Business Travel. Will it ever return?
WEEKLY REFLECTIONS WITH RON KUHLMANN & THE CENTRE. Last year’s fuel spike and the current economic collapse have provoked a dramatic decline in business travel with a particular effect on the premium sector. Not only have the absolute numbers of travelers decreased, but the fares (and consequent yields) collected for these formerly pricey seats have tumbled as well.
Some of the astonishing discounts have been displayed in previous articles and the trend appears to be continuing unabated into the second half of 2009. Just this past week Lufthansa offered a fare sale that priced round-trip business class seats from California to many points in Europe for about USD3,000 – a bargain whether you can afford it or not.
Recovery will take more than a bit of time
There was an assumption that this current decline is a blip – albeit a pretty impressive one – and that carriers will eventually see that affluent clientele return. In a November 2008 interview with The Transnational: A Multinational Travel Newsletter, British Airways’ Willie Walsh commented on the declines in premium by saying it “…is a double-digit decline on last year in terms of bookings from the banking corporate sector, and we believe that there is still some underlining uncertainty in that industry. We would expect that to improve from the current booking trends that we are seeing. But it is far too early for us to give you any certainty going forward.”
And, not having the benefit of foresight, “we don't believe it is a case of trading down. There is no evidence of them trading down from premium cabins to non-premium cabins. It is more of a case where these people just aren't traveling.”
Later in the same interview, when asked if the market would rebound, he replied, “I think there will always be a strong corporate market.” But then added that, “It will take a bit of time before we see traffic volumes to return to the levels that they were at.” Indeed.
Mr Walsh was not alone in his thinking. After all, the airline industry has never experienced a global downturn of this magnitude.
Here we are in August 2009 and, according to BA, July premium travel continued to fall by 11%, but with a 3.5% increase in non-premium. While load factors have remained fairly constant year-on-year, yields have tumbled and the airline is posting and predicting losses.
Consequently, it is obvious that a “return to levels that they were at” is a distant goal – far more remote than could have anticipated last November. The continued decline in premium, juxtaposed with an increase in the back, indicates that there may still be a pulse in the corporate market, but it is no longer filling the good seats.
Trading places - downwards
This trend is confirmed by a recent American Express Business Travel report that has tracked its business travelers' airfare class purchases since 1999. For the first time ever, in the past three months, Amex’s business clients in economy represented the majority, with 56% now flying in the cheaper seats. This signals not only lower numbers overall but a shift in the mix amongst those depleted traveler numbers.
More bad news came from a study done by the National Business Traveler’s Association (NBTA) that reported an overall decline in travel spending as companies improve the productivity of travel, requiring fewer journeys.
Corporate responses to the crisis
Bankers constitute a generous proportion of premium travelers and their collapses hastened the decline in the last quarter of 2008. Yet today, even the newly re-profitable banks are skittish of a return to the extravagant spending that resulted in their customers’ angry backlash virtually everywhere.
But, as often said, a crisis of this magnitude should not be allowed to go to waste. Corporations, eager to get out of their doldrums, have begun to seriously look at alterations and alternatives to existing travel policies. Some of these revisions are bound to stick around.
Stricter corporate travel policies and more rigid enforcement have been adopted at many corporations. According to the Association of Corporate Travel Executives (ACTE) more than 70% of corporations are cutting travel budgets by between 10% and 20% in 2009. In some cases this is in addition to the downgrading of travelers from premium to economy.
To further complicate the situation, no one appears to be very adept at forecasting. In a comprehensive report entitled 2009 Travel Management Landscape, jointly produced by ACTE and a range of suppliers, one portion of the survey dealt with fares. The corporate travel agencies involved all speculated that airfares would rise appreciably in 2009, with one supplier proposing that domestic fares could see as much as a 12% increase and international fares up to 20%. So much for planning.
Corporate deals lose their shine
Instead, fares have fallen precipitously, with Southwest’s Gary Kelly saying recently, "We are certainly on sale this year and were not last year. We have adjusted to the environment, which means we definitely need to get out there and sell as many seats as we can." Jeff Smisek of Continental echoed that by stating, "We continue to see a relaxation of fare rules, thus lowering the fences between business and leisure demand and allowing business travelers to book at much lower fare levels."
What this has done is to make the negotiated discounts less attractive and create some havoc for both travelers and policy makers. If the corporation has negotiated a 40% discount on full business fares of, say USD8000, but the carrier offers sale fares of USD3000, the “deal” provided by the contract is fully diminished. And, if the much lower price is offered on a non-contracted airline, the corporation is confronted with interesting choices.
So, while more aggressive enforcement of policy forms a key component of many corporate plans, the effectiveness of that strategy can be compromised by fluctuating fares and changed booking restrictions. Additionally, corporate budgets are being negatively affected by the continued unbundling of services which adds cost that cannot, in most cases, be negotiated. Getting a good fare to a trade show can be undermined by the baggage and ancillary charges that continue to expand. Traveling with equipment can easily add hundreds to the base fare, wreaking havoc on the budgeted amounts.
Teleconferencing, the old rival, reappears - stronger
More interesting is the development and increased usage of non-travel means of “visiting and meeting.” A recent article written by Silicon Valley’s Mercury News notes that “Cisco Systems has slashed its annual travel budget by two-thirds — from $750 million to USD240 million — by using conferencing technology to replace air travel and hotel bills for its vast workforce.” The article also reported a 30% travel budget reduction at Hewlett-Packard.
Alan Bender, professor of airline economics at Embry-Riddle Aeronautical University did a study 10 years ago that showed a 10% reduction in travel due to video conferencing. With vastly improved technology, he believes that the reductions in years to come will be much greater.
These systems are now greatly improved, and have become less costly to operate. But they also now represent substantial corporate investment that must pay for itself (themselves) in savings elsewhere. That “elsewhere” is the travel budget line-item. If teleconferencing continues to flourish, further reductions in travel expenditure are virtually assured. Very bad news for the purveyors of USD10,000 seats.
Managing expectations back upwards? Not easy
One of the hallmarks of business class has been its seeming immunity to discounting. Certainly there were deals available and travelers availed themselves of savings as they were able. But the steep discounts, available in virtually every market, that have been spawned by the current downturn and for those able to pay, have put premium travel into the “affordable” column.
In the 1980s and even into the early 90s, US carriers regularly offered USD99 transcontinental fares. For customers willing to do a bit of research, they were available on a regular basis. When carriers tried to increase these fares, there was widespread grumbling as the traveling public saw USD99 as the appropriate cost of coast-to-coast travel.
At their inception, business class seats were given to passengers paying full-economy fares. Over time, however, the spread between full Y and C grew until business fares had far more in common with First class levels than their economy roots. What will be the reaction of travelers when the USD3,000 sale fares are again priced at USD10,000? Will increasing numbers of passengers and corporations simply refuse to purchase?
Fundamental change will result
So Mr Walsh’s statement that it may take “a bit of time” for premium traffic to return to previous levels may be correct. But it will be a very big bit. And, even when it comes back, it will likely have expectations of pricing levels that do not match the good old days.
If this is in fact the case, airlines are going to have to look a lot harder at how they approach this downturn. Hoping for a return, which may never be fully realised, is not an acceptable form of corporate risk management. There is a lot more depth to this issue than just a temporary yield problem.