Following the worldwide credit crunch, TMCs could be forgiven for thinking it would be a buyer's market, says Bob Papworth. Only it wasn't quite that simple...
AS WE APPROACH the fifth anniversary of the start of the global economic meltdown in 2008, corporate travel managers’ palms should have been positively leathery after half a decade spent rubbing their hands with glee. The slump in the developed world’s fiscal fortunes saw dramatic cuts in corporate business trips, followed by the stark realisation that lower travel volumes generally lead directly to lower turnover and lower profits.
So while the end-of-the-world recessionistas persisted with their dirges of doom-mongering and despair, travel volumes began to creep up again, and corporate travel buyers were busily enumerating their reasons to be cheerful.
With suppliers desperate to fill their planes, trains and automobiles (and hotel rooms), prices would inevitably come a-tumbling down, they argued. Hurrah!
At least, that was the theory. In fact, far from resembling a blacksmith’s apron, those aforementioned palms remain – to borrow from a 1960s pipe tobacco slogan – as smooth as a baby’s bottom. The gleeful hand-rubbing scenario never really got off the ground...
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EARLY WARNING
At least part of the reason for suppliers’ resilience stems from the fact that the corporate travel world pre-empted the economic crisis by several months. Long before Lehmann Brothers and Bear Stearns went belly-up, the Association of Corporate Travel Executives (ACTE) was warning of a business travel slump. The International Air Transport Association (IATA) was projecting massive airline industry losses. British Airways’ then head of sales, Drew Crawley, was telling the GTMC’s Istanbul conference that “partnership” was the way forward, because costs – and, therefore, prices – could not be trimmed any further.
The corporate travel industry was in crisis long before the world economy latched on to the idea. IATA figures show that while average international air fares went into freefall in the year from mid-2008, they then started to climb back.
By the autumn of 2011, they had regained all their lost ground and were back above the $500 mark. Fares have remained there or thereabout ever since. And passenger load factors, which dipped below 74 per cent in mid-2009, have recovered to around 79 per cent – higher than their pre-recession peak.
Accurate hotel data is harder to come by because of the vast range of product available, and because of huge variations within regions and even within individual countries. However, STR Global’s data for average daily rates in North American hotels may provide a useful snapshot. In 2008, the number-crunching specialist revised its three-year forecasts, predicting successive small increases – no decreases at all – to a year-end 2010 figure of $110.80. Earlier this year, the American average daily rate stood at US$110.94. The growth may be painstakingly slow, but it is growth of sorts.
SOMETHING HAD TO GIVE
But while suppliers’ prices have returned to near-normal, the negotiating process certainly hasn’t. Chief financial officers’ demands for year-on-year financial savings were never going to be sustainable for long, and with many suppliers’ costs outstripping the rate of inflation, something had to give.
Corporates and their TMC intermediaries are having to come to terms with the fact that the negotiating battle-lines have been re-drawn, with the emphasis increasingly on ‘savvy travel’ rather than ever-deeper discounts. “That’s absolutely right,” ACTE regional director Caroline Allen says. “The financial turmoil of recent years has led to a definite conservatism around pricing.”
Of course, the traditional quest for a balance between supply and demand remains a major factor in negotiations, but providers have become more selective about the amount and nature of the incentives they are prepared to offer. Paul Tilstone, senior vice-president of global operations with the Global Business Travel Association (GBTA), identifies what he calls the WIIFM (“what’s in it for me?”) factor. Buyers have always sought added-value come-ons in return for their business volumes, but more effective yield management practices, coupled with increasingly sophisticated distribution methods, are enabling suppliers to become much more picky about who gets what.
TAILORED TARIFFS
In particular, airline pricing has become much more closely targeted, and IATA’s New Distribution Capability (NDC) will give carriers even more power, enabling them to tailor tariffs right down to specific individuals.
The scheme is widely seen as a move away from publicly-quoted fares – ticket prices would be adjusted in much the same way that supermarkets personalise their special offers on the basis of shoppers’ regular buying habits.
Online retailers such as Amazon are renowned for informing customers that “people who bought this, also bought that” – and the NDC would emulate that. Some TMCs fear they will lose their consultative role – searching for the best available flight deal will become impossible if ticket prices are calculated on individuals’ travel patterns.
Furthermore, airlines – particularly those with sizeable mixed-type fleets – have become a lot smarter when it comes to aircraft utilisation. They can and do withdraw supply pretty much at will, and thus control availability and, by extension, prices.
Airlines have become much more adept at matching available seat kilometres to revenue passenger kilometres, maintaining relatively healthy load factors.
Just to add to the whole unholy mess, there is a big question-mark over the value of even attempting to press for volume deals with airlines today. Unless a corporate has truly colossal buying power, spot-bought tickets can represent a better bargain than negotiated fares.
VOLUME DELIVERY
Rather more happily for the buying community, hoteliers have considerably less flexibility; fixed assets entail fixed costs, regardless of occupancy levels. You can’t turn off the hot water and send the chef home just because the hotel is only half full.
However, those fixed costs have to be met somehow, and accommodation providers are increasingly reluctant to be beaten down on price, preferring to offer non-financial sweeteners such as “free” car parking or wifi (although complimentary connectivity is now becoming so ubiquitous that it may not count as an incentive for very much longer).
Historically, the big sticking point for hoteliers has been volume delivery – notoriously, some corporates have over-promised on the amount of business they can push towards a particular supplier.
“It’s still a complaint,” says Clare Murphy, director of specialist travel management consultancy Bouda. “Clients should have accurate data, and if they haven’t they need to talk to their suppliers and their TMCs, and then sit down and analyse the data – there’s really no excuse these days.”
Her comments echo Carlson Wagonlit Travel’s (CWT) stark warning – published as an “additional perspective” in its forecasts for this year. Suppliers, CWT said, “will remain strict on enforcing the contractual commitments that travel buyers have made with them… Travel buyers must proactively monitor and understand their performance to conduct effective conversations with the suppliers, and to avoid penalties for missing targets.”
The GBTA says that in North America, while corporate travel prospects are improving all the time, travel buyers are expecting a much tougher negotiating season this year, with hoteliers driving the hardest bargains.
Nearly half (48 per cent) of buyers polled for the Association’s first-quarter report expected negotiated discounts with hotels will be lower in 2013, against only 29 per cent who said the same about airlines, and 28 per cent who thought meeting venues would be tough nuts to crack.
The European picture is more mixed, with comparatively strong growth projected in the UK and Germany, and a weaker recovery in Mediterranean countries – suggesting corporates buying in northern Europe will have a rougher ride at the negotiating table.
GENTLER APPROACH
And the nature of those negotiations may be changing, too. According to a recent white paper produced by TMC Egencia, hard-nosed procurement practices are giving way to a gentler approach to life on the road.
“Especially in a recessionary environment, the pendulum between service-oriented travel management and more savings-oriented procurement practices swung decidedly to the side of procurement,” the report says. But: “As the economy begins to recover and corporate travel volumes return to – or even exceed – peak rates of 2007 and 2008, the most progressive travel programmes have discovered that a heightened awareness of traveller needs is critical to driving the right traveller behaviours and supporting the procurement constructs that now form the backbone of travel management.
“The most effective travel programmes engage procurement professionals who understand the personal side of travel, and travel management [professionals] who value the rigour of procurement processes.”
With procurement’s rottweilers back on the leash, and a new touchy-feely take on road warriors’ well-being, corporate travel appears to be going through a period of role reversal. Today, it’s the suppliers who are starting to rub their hands with glee.
MEETING TARGETS
THE BLURRING OF THE boundaries between transient travel and the meetings sector continues to throw up a plethora of challenges for the world’s travel buyers – and the situation is likely to get worse before it gets better.
Meetings specialist Grass Roots Eventcom director, Alan Newton, warns that venues in general, and hoteliers in particular, are taking an increasingly hardline approach in a market which is fast becoming supplier-led.
Launching his company’s latest Meetings Industry Report, Newton says trends in North America indicate a distinct shift in power away from buyers.
The report suggests that the contracting of meetings is taking longer, while meeting space being held by companies is increasingly being ‘bumped’ for more lucrative bookings by the venues. A number of hotels are refusing to commit to catering-only events – one-day gatherings without the need for accommodation – until a mere 30 days before.
The report also warns that the buyer-supplier imbalance is likely to get worse this year and through 2014, and adds: “Corporate planners need to be prepared to come to market with more certainty regarding whether their events will go ahead and ready – if need be – to contract sooner to secure their most desired options.”
That may prove difficult for some. According to HRG, 56 per cent of its corporate clients do not know how much they spend on events and meetings – although 53 per cent believe they will be spending more over the next year or so.
A global survey by payment solutions provider Airplus International goes even further, with nearly 90 per cent of UK travel managers confident that 2013 meetings spend will be as high, or higher, than last year.
In a global context, however, the same report reveals that travel managers are responsible for only 33 per cent of meetings activity, with the rest divided between other departments within the same company (which handle 42 per cent of all meetings) and external providers. Yael Klein, managing director of Airplus UK, said: “We are seeing here in the UK that those responsible for managing travel are more often trying to get a handle on the event piece as well.
“We believe this presents an opportunity for travel managers to begin to truly control their meetings and events spend, through better insight and analysis tools.”
That‘s quite a tall order. According an economic impact study conducted for the Meeting Professionals International (MPI) Foundation, more than 1.3 million meetings took place in the UK in 2011, attracting in excess of 116 million participants to more than 10,000 venues.
More than 80 per cent of all meetings were held by the corporate sector and – worryingly, given hoteliers’ tough stance on catering-only functions – nearly 54 per cent were for one day or less.
MURPHY’S LAWS
Clare Murphy, director of specialist travel management consultancy Bouda, lists the key points for those buying hotel rooms- Decide if you are going to manage your hotel programme or ask your travel service provider to manage it on your behalf.
- If the travel service provider is to manage the programme, is there a fee? And check that the hotel recommendations include properties you specifically require.
- If you plan to manage the programme yourself, establish whether your travel service provider will be charging fees, for example for loading the rates on to the GDS on your behalf.
- Use historic data to formulate your hotel programme, but also speak to key departments about forthcoming projects which you may need to take into account.
- Canvas travellers’ views on the current hotel programme and establish what ‘extras’ might be important to them.
- Understand your booking profile and advance purchase habits.
- Use publicly-available industry research – from STR Global, for example – to gain an understanding of general developments in your key markets.
- Produce a template in Word or Excel of the key information you want to collect – room type, rate, cancellation periods and the like – so hotels can respond in the same format.
- Tell hoteliers how many room-nights they can expect, and indicate the kind of room rates you are seeking.
- Press for an ‘on the day’ cancellation period.
- Check advance booking patterns to see whether last room availability (LRA) is important to you, and be aware that some hotels will charge a premium for it.
- If your travellers are likely to eat and drink at the hotel, request a discount on food and beverage spend.
- Support your preferred hotels. Proactively manage policy compliance to ensure they benefit from the business you promised.
- Check whether your travel service provider charges a fee on nett rates. If commission is payable, establish precisely how much can you expect to receive – your return may only be a fraction of the negotiated commission.