BTN's 2009 Corporate Travel Index: Domestic Business Travel Pricing Growth Slows - 2009-02-23

New York, Washington, D.C., Boston, San Francisco and Chicago are the most expensive U.S. cities in which to travel to conduct business, according to Business Travel News' examination of the daily costs to stay in a hotel, eat three meals and rent a car in 100 business travel destinations in the United States.

Hotel, rental car and dining costs registered only modest increases when compared with BTN's 2008 Corporate Travel Index. After years of price increases, on-the-ground T&E expenses are not likely to grow much this year as the travel industry faces the slumping demand of the recession.

This year, as in the past, hotels represent the single largest component of non-air expenses, which account for about 42 percent of the travel dollar, while dining expenses, which represent 30 percent of the daily cost to do business, take a larger bite out of daily travel spending than rental car pricing.

New York once again is the most expensive city in which to do business, anchored by high hotel costs that far surpassed any nightly rates in any other U.S. city.



The pattern of hotel rate increases that had steamrolled buyers during the past several years was broken by a plummeting of demand from all sides during the final months of 2008. Leisure travel and transient business travel both dropped in the face of economic upheaval, and convention hotels took an especially hard hit as businesses scaled back or completely eliminated meetings and events. The global nature of the downturn also cut inbound international travel, which hoteliers once touted as a surefire backup to propel them through any bumps in domestic travel.

At a Best Western-sponsored business travel summit in February, MasterCard Worldwide vice president of co-brand development George Zilvetti said the company has seen a significant drop in hotel spending, citing its SpendingPulse data—a combination of leisure and business travel data from MasterCard's volume and research through other forms of payment.

"For the month of January, in the hotel area, we've seen reductions of 15 to 25 percent," Zilvetti said. "This is the fourth month in a row we've seen declines."

At the same time, projects planned during fatter times were coming online in 2008. Supply growth is not expected to peak until sometime in the middle of this year, according to Smith Travel Research, exacerbating occupancy problems for hotels.

Hotel negotiations for 2009 rates ultimately resulted in buyers getting rates in North America between 3 percent lower and 3 percent higher than the rates they paid in 2008, according to Bob Brindley, vice president of BCD Travel consulting unit Advito.

"In a lot of markets, there was a reduction compared with the report from last year," Brindley said. "The increases also were a lot less than last year."

To arrive at its hotel rate index, Business Travel News used data provided by Advito that show negotiated rates at limited- and full-service properties for BCD clients. BTN editors then averaged the limited- and full-service rate data, and ascertained and added on individual city hotel tax rates to arrive at the total cost.

The overall average cost of a stay actually dropped when comparing this year's index to the 2008 index—only by 20 cents, but a drop nonetheless.

The ranking of the top cities did not change much compared with the 2008 index. New York remains the most expensive U.S. city for lodging by far, maintaining an almost 30 percent premium in total hotel cost compared with Washington, D.C., the second most expensive city. Boston and Chicago also continued to show healthy year-over-year increases in rates.

Baltimore, which was the third most expensive city for hotel rates in 2008, fell back a few places as its total lodging cost actually dropped by a few dollars. Newark, N.J., similarly fell in the Corporate Travel Index, with the total cost of a stay falling almost 30 percent compared with last year.

Cities that saw a considerable increase included White Plains, N.Y., in which the cost of a stay increased almost 10 percent to make it the seventh most expensive city for lodging this year, as well as San Diego, in which rates increased by almost 20 percent to propel it from the 20th most expensive city for lodging in 2008 to the ninth most expensive in 2009.

The price differential between full- and limited-service continued to tighten in some markets, with limited-service properties even outpricing the higher tier in Boston.

The difference is less pronounced in urban areas because the higher-tier properties are much more dominant in the larger cities while the limited- service supply is more scarce. The rate itself does not give the entire picture, either.

"The dilemma in the hotel business is the higher-quality properties, which you think would be full-service, charge extra for everything, and the lower-tier properties have things like breakfast and Internet included," Brindley said.

Travelers also face combined sales and lodging taxes of at least 10 percent in every city. Cities with the highest taxes on lodging include Houston at 17 percent, Knoxville and Chattanooga, Tenn., at 17.25 percent, and Omaha, Neb., the highest at 18.16 percent. Several cities also charge flat fees on top of their tax rates.

With economic conditions expected to deteriorate further throughout this year, Brindley said buyers could face a new challenge. They will have to be mindful that the negotiated rates they set for the year might not remain the best deal throughout the year.

"Because of the economic downturn, occupancy rates will be coming down," Brindley said. "That means there will be more situations in which there are promotional rates in a market that clients can take advantage of because they are lower than their negotiated rates."



As changes in the economy have pushed the corporate car rental arena toward a buyer's market in 2009, rental companies are employing a variety of revenue management strategies to offset the sharp drops in demand, the trend toward renting smaller vehicles and increased fleet costs as the dried-up credit and depressed used-car sales markets have left car rental companies with aging, cost-heavy fleets.

In a travel buying category that plays third fiddle in travel management to air and hotel, car rental spending on average accounts for about 10 percent of a company's T&E expenditure. Changes in 2009 pricing present a significant opportunity for travel buyers to cut car rental costs by 10 percent or more, said American Express Global Advisory Services vice president Frank Schnur.

Meanwhile, car rental companies have implemented a variety of new ancillary fees to help preserve some of the lost revenue from increasing drops in demand. Such new revenue-generation practices include tacking on fees to extend a car rental reservation, eliminating 60-minute grace periods for returns and significantly upping prorated late fees, according to Schnur.

Compounding the problems facing car rental companies is their inability to pare capacity or turn over fleets because of the lack of capital available to buy new cars. Older fleets drive up their maintenance, holding and insurance costs.

While car rental companies used to remove cars from their fleets after 18,000 to 20,000 miles, that number has climbed to about 30,000, said CWT Solutions Group managing director of ground transportation Dave Kilduff.

The trend toward renting smaller, more cost- and fuel-efficient vehicles also has upset the cost differential between full-size and smaller vehicles, which has tightened to just a few dollars in many of the 100 cities in this year's Corporate Travel Index.

This year's average base rate for a full-size vehicle is $81.44, compared with $75.33 for intermediate and $71.06 for compact models. Including taxes and fees, the average published U.S. daily car rental rate is $90.25.

For the car rental numbers in the index, Advito pulled car rental rates of the major rental car companies from Sabre Holding Corp.'s global distribution system for one-day rentals of full-size, compact and midsize vehicles during eight midweek days in November 2008. Advito and BTN editors averaged eight days of pricing for the different car sizes, then added local taxes and fees to arrive at a final daily average car rental rate for each city.

In several 2008 industry forecasts for 2009, travel management companies predicted small increases or flat growth in prices. While corporate rates have for the most part experienced the predicted flat or slight increases, price markups in the leisure market have impacted the corporate market as well.

"A lot of companies about 25 percent of the time are using the leisure rates, so it does affect the corporate marketplace," said Kilduff. "Almost no one rents 100 percent on corporate rates."

For the most part, however, Kilduff said the corporate market is relatively safe for now from the increases being levied in the leisure market, including February's move by Hertz to up rates at airport retail locations $5 per day and $30 per week after average rates fell 2 percent in the past 12 months.

"To affect the corporate rates today, you only have a certain amount per month that come up," he said. "It takes a year to affect your entire base, unless you do something drastic where you are going in and not honoring your agreements."

While overall demand has dropped, there is some new interest by corporations to rent cars for short-haul routes as alternatives to flying or using employees' personal vehicles because of the high Internal Revenue Service mileage reimbursement rate implemented after gas prices reached record highs last year.

According to American Express' Schnur, some buyers also have turned to renting cars from off-airport locations as on-airport rental prices increase. Some are negotiating for one-way routes between airports and corporate offices, where companies may maintain their own car rental fleet.

Even in this year's challenging market, car rental companies can be only so receptive at the negotiating table as they need to cover their increased costs and are facing capital issues.

"They are more receptive, but it's not a sustainable formula," Kilduff said. "Their costs are going up and, if their prices aren't going up at the same pace, you can only keep that pace up for so long."



Menu price increases in the top 100 domestic business travel destinations are expected to be minimal this year, as restaurant operators—ever vigilant against raising prices on cost-conscious diners—are focusing on value, while consumers increasingly are trading down in restaurant class.

According to this year's Corporate Travel Index, the cost of eating three square meals a day, including tip, in the top 100 business travel destinations in the United States averaged $97.13, about $3 more than in last year's edition. San Francisco, New York, Portland, Ore., Los Angeles and Seattle registered as the most expensive U.S. cities in which to eat breakfast, lunch and dinner.

"In this environment, consumers remain extremely sensitive to menu price inflation," said Hudson Riehle, senior vice president of research and information services for the National Restaurant Association. "You do see among the operator community a much greater emphasis on value marketing, which you'll see in a variety of forms and permutations. For example, for higher-check table service, you see a greater example of prix fixe offerings, a greater range in price points for entrees and different components of the menu. In quick-service, you see a greater emphasis on the value items."

Though control over dining expenses registers as a lower priority at corporations when cast alongside higher-priced air, car and hotel categories, Management Alternatives president Carol Salcito said most travel policies have a cap on spending for daily dining expenses.

Salcito said that even if dining was not included in the latest round of policy reviews that accompanied the deteriorating economic environment, dining expenses have not escaped the general sense of corporate belt-tightening.

Driven in part by business trip reductions, budget cuts and corporate frugality, a more cost-conscious attitude is pervading the rank-and-file business traveler.

"If somebody is stupid enough to spend tons and tons of money on meals at a time when more and more people are losing their jobs, they've got to be crazy," according to Salcito.

By and large, consumers share that attitude, Riehle said, noting growing evidence of diners trading down in their choice of restaurant. Once the provenance of lavish expense-account dinners, higher-tiered restaurants are disproportionately affected by the economic downturn, he said, citing NRA research.

"In general, the higher the average check per person of that operation, the more likely that restaurant operator is to report that the economy is a top challenge," according to Riehle. "The fine dining/white tablecloth segment has a higher proportion of operators reporting the economy is a top challenge, compared with the quick-service segment, which has a much lower average check per person."

As it has done previously, Business Travel News purchased data that calculate the cost of standard meals in 100 U.S. cities using restaurant pricing for breakfast, lunch and dinner from Chicago-based management consulting firm ORC Worldwide. Those meals assume a breakfast of two eggs with breakfast meat, toast, orange juice and coffee; a lunch of soup, a hamburger or chicken sandwich, a slice of pie and a soft drink; and a dinner of soup, filet steak, a glass of red wine, dessert of pie or ice cream and a cup of coffee.

The total food price averages do not include local or state tax, but do include a 15 percent gratuity.

Restaurants, like most business sectors dependent on consumer spending, are anticipating protracted softness, but Riehle said sales would reach a new high of $566 million in 2009.

Riehle cautioned, however, that restaurants are facing an increase in overall expenses that will offset the overall sales gain, even though growth in restaurant expenses, anchored by wholesale food prices, recently has abated.

"At the wholesale level, food price growth over the past two years has been in excess of 7 percent each year," he said. "This year, we're forecasting 2.9 percent, which is better compared to 2007 and 2008 but still is positive. The fact is, the wholesale food price inflation in 2008 was at its highest level in 29 years."