As the first signs of economic recovery began to dot the U.S. travel landscape in recent months, industry professionals began to talk about the need for a new, post-recovery road map. But is this truly a recovery? And what, if anything, in travel management has been permanently altered by the challenges of the past two years?
"Our industry has been through downturns before. We have seen recessions before. Sadly, this one is different. Everything that we know about in travel and tourism has been turned on its head," Loews Hotels chairman and CEO Jonathan Tisch said in January at a Professional Convention Management Association meeting.
The recession that began in 2007 is unlike any of the 10 that have occurred since 1947, according to Lee McPheters, research professor of economics at Arizona State University's W.P. Carey School of Business. At the Institute for Supply Management- National Business Travel Association Summit on Travel and Meetings in January, McPheters said this recession already has lasted twice as long as the 1990-'91 recession and it will take twice as long--perhaps four years--to recover the lost jobs, once the recession ends that is.
Some expect recovery to be built on slow growth, but other economists warn of the potential for a double-dip "if the job market doesn't improve soon," McPheters said. The 1980-'82 recession appears on charts as a "w" instead of a single valley as the economy rebounded then dipped back into recession a second time.
Mixed indicators have made it difficult to garner a true picture of the current environment. Although many economists have declared that the recession has ended, McPheters noted that the majority of consumers, according to various surveys, don't agree. "If it is over, it's still the worst post-war recession [the United States] has had," he said.
Instead of the Path to Recovery, McPheters said a more apropos title for his summit presentation could have been Curb Your Enthusiasm or Obstacles In The Path To Recovery, given the "fragile economy. Hotel occupancy is still terrible, but turning up. Gross domestic product is turning positive," McPheters said. But organizations have cut 7 million jobs in the past two years. "Every state in the country has fewer jobs compared to one year ago."
Industry Impact
The "worst" in our lifetimes or hotel history is how lodging experts like Starwood Hotels & Resorts CEO Frits van Paasschen and Smith Travel Research president Mark Lomanno describe the impact.
And 2009 was no better for airlines, as ticket prices, cost per mile, capacity and, in some instances, profits declined as high-yielding business- and first-class passengers vanished, perhaps to the back of the plane.
On an individual agency level, American Express Business Travel experienced an even steeper drop in corporate travel sales than the industry at large--down 42 percent year over year in last year's second quarter--before climbing back to a more modest 5 percent decline for the fourth quarter. The company's Global Commercial Services unit, which includes its corporate card and business travel operations, in the fourth quarter achieved 6 percent revenue growth, an 8 percent increase in business billed to cards and 7 percent higher average cardholder spending, year over year.
[PULL_1]"When we get back to a more normal economic climate, that long-term growth profile will return," Anderson continued. "I don't think the correlation will be as strong as it's been in the past. Instead of 2-to-1, it may be 1.5- or 1.75-to-1 because there have been some permanent changes in the way companies think about travel. One of those permanent changes will be around virtual meeting alternatives, especially for internal meetings. But I don't think it will be a sea change in terms of that growth profile, it will be a small step down and will be permanent."
Travel suppliers are concerned that the use of virtual conferencing could prompt a permanent change in the perception of its ability to replace travel. Buyers note that as the economy has improved, some internal meetings have migrated back to face to face. Yet, even hotels are installing the technology to garner new revenue streams. Telepresence and such alternatives are here to stay, most agree.
Travel Learns Agility
Agility has become a strength as buyers and suppliers learn how to read the tea leaves and reverse course, renegotiate, freeze travel or rely on travel alternatives to get the job done when conditions warrant. As business travel and meetings took a freefall, travel suppliers quickly employed marketing techniques to attract leisure travelers to fill the voids. That prompted corporations to renegotiate numerous hotel contracts, sometimes more than once.
"The overall transient decline over a two-year period was only 4 percent, so you can see how disproportionate and how focused that was in the corporate travel area. The bigger issue with corporate travel is where you all took advantage of us because rates dropped about 18 or 19 percent, and we felt the brunt of that and are looking forward to getting some of that back," Host Hotels & Resorts CEO Ed Walter said at The Masters Program last month. "On the transient side overall, we were off about 18 percent on rate. On the special corporate side, even with all the renegotiations that happened over the course of last year, on a two-year basis we will probably be down 10 percent on rate. We are seeing now that area is beginning to firm a bit, and we are not going to see that same level of renegotiations in 2010."
Pricing Schemes
To fill inventory, suppliers increasingly are using "flash sales," or what A.T. Kearney calls "covert pricing." With covert pricing, companies "offer short-lived promotional prices to undercut competitors' prices." The promos are typically sent via email to targeted customers and available only for a few hours or at most a day, according to A.T. Kearney. Timing is important so "competitors do not have time to detect the new prices" and respond, and shoppers "feel pressured to act."
"The term 'agility' is becoming a key differentiator, and that is the new normal," according to Christopher Sawchuk, procurement practice leader for consulting firm The Hackett Group.
"What we're preaching to our hotels is to be very agile in 2010. Learn what's happening, see the trends and be ahead of competitors as demand improves," Host Hotels & Resorts executive vice president of asset management Minaz Abji said at a recent conference. "We're asking our hotels to get closer to their top customers--meeting planners or top accounts--so we can offer the right solutions. Changes are happening too fast. The change business is going to continue; we're not going to be what we used to be."
Beyond change and agility, Sawchuk said to expect even more globalization; smaller, more effective talent to do more with less; and an increase in outsourcing in coming years. The focus of procurement, according to a recent survey of corporate executives his firm updated, will remain on balancing cost-cutting and risks.
Opportunities For Buyers
Indeed, the recession provides a "window of opportunity for procurement and finance" to push travel initiatives to the forefront within corporations, Salesforce.com's Colunga said. "You are already elevated," given the focus on cost-cutting and the ability to deliver that in travel. "That is an opportunity to reshape, rethink and re-educate management in terms of what's important and what we should focus on. My experience is that management has short memories when profits return. Those things that were so important in terms of cost savings get pushed back. It's really important to seize upon this opportunity at this stage."
At Deloitte, procurement took over travel about seven years ago, said Deloitte chief procurement officer Michael McMahon. Speaking to procurement executives who had yet to take over travel, he said: "Maybe travel isn't that big of a spend for you, but in our company it's huge and very strategic to what we do for a living, and at the top of the chart for importance." He said Deloitte spends about $400 million per year on air, hotel and car.
Like most companies, Deloitte became "very adept at managing costs in the downturn," adjusting budgets on a monthly basis as it tried to identify the bottom, McMahon said. "Now that we're coming back, we're managing and maintaining costs with different key performance indicators." Econometric modeling used to forecast business growth is also tied to "very strict KPIs" of drivers necessary to meet those expectations.
Meeting Professionals International president Bruce MacMillan said meeting professionals also could take advantage of the current mindset to evolve to a role that focuses more on delivering the message and metrics that meetings drive business results. "The role of the meeting professional has to be more focused on business returns, the return on investment and measurements," he said.
As for managing risks, buyers could spend more time in the next year or so managing the risk of their supply bases, especially in hotels.
"We're taking a hard look now at rationalizing our supply base" in all categories, including travel, McMahon noted. Deloitte 24 months ago "had a very large supply base" that has shrunk for various reasons. "Some suppliers aren't here anymore, they look different than they did 12 months ago. We're looking at each industry that is strategically important to us," asking "what sort of relationship do we want to have with that supply base and how are we leveraging what Deloitte brings to that relationship?"
Host Hotels' Walter, Loews' Tisch and others also warned of financing issues that could force more hotels into foreclosure in the next couple years.
As business improves, IHG's Collazo said the financing woes could prove challenging for hoteliers to make enough money to meet debt service. "There will be service impact even as hotels come back because they just won't be able to afford it," he added.
When Will Recovery Be Realized?
"Basically we're looking at an economy that is just going to be pretty weak in 2010," McPheters said. "2009 was ugly; 2010 is homely. Watch for signs of a double dip," he warned. “Unemployment is going to be 10 percent or near there for all of 2010. You just have to wait this whole thing out, for the free market to kick in and get this economy going again."
~ Additional reporting by Jay Campbell, Lauren Darson and David Jonas