No one should be surprised that it’s coming, and consultant Mark O’Brien expects it in the second half of this year: higher pricing for transportation and lodging. What does it mean for corporate travel buyers?
According to O’Brien, a BCD Travel exec until 2021 who now runs Avenue5 Consulting, hotel prices will be up by 5 percent to 9 percent in the third and fourth quarters over 2019 levels, while flights will cost 3.5 percent to 4.5 percent more than before the pandemic.
During a Jan. 21 presentation for the U.K.-based Institute of Travel Management, O’Brien said upward pressure on rates would result partly from what he called the “refinancing” of travel. Avenue5 calculated about $540 billion in new debt and investment among lodging, transportation, travel tech and intermediary companies (not including infrastructure such as airports).
Staffing shortages, increased fuel costs, sustainability charges, government-imposed infrastructure fees and higher demand also may factor in.
“Prices have been lower across the board in 2021 and Q1 2022 as the supply chain aggressively re-engages corporate companies to travel again; however [suppliers] are operating at a near break-even level,” according to Avenue5. “Once the demand returns, [suppliers] need to recoup their losses, service their debt and provide meaningful returns for their financial investors. This will result in higher costs for the travel buyer.”
In November, CWT and the Global Business Travel Association said they expected price increases for some of the same reasons.
According to an American Express Global Business Travel report published this month, demand uncertainty means “air pricing remains extremely fluid. Just consider the experience of the last year: prices on many key business routes in the U.S. recovered close to 2019 levels in June only to fall back significantly when concerns about the delta variant overturned the supply-demand equation. It is difficult to forecast price for 2022 with any degree of accuracy or credibility.”
Lack of seat availability, GBT wrote, could inflate air travel expenses.
In lodging, STR numbers cited by GBT pointed to full recovery of demand and average daily rates this year in the United States.
STR and Tourism Economics last week “slightly upgraded” their forecast for the U.S. market: “On a nominal basis, ADR is expected to surpass the pre-pandemic comparable this year, while revenue per available room is anticipated to exceed 2019 levels in 2023. When adjusted for inflation, however, full recovery of ADR and revenue per available room are not projected until after 2025. Occupancy is projected to surpass 2019 levels in 2023.”
“While many hotel groups have been willing to extend 2021 rates for 2022 programs, travel managers should not expect to find many opportunities for rate reduction without substantiated spend,” according to GBT. “In fact, rates could be going up.” GBT noted rising average daily hotel rates around the globe, including in some top business destinations, where business travelers will “compete with tourists” for rooms.
According to the travel management company, “The most significant upwards influence on hotel pricing could come from ongoing global labor shortages that afflict hospitality. Labor is the single biggest cost for hospitality providers; getting staff back into hotels will put increasing pressure on hotels’ cost base. Where they can, hoteliers will pass on these costs to guests.”
Shortages of cars in the rental business and drivers in chauffeured transport, meanwhile, mean price increases are on the way — “the only question is by how much” — according to GBT.
A December BCD Travel paper also referenced shortages and “inflationary pressures” in transportation.
O’Brien said the response from buyers to higher pricing should center on “risk mitigation” and “future-proofing.” Whereas the decision to roll over supplier contracts early in the pandemic was the right one at the time, he said, it’s time to look at what’s next. With volume hard to predict, this could mean more marketshare arrangements.
Mark O’Brien, Avenue5 Consulting managing partner
“We suggest a deep-dive risk analysis, particularly related to key routes and major cities, with perhaps more consideration to be given for a strategy of best price on the day,” said O’Brien. “Is a total trip cap viable, perhaps for certain departments? You have data for the average total trip cost for, say, London-Paris-London for two nights. You should be able to know the average price paid for that whole trip. Include ground costs, parking, etc.”
He suggested that companies consider different policies for different types of trips as part of a demand management strategy. Although it’s “tough to pull off,” perhaps a trip planning approval process for a revenue-generating traveler is different from one for a non-revenue-generating traveler.
“Travel managers will need to clearly define what constitutes necessary business travel,” according to the BCD Travel paper. “A well-organized business trip that combines visits to several clients at nearby destinations may come at a higher trip cost, but it avoids travelers hitting the road as frequently. Day trips to attend a two-hour meeting may disappear since they are harder to justify.”
Meanwhile, O’Brien emphasized the importance of content strategy. “Is your content hub fit for purpose, and how auditable is that?” he asked. While NDC has not delivered what it promised, he said, buyers should look into supplementing existing channels.
While pre-pandemic business travel volume is unlikely to fully recover until 2024 or 2025, according to O’Brien, the amount of investment in the industry is encouraging. The travel industry was “kind of ignored” by investors, but the pandemic changed that. It’s now a “strategic” and “professional” category — which “many of us have been championing” for years.