn't the only company having a hard time forecasting a travel budget this year. According to a July Procurement.travelsurvey, 51 percent of 101 travel buyers said budgeting would be "more difficult than ever" for next year and only 3 percent expected it to be "easy."
[PULL_1]"We hear things are going to get better, but buyers are being challenged in this environment to figure out what their budgets are going to look like," Michael Lyons, then National Business Travel Association vice president, said in July. "They cut back and cut back, where else are they going to cut?"
Even though buyers may be finding it difficult to meet their marketshare commitments, they are retaining high expectations from their suppliers and want their shortfalls seen in the larger context of the troubled economy, said Neysa Silver, director of hotel and ground solutions for Carlson Wagonlit Travel's CWT Solutions Group consulting arm.
"Our clients realize that travel is lower. But even if they go from 1,000 room nights with a supplier to 500, they aren't willing to accept a rate that's one-and-a-half times higher," Silver said.
To add to travel managers' frustrations, many suppliers have offered promotional prices far below negotiated rates to book any business. Buyers face a tough choice: maintain a strict policy and drive market share to preferred suppliers, or let travelers take advantage of rock-bottom deals designed to lure leisure travelers.
[PULL_2]"This is a problem particularly in our secondary cities," said Priscilla Campbell, corporate travel manager for Natick, Mass.-based The MathWorks. "Our travelers and our agency have been advised that due to the volatility of the hotel industry, MathWorks rates should be considered a ceiling price and that, typically, a lower price can be obtained."
For companies with an agency partner, promotional rates and lower-than negotiated published rates tend to be a "non-issue," said Silver. Most agencies will automatically use the lowest available and logical rates when booking travel, and the data is compiled and incorporated into negotiations with preferred suppliers. During the past two years, CWT has seen a trend toward dynamic hotel pricing contracts for corporate travel, Silver said, and many hotels have even begun developing technology to support such flexibility in rate loading and booking tools.
On the air side, where dynamic pricing has already been established as the norm, the challenge is in capacity cuts, said Dale Eastlund, senior director and air solutions project leader for CWT Solutions Group. CWT expects operational reductions to continue in 2010 based on the latest report of airline losses. "Forecasting is a challenge when capacity is way down," Eastlund said.
'Organic' Budgeting
For many buyers, historical travel data has become nearly useless in predicting market commitments for 2010, Lyons said. Some companies have made fundamental changes, sold off nonperforming lines of business or consolidated operations. "If you're going to look at historical data, look at the last couple years," Lyons advised. "If you were riding high three years ago, look at how deeply it has fallen and whether that is tied to internal or external factors. Be fair and honest about that, and get the big picture."
[PULL_3]"It's not a time to take advantage of the situation," he said. "It's a great time to be partnering together and to realize that the suppliers are in a tough situation, too."
For airline and hotel negotiations, Lyons advised "creative contracting" for 2010. Buyers should seek to establish flat discounts that aren't tied to specific market volume commitments, fee waivers, upgrades, club memberships and any number of items that were "off the table before, like point of sale or class of service," he said. "So many [buyers] with significant layoffs are stuck with nonrefundables. Give them a way to effectively use those!"
Some airlines are offering more tiered discounts to customers unsure of how much volume they can commit, said CWT's Eastlund. For example, a 50 percent market share might net a buyer a 10 percent flat discount, but if the share drops to 40 percent the discount would be 5 percent. "Waivers and favors" on fees and upgrades are definitely on the negotiating table, but "at the end of the day customers are most concerned about price," he said.
For hotels, CWT increasingly is focused on "total cost of stay," said Silver, adding that negotiating free parking, Internet and breakfast tend to be the most common strategies to lower costs.
Buyers also say they are finding a willingness among suppliers to be flexible on rates and amenities.
"So far, all our key hotels have either lowered their rates or offered additional amenities, such as complimentary breakfast and/or transportation from the initial 2009 negotiated rate," said The MathWorks' Priscilla Campbell.
While buyers may find it difficult to meet their previous market commitments this year, Campbell has not heard of any suppliers cracking down on contract penalties. "My experience has been that our preferred suppliers are understanding of the fact that our travel budget has been deeply cut. It goes without saying that tough times like these are where the value of strong preferred partnerships shine," she said.
Gartner global travel director Susan Osterberg said the downturn has enabled her company to negotiate a multiyear contract with its agency and renegotiate hotel contracts midyear for "significantly" lower rates. In fact, "hotels are coming to us lowering rates," Osterberg said. "This works well for policy as we [mandate] lowest logical fare and lowest mid-tier hotel. Hotel [rates] we update in the GDS, and if we see lower airfares than negotiated we are programmed to take those."
For car rental contracts, little can be done about taxes, Abrams said, but buyers should conduct due diligence on their top 20 markets and keep a close eye on what legislation is pending. For surcharges, strict policies can protect companies from the most exorbitant fees, he said. For example, the charge a rental company levies for refueling a vehicle can be three times as much as prices at the pump, adding as much as $45 to the overall cost of a rental. Corporate policy can mandate that travelers not be reimbursed for that charge, he said.
"Look at the cost of a GPS system. It's $10 a day when a good, old-fashioned map provided by the rental company costs nothing," Abrams said. "I wouldn't ban it, but I would certainly limit the use of them."
Using off-airport rentals and off-brand rental companies can also save substantial dollars for corporate travel budgets, he said. "When companies are making a lot of money, management looks the other way," Abrams said, "but these days companies are holding their employees more accountable."
Overall, compliance issues may not make a huge difference to the budget--many companies have already worked those issues out--but "we need to be pulling out every tool in the toolbox," Lyons said.
It's true that crisis and opportunity often go hand-in-hand, and budget cuts can give buyers the footing they need to push through unpopular changes to travel policy.
For some companies, the best solution may be more flexibility. "We have to adapt more quickly to changing market conditions," Align's Arakelova said. "Every month we have to look at how much we could save and how much we did not save. That helps determine where the policy needs to be tightened or given more flexibility."
During difficult economic times with high unemployment rates, policy compliance can be effectively driven by employee responsibility and management awareness, Arakelova added. Performance measurement is critical in these economic conditions, she noted, as it enforces the policy and gives visibility of traveler behavior. Delivering detailed reports showing policy compliance, adoption of lowest rates and cost reduction rewards travelers for making the right choices, Arakelova said, adding: "Recognition, even if it's not financial recognition, is very important."