Soft Supplier Pricing Keeps Lid on U.S. Travel Per Diems

In what perhaps was the last stand of this recessionary cycle's U.S. business travel buyer's market, average 2010 negotiated corporate hotel rates and January 2011 food prices each softened a bit from the previous year's levels, allowing business travelers some expense-report relief before expected price hikes take hold.

The daily price of a hotel room and rental car booked between January and November 2010 at BCD Travel's average negotiated corporate rates, combined with breakfast, lunch and dinner, was $285.28, according to Business Travel News' 2011 Corporate Travel Index. A significant change in this year's car rental data forbids legitimate comparisons between this year's and previous years' average total per diems, but the newest figure certainly is lower than what existed at the height of the seller's market a few years ago.

Please click here to download BTN's 2011 Corporate Travel Index, featuring all charts and per diem listings.

By far, hotel stays comprise the lion's share of the typical business traveler's daily dollar (excluding airfare) at 52 percent, with food consuming about 30 percent.

HOTEL

Hotel rates are rebounding in major U.S. business travel hubs, but figures provided by BCD Travel's Advito consulting unit show overall U.S. corporate hotel rates between January and November 2010 largely were flat compared with 2009. Analysts cautioned that the power balance is shifting, however, so buyers should tighten and strengthen their hotel programs in preparation for what appears to be difficult negotiations looming at year-end.

The overall average corporate rate for U.S. hotels in 2010, including taxes and fees, decreased by 2 percent year over year to $147.30, according to the Corporate Travel Index.

The 10 most expensive cities for hotels changed little from the previous year. New York, Washington, D.C., Boston and San Francisco remained at the top of the charts. Only Hartford, Conn., fell out of the top 10 from last year. Despite a slight year-over-year decrease in rates, Philadelphia took its slot.

Besides being the most expensive city for hotels, New York also had the largest increase in corporate rates, up 5 percent year over year. Even so, the city's hotels still are recovering from the drastic drop in rates during the economic downturn. New York's hotel pricing premium is no less than $35 over all other listed U.S. cities, but that figure is lower than in previous years. New York hotel rates now are only about 11 percent higher than the next most-expensive city, Washington, D.C., whereas just a few years ago they were more than 30 percent higher.

Rates in New York this year should continue to strengthen, said Deloitte & Touche tourism, hospitality and leisure sector vice chairman Adam Weissenberg, despite the fact that the city also is likely to be one of the few places in the United States that sees a significant increase in room supply.

"It's mostly conversions, but there are a lot of people chasing a limited number of deals in New York right now," Weissenberg said. "There's still a demand for certain non-U.S. hotel companies to get their gateway city presence there."

Rates in Washington, D.C., increased by a slightly more modest 3.4 percent, though Weissenberg noted that pricing there had not decreased as severely during the downturn. Travel for government purposes tends to remain strong even during periods of corporate travel slowdown, he said.

Other cities with rate increases of 2 percent or higher last year include Mobile, Ala.; Louisville, Ky.; New Orleans; Charleston, W. Va.; Spokane, Wash.; Buffalo, N.Y.; Charleston, S.C.; and Las Vegas.

Corporate travel buyers, particularly those shopping for meeting space, still should be able to find good deals in such resort-heavy cities as Orlando, where rates decreased 4.7 percent year over year, Weissenberg said.

"Those markets still have plenty of capacity, and you just had tons of supply growth there," Weissenberg said.

Some cities in the Corporate Travel Index had rate decreases even steeper than Orlando's. Corporate hotel rates dropped by 5.6 percent in Dallas, 5.8 percent in Memphis, 6.6 percent in Detroit and 6.8 percent in Houston. The largest decrease occurred in Sarasota, Fla., where corporate rates dropped 10.5 percent year over year.

Hotel rates this year might not include as much as they had in previous years, however. American Express advisory services research director Christa Degnan Manning said hotels for 2011 pushed a tougher line on amenities in negotiations, often dropping previously included items in exchange for holding rates steady. Additionally, last-room availability more frequently came at a premium, she said.

"Hotels dug their heels in and did not concede as much as they had in the past," she said.

Those difficulties could be a portent as to what travel buyers might face later this year when pursuing 2012 rates, particularly when negotiating with higher-end properties. As demand continues to strengthen and new hotel openings stall, U.S. hotel rates in 2011 will increase 4.2 percent year over year, with a 6.1 percent increase in the upper upscale segment and a 7.4 percent increase in the luxury tier, according to STR forecasts. The hospitality research firm said increases would accelerate in 2012, with hikes of 6.8 percent in U.S. average daily rates, 8.4 percent in the upper upscale tier and 11.5 percent in the luxury tier.

During Marriott International's fourth-quarter earnings call, president and COO Arne Sorenson said smaller markets are beginning to see the rate growth that already began in gateway cities.

"We've got occupancy growth in most markets in the United States, including secondary and tertiary markets," he said. "The rate growth is a bit more modest than it is in the primary markets at the moment, but it will come."

Negotiated rates for 2011 "came really close to what we predicted, and in the end, it was maybe a little bit better than I anticipated," said Lisa Maloney, project manager for Carlson Wagonlit Travel's Hotel Solutions Group. "We did multiple rounds more than usual, and in certain cities we had to do more than three rounds."

Maloney said buyers should start preparing now for the turnaround. Those who focus on tightening up policies, pushing compliance and tracking spending will fare better when the negotiating season begins later this year, she said.

"It looks like it will be more difficult, and the best way to combat that is to have a good program in place," Maloney said. "A program that just sits is not going to gain anything in a market like this."

CAR RENTAL

Negotiated corporate rental car rates for 2010 declined in the vast majority of U.S. markets, according to BCD Travel corporate client data for January through November. The average rate paid in 2010 was yet another indicator that rental car providers have been unable to maintain the grip on pricing power witnessed in the second half of 2009. Rental car executives and analysts expect pricing to remain stable this year, with no major increases in public rates and the potential for further declines in corporate rates.

Even though the average corporate rate in New York declined 4 percent from 2009, the city last year was the most expensive place in which to rent a car for a day, at $85.88—well above the $52.60 average for the top 100 U.S. business markets. Nearby Newark, N.J., and White Plains, N.Y., round out the top three with rates of $72.96 and $68.51, respectively. Car rental costs are based on average rates booked by BCD Travel corporate clients for January through November 2010, provided by Advito along with tax and fee information. This represents a marked change from the 2010 Corporate Travel Index, in which average rates were based those listed in the Sabre global distribution system on three days in November 2009. Advito also provided the year-over-year percentage change in BCD's corporate car rental rates.

That period in 2009 represented some of the strongest pricing power rental car providers had seen in years, but refleeting efforts had yet to take hold. However, typical industry themes of "up-fleeting" and price stabilization since have ensued.

"Before they decided to start growing their fleets again, they were waiting to see if the economy had legs," said Avondale Partners senior research analyst Fred Lowrance, discussing the late 2009 supply-and-demand equation. "While they were waiting, pricing benefited from those low fleet levels. Now, we're kind of back to normal, where everybody is growing fleets in the low-to-mid single digits, and you're just not going to get the same pricing."

Lowrance noted such behavior is typical in the rental car industry, which often gains revenue through volume rather than price. "It only takes one company to see more demand and capture that with more fleet, rather than not worrying about that extra demand, taking what you got and price it a little higher," he said. "In a normal year, I would expect the Hertzes or Avises of the world to expect flat pricing. That's how they're going to manage their business."

According to commentary from rental car executives and earnings reports, 2011 indeed sounds like it will shape up to be what Lowrance would characterize as a "normal year."

Hertz expects corporate pricing this year to be down 1 percent to 2 percent compared with 2010, according to company executives speaking during a February earnings call. CFO Elyse Douglas cited "aggressive competition and the slower recovery of higher-priced small business accounts."

Dollar Thrifty similarly "expects further recovery in travel activity as the economy continues to improve," but noted that industry competition should result "in flat pricing for 2011 compared to 2010," according to an earnings report issued in February.

MKM Partners travel analyst Christopher Agnew in a research note wrote that he expected Dollar Thrifty this year to see rental revenue grow 4 percent, "based on a 3.4 percent volume growth assumption and a 0.7 percent pricing assumption."

Avis Budget Group, meanwhile, reported that year-over-year rental car demand for the last three months of 2010 was up, though domestic pricing for the quarter was down 3 percent. A 7 percent increase in volume helped lift revenues by 4 percent. Those trends have continued this year.

"The right way to characterize pricing right now is that it's stable," said Avis Budget Group CEO Ronald Nelson in February during the company's earnings call. "We're not getting any price increases, but we don't see pricing declining either."

While pricing remains flat, the lift in demand has injected some health into the rental car industry. Though Nelson expects lower revenue per transaction day this year, he attributed that to a shift in the mix of business, as the leisure market comes back more strongly and more rental car companies target expansion into lower-cost off-airport markets. "You're getting more leisure business coming back, which is a lower price point but is a longer length of rental," said Lowrance. "It's a trade-off, but essentially puts you in the same spot from a profitability perspective, even if that revenue per day number actually goes down."

Though privately held Enterprise Rent-A-Car does not disclose quarterly details on pricing, vice president of business rental development for tour and travel Brad Carr concurred with the stable pricing sentiment shared by competitors. "Competition is fierce, and no one wants to lose any market share," he said. "Those companies we do business with are certainly still trying to get the best deal they can. Even though things are improving, they're still trying to negotiate a better deal, and their expectation is they're going to get a better deal, regardless."

Carr said some corporate clients, for example, have sought to lock in longer negotiated rate terms than the standard two years. "It's difficult for us to commit for that period of time," he added, since the variables that drive supply, demand and pricing are difficult to forecast.

FOOD

Despite what the National Restaurant Association calls an increase in consumers eating out, the restaurant industry remains under pressure. Corporate travelers in the top 100 U.S. business travel destinations therefore can expect to pay roughly $85 per day for three meals, compared with $98 a year ago, according to the Corporate Travel Index.

BTN this year commissioned consulting firm Mercer Inc. to survey restaurateurs and calculate the cost of standard meals in each location, based on January 2011 pricing. The cost for three meals in the 100 U.S. cities in the Corporate Travel Index average more than $100 per day, assuming 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 and a cup of coffee. The listed prices do not include tax, but do include a 15 percent gratuity.

Although 2011 prices are expected to decline slightly, restaurant industry sales across the country are estimated to hit a "record high" of $604 billion, up 3.6 percent from 2010, according to Hudson Riehle, senior vice president of the National Restaurant Association's Research & Knowledge Group.

"It will be the best industry environment in four years, but compared to historical performance, sales growth obviously remains constrained by the employment situation as well as consumer's cash on hand," Riehle explained.

The National Restaurant Association for 2011 forecast a 2.4 percent increase in menu price inflation from 2010 levels, "but over the past several years and certainly again this year, operators remain extremely judicious in raising menu prices," Riehle said. Historically, menu price inflation averages about 1 percent to 3 percent a year.

As in any year, but perhaps more so than usual during 2011, restaurant sales and pricing will rely heavily on travel and tourism, and especially on international visitors to the United States. This year, the restaurant industry is hopeful that "one out of every three sales dollars are travel- and tourism-related," Riehle said. "What goes on with business, leisure and international visitors has a very strong impact on how restaurant sales are perceived. Where the restaurant is actually located as well as the visitation patterns within that market can vary dramatically by metropolitan area."

San Francisco again this year is the U.S. list's most expensive food market, where corporate travelers would pay on average $124 for three meals. Honolulu ranked second, followed by Los Angeles and New York City.

"The cost of doing business varies substantially," said Riehle. "If one is looking at the absolute price points and how they vary across the country, restaurant sales end up being local. Depending upon what the economic mix in the industry is, how employment in that market is progressing or stagnating and personal income growth … these are the indicators that are closely linked with restaurant growth and sales."

BTN's Chris Davis contributed to this report.

Methodology

The 2011 Corporate Travel Index for the first time offers actual average car rental rates booked by BCD Travel corporate clients from January through November 2010, provided to Business Travel News by the travel management company's Advito consulting arm. Advito also provides average hotel rates booked by BCD Travel corporate clients in the same time period.

The charted hotel costs on pages 10 and 11 include average booked upper upscale, upscale and midprice hotel rates in addition to an overall average rate. However, the overall listed booked average daily rate is not an average of the rates of the three listed tiers, as it also incorporates luxury and economy tier rates. Business Travel News added 2010 hotel tax and fee information to the average booked hotel rate based on original research into sales and occupancy taxes and surcharges through each city's convention and visitors bureau, chamber of commerce or other public data.

The car rental costs on pages 14 and 15 include average booked compact, intermediate and full-size rates, of which an average was determined. Tax and fee information, provided by Advito, was added to that average to determine the average total cost for each city. Advito also provided the year-over-year percentage change from last year's average figure.

For the food cost chart on page 16, BTN this year commissioned New York consulting firm Mercer Inc. to survey restaurateurs and calculate the cost of standard meals in each location. Totals reflect January 2011 pricing for a breakfast of two eggs, 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 and a cup of coffee. The listed prices do not include tax but do include a 15 percent gratuity.