 1997 Winter ACTE Quarterly: President's Message | 1997 Pricing Outlook | Long-Awaited Travel Index
1997 PRICING OUTLOOK Thought 1996 corporate travel prices were steep? There's no relief in sight for 1997. Anticipating corporate travel costs for the year is usually challenging. Airlines and hotel companies in particular are prone to boom-and-bust cycles; fuel costs, which get passed along to consumers as quickly as they spike up, are subject to the vagaries of the commodity market and international politics. Any volatility in the supply-demand equation--which in more recession-prone times used to lead to a predictable flurry of discounts--is now, in robust U.S. and certain European economies, resulting in little flexibility on rates and little room to maneuver in negotiations. Industry analysts predict with a qualified amount of certainty that business travel costs in the U.S. are going to rise 6-7% overall percent this year. "Corporations will have to redouble their travel management efforts just to control business travel costs," said Ed Gilligan, president of American Express Corporate Services. "And they'll have to compensate for higher prices by attacking indirect costs, such as expense report processing and ticket delivery costs, by using new interactive technologies." Price hikes are predicted across the board in all business travel categories: airfare, lodging, car rental, and meals.
Airlines There are three reasons for the steep price hikes, according to Ed Gilligan: slow capacity growth, high demand and high fuel costs.
Industry Outlook High fuel costs will also put upward pressure on prices. Not only are fuel prices creeping up, but airlines also recently lost a 4-cent-per-gallon fuel tax exemption. Even with higher fuel prices, U.S. airlines still posted record profits for 1996: $3.7 billion, which included a $500 million windfall from the lapse of a 10% federal air ticket tax during the first eight months of the year--a windfall, one travel manager said tartly, which was not passed along to corporate customers. And more profitable airlines are less likely to make concessions to travel managers, she pointed out.
Corporate Strategies It may be that the only price relief may come from increasing competitive pressure in certain markets by low-cost airlines. In the West, for instance, Alaska Airlines is offering low fares even on monopoly routes like Palm Springs-Seattle in order to keep travelers from using Ontario Airport, where Southwest has a beachhead. United Airlines, which uses Denver as a base, is concerned about upstart Western Pacific's Colorado Springs hub. Southwest is using Providence as a low cost alternative to Boston, which is bringing some long-needed price pressure in the Northeast. Travel managers may have success negotiating on specific city-pairs, even if they're having next to no success forging a more sweeping airline agreement. Low-cost airlines are also forcing downward pressure on airfares within Europe. In April, when European airfare deregulation takes full effect, fares are expected to drop as much as one-third. "The next big push for negotiated programs will be in international markets," said Valerie Estep of Topaz Enterprises. "By tying them in with domestic programs, travel managers may be able to take advantage of the increased competition." Point-of-sale discounts, in addition to soft-dollar deals, are expected to become even more commonplace in Europe, she added.
Hotels Some travel managers are concerned that it's proving difficult to find rooms in any category in Europe, particularly in the U.K. "I think this year is going to be almost as tough as last year," said Denis Campbell, a travel management consultant in West Sussex, England. "There's very little new building going on, so there's no new room supply, and yield management is really starting to come into play here. Hotel companies are looking at volume site by site, and general managers are being charged with not just filling rooms but filling them at the best possible rate. They're even telling us either that the hotel is full--when we know there still are 20 or 30 rooms left--or that there aren't any rooms left at that rate."
Industry Outlook The industry has "pared operating costs, restructured unprofitable departments, implemented productivity enhancements and brought down fixed charges," according to Bjorn Hanson, chairman of the Coopers & Lybrand Hospitality Industry practice. Hotel companies are also holding firm on inventory, especially in the high end of the sector. Despite a growing public attitude toward tougher policies, the luxury category is enjoying higher than average occupancies, according to Randy Smith, chief executive of Smith Travel Research, which suggests that companies are allowing more high-end hotels on their preferred lists. "It's not only growing demand," that's pushing up occupancy figures, Smith said, "but the fact that virtually no new luxury hotels are being built in the U.S." The only booming markets for luxury hotels are Asia and Latin America. The glum news for travelers: most major markets in the U.S., particularly New York, Chicago and San Francisco, will be so full in 1997 that "it will be difficult to get rooms at any price during the workweek," according to Smith. The only good news for travel purchasers seems to be in the budget and economy segments, both of which turned in lackluster performances last year and which show signs of overexpansion. There were 102,000 room starts in 1996, according to Coopers & Lybrand, 65,000 of which were in these two categories.
Corporate Strategies If you can negotiate a chainwide deal, try for a long-term contract. Citibank U.K.'s David Randall signed a three-year deal with his hotel partners last year, having anticipated both rate increases and rising occupancies. Steady Citibank business through traditionally slow as well as peak periods appealed to the hotel companies, Randall told ACTE Quarterly. He also factored in a "inflationary increase" which may or may not be triggered in April. But in both the U.S. and Europe hotels are cutting back on offering last-room availability. Radisson, for instance, had once extended the last-room policy to all of its corporate accounts. Now it's only available to its key big-volume accounts --with emphasis on big volume. Denis Campbell said that it's important to check the fine print of your contracts to make sure travelers can get rooms at the negotiated rate even when they're nearly full. "You have to choose between rate and availability," cautioned Marsha Massey, director of business travel sales and marketing for Westin. "You may have to pay a premium for availability, since there are 10 more people lined up willing to pay more for that room." What to do if your volume is less than spectacular? Book suburban hotels, or consider corporate apartments, suggests Robert Mandelbaum, vice president and director of research for PKF Consulting. Other travel managers are looking to make deals with mid-range hotels. Cindy Scanlon, travel manager for Philips Electronics, is encouraging travelers to use midpriced hotels in cities without preferred properties. Another strategy: guarantee group meeting business as part of a transient business travel deal. This is also a defensive strategy for travel managers who are also finding it increasingly difficult to find attractive rates for meetings while occupancy remains so high. The problem is expected to grow more acute, since corporate group travel is expected to grow about 10% this year, as companies place a higher emphasis on training and as group travel is better identified within corporations. Some U.S.-based travel managers are looking to meet in Canada, where a favorable exchange rate offers a de facto 20% discount over domestic prices. Other advice: use weekends for meetings, and give employees compensatory time off; or seek out resorts in the off-season, where it still may be possible to find a deal.
Car Rental "It's time for a big increase," she said. "Gas prices are going up, labor is going up, insurance is going up, car prices are going up. And nothing's going down." "The large travel consumers have been lulled by a pricing structure that's been unrealistic and inappropriate for a decade," agreed Neil Abrams, president of Abrams Associates, Purchase, New York, a leading consultant to the car rental industry. "The reality is that the pricing changes of the last year and a half are ratcheting auto prices up into a direction they should have been for years--to a more rational profit margin."
Industry Outlook 1997 will also see continuing creative approaches to merchandising what's otherwise a commodity market, Abrams maintained. "Expect to see broad changes in how a fleet is managed," he said. "HFS, being a multi-brand marketer, may introduce more cross-marketing between Avis and HFS's hotel brands. The relationship between Alamo and Republic may have some interesting synergies in the asset management part of the business, which hasn't been developed before. Thrifty will become a more aggressive marketer, certainly on an international level, where, following technological developments and common transportation policies being developed in the EU, you'll see more global marketing opportunities for travel managers. Until then, Abrams said, expect making pan-European car-rental deals "challenging," since rate structures vary considerably from country to country.
Corporate Strategies Neil Abrams predicts that car rental companies will take a much more aggressive position for contract negotiations. "They're very interested in adapting price structure to actual travel patterns, and tailoring contracts to the specific travel patterns. No more boiler-plate rate structures, a move which will benefit both parties. Car rental firms will be able to put together more effective yield management strategies; and detailed attention to patterns will allow travel managers to factor in things like special vehicle needs, and extras like navigational systems and safety systems, like an in-car cellular phones." There's also some movement, he said, towards regional pricing, the theory being that it's much more expensive to rent and operate a vehicle in New York City than it is in Tulsa. Also expect more surcharges, on everything from location to the duration of rental. "Make sure you know everything that's going into that rate," Abrams suggested. "And remember that it's a competitive market segment--and one where it's a lot easier to shift market share among vendors than in other travel categories." AQ
1997 Winter ACTE Quarterly: President's Message | 1997 Pricing Outlook | Long-Awaited Travel Index
|