Whether travel is already part of your world or could be in the future, as the New Year gets rolling, I think it's a helpful time to outline some pricing expectations for travel in 2011. And, while the classic laws of supply and demand will tip the scales in favor of suppliers this year, I'll also share approaches that can be used to contain price increases to the extent possible. That said, procurement professionals should be aware that cost avoidance, not hard dollar savings, will be the reality next year.
My organization, Carlson Wagonlit Travel, experienced an 18.2 percent increase in North American traffic during the first half of 2010 compared with the same period in 2009. This means our clients began sending their travelers back out on the road as economic conditions improved, and it's just one of many industry statistics that indicate business travel is coming back.
However, airlines are maintaining pricing power by intentionally not reintroducing capacity at the same pace as returning demand. While all of this creates what many call a "perfect storm" for airlines in terms of profitability, it certainly doesn't create an ideal environment for buyers, who will be subject to 3-5 percent price increases in domestic economy, international economy and international business classes next year. While international first class will increase slightly more, by 4-6 percent, domestic first and business class fares are expected to decrease by 2-7 percent, as these pricier premium seats are still in less demand.
While airfare increases unfortunately will be the reality next year, buyers still have opportunities to control costs, including on ancillary fees, which are currently generating billions of dollars in incremental airline revenue. While these are still considered non-negotiable by the airlines, some of our clients have been successful getting their airline partners to grant a fixed number of additional elite statuses, which include waived checked baggage fees, among other traveler benefits.
The other area of opportunity for buyers to explore in 2011 results from the many airline mergers, acquisitions and alliance developments recently completed or currently underway. Several notable examples include the newly combined Continental Airlines and United Airlines, which has surpassed Delta Air Lines as the world's largest airline in terms of revenue, and American Airlines' long-awaited transatlantic alliance with British Airways and Iberia Airlines. The critical task for buyers is understanding the opportunities and challenges these moves present. While impact will vary significantly company-by-company, the factors with the most influence will likely be:
- your organization's existing relationship with one or more of the airlines involved in the consolidation;
- your organization's travel patterns and the extent to which they align with the network of a newly combined carrier;
- your access to accurate and timely data on your organization's travel spend and travel patterns; and,
- your ability to shift volume between suppliers by effectively influencing traveler behavior.
Hoteliers were particularly hard hit in the economic downturn because, unlike airlines, which can reduce capacity relatively quickly by parking planes, hotels are permanent structures with bills to pay, regardless of whether people are filling the rooms. This dynamic forced hotels to cut prices by double-digit percentages over the past two years, and to drastically cut their construction pipeline. In fact, according to PricewaterhouseCoopers, the number of hotel rooms under construction in the U.S. decreased 76 percent between 2008 and the second quarter of 2010.
When it comes to procuring hotels, the most significant area of opportunity for most buyers lies squarely in the basics. The first is to ensure your travelers make their hotel reservations through your company's travel provider. Only half of the multi-day airline reservations booked by CWT clients include a hotel, and while there are some legitimate reasons for a hotel to be booked separately, the fact is many more hotel reservations can and should be booked through the company's approved channels. As a procurement buyer, I don't have to tell you about the significant amount of money being left on the negotiating table when a company has data on only half of its hotel spend. However, other risks you might not have considered include decreased leverage for negotiating free amenities, which constitute one third of the total cost of a hotel stay; and lack of location information beyond city-level detail for half of your travelers, severely limiting your ability to quickly locate and assist them in an emergency. While not your typical security or weather related incident, this year's volcanic ash cloud provides a perfect example of how critical it is to be able to find and assist travelers immediately when time is of the essence.
The second largest area of opportunity lies in those amenities I mentioned, which are the ancillary fees of the hotel world. While rates are increasing, hotels are still willing to include some free amenities, including breakfast and Internet. That said, beware of the new amenity charges cropping up across North America as hoteliers also try to drive incremental revenue. Additional room service fees and more are starting to surface and may need to be included in negotiations in the coming years.
Up until now I've been discussing how classic laws of supply and demand are driving prices up for next year. However, car rental is the only segment of business travel that won't be able to increase prices in 2011, despite the fact that many of the same factors are in play here as with airlines and hotels: suppliers have successfully reduced capacity by decreasing fleet sizes, and they too will enjoy improved demand caused by the increase in travel. The difference is that car rental suppliers historically are willing to negotiate long-term contracts, allowing buyers to lock in rates for much longer than the annual expiration dates on air and hotel contracts; in fact, CWT is forecasting an overall decrease of 1.5-2 percent for 2011 car rental rates.
Although car rental rates are indeed going down next year, this segment of travel is ripe with ancillary fees, which can add as much as an additional 50 percent to the total cost of the rental. The type and amount of fees differ by location but can include everything from airport concession fees to local taxes designed to raise funds for sports stadiums. While some of these fees are out of the supplier's control and therefore are not negotiable, many are if you request itemized invoice data from car rental providers and take the time to analyze the charges and compare them against what other suppliers provide and with what other companies are being charged.
While the negotiating environment no doubt will be tough next year, the good news is buyers still have the ability to influence travel supplier agreements to the advantage of their organizations in 2011. While rates will indeed rise in most areas, overall cost containment can be achieved through ancillary fee negotiations. Buyers can also use data right at their fingertips to analyze how industry changes are impacting their programs and respond accordingly. These simple tactics will go a long way toward effectively navigating the travel landscape in 2011.
About the Author: Nick Vournakis is global vice president of Carlson Wagonlit Travel's consulting division, the CWT Solutions Group. He leads a team of 100 consultants in all regions of the world, who assist corporations in sourcing and continuously optimizing their managed air, hotel, ground transportation, and meetings and events programs. Before assuming his current role, Vournakis was senior vice president and general manager of CWT Canada, and prior to that he led the CWT Solutions Group in the Americas. Vournakis can be reached at [email protected]. More information on Carlson Wagonlit Travel at www.carlsonwagonlit.com.