12 December 2022, etc.venues Monument, London
Business Travel Show Europe, presented by The BTN
21 November, London Hilton Metropole
Does the amount spent on business travel correlate with a company's profitability?
Addressing politicians and economists in Washington this April, the head of the International Monetary Fund (IMF) said the global economic outlook was positive, though still “too weak for comfort”.
Christine Lagarde admitted some regions were suffering high levels of unemployment, and public debt remained cause for concern. However, she was confident great swathes of the economy had already “turned the corner”.
In many quarters of the corporate travel sector there is a tacit expectation that the amount corporations spend on travel will inevitably return to what is often referred to as “pre-recession levels”. In the pre-credit crunch era it was easier for travel managers to permit more profligate policies, such as short-haul business class travel and five-star hotels for all management level staff. Money was swilling around the system and confidence was sky high.
What followed the collapse was a disaster for the travel sector. Corporate travel bans and avoidance schemes were rife, pushing many suppliers to the edge of collapse and others out of business completely. What did not seem to be considered, however, was the damage travel cuts were doing to company revenues. As we head towards the third quarter of the year there is genuine belief that the economy is on a path to sustained growth, though the trauma of the financial crisis remains fresh in the minds of chief executives (CEOs) and chief financial officers (CFOs) who have become extraordinarily cost-conscious. It therefore begs the questions: is business travel seen an expense or an investment?
Andrew Tessler is associate director of global forecasting organisation Oxford Economics and author of a number of travel industry studies. His most recent work was entitled Shaping the Future of Travel, a white paper commissioned by travel technology firm Amadeus. There is, according to his research, a strong perception among CEOs and CFOs that profitability and travel spend are correlated; bans and avoidance are only taken in extreme circumstances. “That is why coming out the worst part of the recession, business travel was only cut back in the short term for many businesses in Western economies,” he says. “When there is major concern [about company finances] travel is always one of the areas to be cut. Those whom we interviewed [for the study] said this is always the case, but then it always bounces back.”
To travel or not to travel?
It is often said that travel and entertainment (T&E) spend is a company’s third to fifth biggest expense. But should it really be one of the first budgets attacked in times of difficulty? Paul Tilstone, senior vice-president at the Global Business Travel Association (GBTA), rolls his eyes when he hears talk of travel avoidance. “I find the term amusing,” he says. “It just illustrates where businesses go wrong when they think of business travel. It suggests the default position for any company meeting is that it has to be face-to-face, and to challenge the meeting methodology is travel avoidance.”
Tilstone believes companies that truly comprehend travel would never use the phrase. “You have to understand when choosing not travel will be detrimental.” The only exception, he says, is when a company must cut travel in order to survive. “But even then, the company knows they must get people back on the road at some point to drive growth.”
Instead of travel avoidance, Tom Stone, managing director of Sirius Travel Sourcing, says organisations must look at cost avoidance. “This is also known as ‘smart travel management’,” he says. “That could be, for example, two trips rolled into one, or turning a two-day trip with an overnight stay into a simple day trip. Use of videoconferencing continues to become more prevalent, but largely as a supplement to travel rather than a replacement.”
Stone says in recent years more restrictive policies have been put in place, such as asking travellers to downgrade to economy class on flights of under five hours. “It’s the new normal,” says Stone, who believes most progressive corporations see travel as an investment that facilitates sales, and not an unavoidable cost of business. “Smart travel contributes to the bottom line, which is why [travel] policies and preferred programmes exist.”
Getting the right travel programme is key to success, insists GBTA’s Tilstone. He encourages company boards to think about the reasons they travel as part of the overall company strategy. “Only once they have done this can they assess when travel is most effectively used to increase company performance, and when technology would do a better or comparable job for less cost. Travel is both a bottom-line cost and an investment to drive revenues. The challenge is assessing how much cost-saving exercises negatively impact profitability.”
Tilstone poses two key questions to C-level executives and corporate travel departments. First, he challenges them to think about self-booking tools: “In big companies their use should result in lower fares and headcount reduction, as secretaries and assistants have traditionally spent a lot of time booking travel. But what does it cost per hour for a lawyer or a sales director to shop and book their own travel?”
Second, he asks policymakers to think about the potential consequences of asking travellers to fly in economy, especially on long-haul journeys. “It saves big money on fares, especially on long-haul, but what price will the company pay on staff performance, turnover or sickness as a result of increased tiredness or stress?” Tilstone says those who know the answers to his questions understand the impact of their decisions on travel programmes and on the bottom line. Those who do not, he warns, will make false economies at some point.
An Oxford Economics study in the US found that every dollar invested in business travel returned US$9.50 in revenue. After making adjustments for higher operating costs and wages, the profit return was around US$2.90 per dollar.
Greeley Koch, executive director of the Association of Corporate Travel Executives (ACTE), admits his experience is slightly different, saying travel and its link to profitability depends largely on the nature and culture of each individual business. “Why a company travels is almost as important as the controls they strive to put on travel spending,” he says. “Administrative travel [to handle internal corporate business] generates no profit, yet can account for as much 60 per cent of a firm’s travel costs. Whereas revenue-producing travel (sales and service calls) is the first direct link in the corporate cash chain.”
Koch says cutting administrative travel, while maintaining or increasing revenue-producing travel, can generate profit beyond the parameters of established formulae. “Knowing the nature of a company’s travel will help define strategies that support the corporate objective without arbitrary cuts. While the arbitrary cut may seem to trim expenses, it can also limit exposure to customers and sales. Fluctuations in world markets have dramatically affected business travel since 2010. Many companies take startling steps to cut costs by slashing the travel budget. Yet travel audits repeatedly indicate that many companies may have cut the wrong type of travel. Learning which kind of travel to cut is half the lesson.”
The other half of the lesson, according to Koch, is learning that effective travel is part of motivated sales. Some companies are still trimming the travel experience as a cost-savings measure, he says. “In the past quarter, it has become more common to require authorisation from a vice-president for certain levels of travel. Companies have restricted business class travel to eight, ten, or even 12 hours in the air. What many firms have yet to learn is that increasing the tension or stress levels on the business traveller can impact profitability, too. Tired travellers, dealing with crashed computers, poor communications, or questionable support are at a disadvantage to their competition.”
Koch says the emergence of smart data, collected through social media and mobile devices, will go a long way in affirming the relationship between supported travel – designed to assist the traveller in making the sale – and just getting there.
Business travel was impacted by the banking crisis of 2008, along with every other sector of industry. But it is, according to the experts, one of the few professional service sectors to report an upswing ahead of the broader economy. The Guild of Travel Management Companies’ CEO Paul Wait believes this is no coincidence.
“Business travel has played a key role in recovery. I am very clear that business travel is not a luxury or a side effect of corporate profligacy. Put simply, business travel is an enabler to growth and should never be overlooked – the two are inextricably linked.” One must hope the IMF shares his confidence.