Corporate Travel Buyers Face Perilous Exposure to Industry’s $540 Billion Debt

Skift Take

Airlines, hotels, taxi firms and travel management companies owe more than half a trillion dollars. Here’s how companies can offset price surges as their suppliers look to pay off mounting debts.

Company travel buyers face years of rising prices due to an industry “debt mountain” that today exceeds half a trillion dollars.

According to a former travel buyer-turned-consultant, the debt totals $540 billion — a figure that mostly covers airlines, hotels, ground transportation firms and travel management companies.

Some $490 billion of that amount stems from government and bank loans, plus cash injections from venture capitalists, private equity and hedge funds.

Sector wise, global airline debt totals $350 billion; hotels $110 billion; ground transport companies $20 billion; and corporate travel agencies $10 billion, calculated Mark O’Brien, managing partner of Avenue5 Consulting.

The debt also includes travel and mobility tech startups which have secured $48 billion in investment, mostly from venture capital firms. An estimated 2,800 companies received investments during 2021, O’Brien said. This figure was the largest amount invested in the last 10 years, and 15 percent up on the amount seen in 2019, he added.

“We live in a world where the word billions doesn’t surprise us any more,” said O Brien. “But to put that number into context, it’s higher than the economies of Belgium and Portugal combined, or 7 percent the size of the U.S. economy.”

The numbers were based on public reports and financial statements, alongside data from the likes of Moody’s, Bloomberg, Fitch and S&P Global. Of course, with such a large scope it’s impossible to get a truly accurate picture, but O’Brien argued it was important for corporate travel buyers to understand the bigger picture, and the commercial pressures that suppliers now face, as it can help prepare them for future price shocks, and help these suppliers with their own recovery.

Payback Time

Companies must now get ready for price surges as governments, banks and investors start asking for their money back.

Travel prices may appear low compared to 2019, for now at least, because suppliers are looking to encourage people to travel again. However, as the recovery gets under way and demand exceeds supply, the travel industry will be under pressure to seek out profits. “That debt has to be serviced, and investors obviously expect a return on their investment … that debt can’t just sit there,” O’Brien said during an inaugural Consultant’s Corner virtual event, called “The Debt Mountain of the Travel Supplier EcoSystem — How this Impacts the Travel Buyer,” hosted by the UK’s Institute of Travel Management.

First, buyers can expects to see their corporate travel agencies, which traditionally operate on low margins, refresh their pricing models. They’re likely to accelerate shifting their business model away from transaction fees to a management fee-based model, and share risks in case of any further downturn.

Airlines will also push up air fares on key routes, up between 3.5 and 4.5 percent on 2019 levels by the third quarter of this year. But at the same time they will pass on further increases due to their investment costs in sustainable aviation fuel and due to airports putting up their landing fees.

On the hotel side, O’Brien said rates could be up to 5 to 9 percent in the third quarter of this year, compared to 2019 levels.

When it comes to budgeting, a company that typically spent $20 million on travel can expect to see that rise by $875,000 to $1.1 million in the future. At the top end, a company that once spent $250 million on its travel program would see an increase of $8.5 million to $13.25 million.

Mitigation Plans

To counter those rises, travel managers will need to get more creative, O’Brien said, and adapt their programs to allow “best price on the day” bookings, rather than hotel rates that rolled over from 2019. And with airlines, travel managers needed to dive into their key origin and destination routes, and key city hotel destinations, and better engage with airlines.

Total trip costs should also be calculated. For example, if a company could work out all elements of a business trip from before the pandemic, including meals, parking or taxis as well as flights and accommodation, it should then look to use that basis when budgeting trips in the future to avoid getting caught out by surges.

And as airlines begin to pass on costs related to sustainable aviation fuel, O’Brien said travel buyers should ensure airlines are transparent about any surcharging, and pinpoint where that money is going. “We should always demand a breakdown of the surcharge, so we can interrogate it. Those surcharges are negotiable,” he said.

Companies would then be more likely to pay those higher fares, as they’d be able to report within their companies — which also have their own sustainability targets to meet.

“Suppliers within the travel ecosystem have shown great resilience during the pandemic and have needed to seek and secure additional funding in most cases,” said Scott Davies, CEO of the Institute of Travel Management. “As the recovery gets under way it is important for buyers and suppliers to understand the commercial pressures and dynamics on each side.”

Leave a Reply

Your email address will not be published.