Trading down

A willingness to adopt alternatives as part of a new cost-control culture is having a marked effect on the low-cost hotel and aviation sectors. Bob Papworth reports

According to Peter Harbison, executive chairman of the Centre for Asia Pacific Aviation (CAPA), "centripetal forces" affecting the low-cost aviation sector pose a potentially huge threat to legacy airlines over the next decade.

In some cases, such an assertion will have provoked those under threat into a headlong dash for cover; in most cases, however, one suspects it will have provoked a headlong dash for a dictionary. What kind of word is 'centripetal' when it's at home? Smarter Buying Business Travel readers will of course be aware that centripetal forces are the opposite of the centrifugal variety. The latter drive rotating objects away from a central point (think where the washing ends up after the spin cycle), while the former drive them towards the middle (think Olympic cyclist Chris Hoy at the top of a banked velodrome).

Harbison reckons that a variety of centripetal forces are changing the way budget airline bosses think.

Until relatively recently, low-cost carriers (LCCs) have focused exclusively on point-to-point services.

Over the next decade, he suggests, they will start to move towards the more traditional hub-and-spoke pattern - drawn, or forced, by commercial necessity into a central point.

Introducing CAPA's Global LCC Outlook Report, Harbison cites AirAsia and long-haul sister airline AirAsia X, and jetBlue's codeshare-based partnership with Lufthansa, as early indicators of the trend.

"These centripetal forces offer probably an even greater threat to the full-service flag carriers than the short-haul movement," he suggests. "The possibility to deliver a networked high-quality long-haul service at low cost - much easier to achieve when extrapolating from a low-cost local base than by contracting from an existing full-service global model - represents a serious challenge for the legacy carriers."

All of this should have legacy carriers quaking in their boots, if it wasn't for the fact that most of them seem to have ridden out the low-cost storm rather well. Figures collated especially for Buying Business Travel by aviation data specialist OAG admittedly highlight the low-fare airlines' phenomenal growth. In 2005, of the 3.9 billion airline seats available worldwide, just short of 633 million - almost one sixth of the global total - were offered by low-cost carriers. Five years later, in 2009, of the 4.5 billion seats on sale worldwide, low-cost carriers were offering more than one billion seats - nearly a quarter of the total capacity.

Of the 600 million seats 'added' during the five-year period, 386 million - close to two-thirds - came from the low-fare sector. In the EMEA region, the five-year total capacity increase works out at nearly 188.6 million additional seats, more than 160 million of which were made available by low-cost carriers. In the more mature North American market, overall seat capacity fell by 108 million; the 2005-09 capacity of legacy carriers was down by nearly 162 million seats, while low-fare rivals added more than 54 million.

In Latin America, while low-cost seat capacity almost trebled, legacy carriers added fewer than ten million seats. And in the Asia-Pacific region, the capacity of 'traditional' airlines rose by 340 million seats, while low-fare carriers saw their capacity grow by 36 million seats.

The most significant figures, however, are those relating to legacy airlines' seat capacity - shy of 3.3 billion in 2005, just north of 3.5 billion in 2009. In other words, while budget airlines may be gaining market share, the overall market has grown, and in numerical terms legacy carriers are holding their own.

This would appear to suggest that low-fare airlines have succeeded in encouraging more people to fly, but they have not induced a mass defection from their generally higher-priced rivals.

Now, says CAPA's Harbison, fuel-price volatility and other uncontrollable external factors "will relentlessly force most lowcost airlines towards reconstituting the network model, domestically and internationally".

Closer to home in the UK and Ireland, there is already evidence of a strategic re-think by both easyJet and Ryanair, where bosses have come over all expansion-averse and stamped on the brakes.

Last year, Sir Stelios Haji-Ioannou very publicly disagreed with the easyJet board's entire growth strategy.

The row ran and ran, and the fall-out was dramatic: Chairman Sir Colin Chandler and Finance Director Jeff Carr both quit, and Chief Executive Andy Harrison recently announced his resignation - but it would appear that Stelios has got his way and curbed the company's expansion plans.

Over in Dublin, announcing a 13 per cent increase in passenger numbers for 2009, Ryanair chief executive Michael O'Leary reiterated his change of course.

"With the unsuccessful termination of our talks with Boeing for a 200 aircraft order in December, planned capital expenditure will now decline from €1.2 billion (£1.05 billion) in the current year to as little as €100 million (£88 million) per annum in the fiscal year ending March 2013," he says.

"We expect our current cash reserves of €2.5 billion (£2.2 billion) to grow substantially by March 2013 and we plan to distribute surplus cash to shareholders from that date."

On the other side of the Atlantic, low-cost daddy Southwest Airlines is being equally cautious. Chief Executive Gary Kelly talks of a "disciplined route strategy" and admits the airline has no plans to increase capacity this year.

With even low-cost belts being tightened, a wholesale restructuring of operational strategies seems unlikely to happen any time soon. Having expanded rapidly over the past few years, economic uncertainties dictate that now is the time for a spot of retrenchment. It's just that nobody appears to have told the budget hotel companies.

Celebrating 25 years in Britain, Travelodge is looking to add more than 40,000 new rooms to its UK portfolio, which already stands at 27,000-plus, by 2020 - the rough equivalent of opening a new hotel every eight days. If that ambition is realised, Travelodge would take over from Premier Inn (583 hotels and more than 40,000 rooms) at the top of the UK room-count rankings - but only if Premier's owner, Whitbread, decides that enough is enough.

That's not going to happen. Premier opened 1,600 rooms last year, has a further 10,000 rooms in the pipeline and is expanding in both the Middle East and India. In July 2004, when Premier Inn components Premier Lodge and Travel Inn were united under Whitbread, the company had fewer than 30,000 rooms.

Budget-sector expansion is not limited to the UK, however. Starting this year, France's Accor group plans to open 290 new hotels totalling 40,000 a year, a total annual investment of €3,950 million (£3,475 million), €400 million (£352 million) of which will come from Accor itself.

Economy and budget hotels will make up 73 per cent of the new stock, with Western Europe identified as a prime target region for the company's lower-rate Ibis, all seasons, Etap and Formule1 brands.

Globally, InterContinental is busily upgrading its 2,000-plus Holiday Inn Express hotels, while the rather smaller Jurys Inn (29 hotels in the UK and Ireland) has made its first foray into Continental Europe, opening a 214-room property in Prague.

The UK's hotel industry is enjoying - if that is the correct verb - something of a budget boom. According to the British Hospitality Association (BHA), back in 2001 the country boasted 847 budget hotels totalling 50,392 rooms. By 2009 those figures had risen to 1,366 and 105,470 respectively.

The organisation's Trends and Developments report, published late last year, says that a further 40,000 rooms are already scheduled to open between now and 2015 and historic trends suggest that at least half of those will fall into the lower-rate categories. "Budget hotels are clearly responding to consumer demand by introducing less expensive but high-value rooms that are attractive to both the business and the leisure markets," says BHA Chief Executive Bob Cotton. "Their occupancies suggest that they fill a big gap in the market."

Opinion is divided, however, as to whether managed, corporate travellers are contributing to those high-occupancy levels - and, in the case of the low-cost airlines, load factors.

Amanda Kotenko, American Express Business Travel's VP head of client management in the UK and Ireland, clearly thinks so.

"The financial crisis has definitely accelerated the emergence of a new business traveller who has learned to be flexible, adaptable and more cost-conscious," she insists.

"There are a number of attributes that are specific to the new business traveller, most notably being now more willing to trade down from Premium to Premium Economy or discounted coach [class] or to stay at lower-tier properties.

"Secondly, travellers are willing to adopt alternatives as part of a new culture that is developing within companies to save money and better control costs," she says. "For air fares specifically, we have certainly seen stable or rising air-fare levels in discounted fare classes over the past year, especially in discounted Economy, which would support the assumption that budget airlines have been able to benefit from the recession by increasing their market share.

"In addition, we've seen our customers' travel policies becoming much more focused on the 'lowest logical fare on the day', rather than tying in to volume-based deals with preferred suppliers."

Nigel Turner, director of public sector and industry affairs at Carlson Wagonlit Travel, has a rather different take on the budget suppliers' impact on corporate travel.

"Looking at the statistics tells us that hotels - the three-stars of this world - have brought their rates down, which has meant people haven't been flocking to budget hotels," he says. "They [the budget operators] haven't got the room to move that the other hotels have - the industry has had to lower rates and go after business that they haven't gone after before [such as] government business for example, and leisure markets. Government business is a good case in point, as hotels have been forced to meet the rates they are prepared to pay."

The same, in many ways, applies to legacy airlines, he suggests. The network carriers have more inherent flexibility - they can more easily shift capacity from under-performing routes to those where demand remains higher, and their highly-sophisticated yield-management systems enable them to raise and lower fares almost at will.

"We have still got a fair share of low-cost carrier business," Turner says. "And for some routes it works very well, but if you can still go from Gatwick or Stansted to a main airport, for a similar price, you're not going to fly to some of these out-of-the-way airports that the budget airlines serve. It's the suppliers who have downgraded, not the clients. Once the demand comes back, I think you will see some changes, but it's not so much about rates, it's about how much capacity you offer up at that rate."

On that note, there is a delicious irony in the fact that this year's World Budget & Economy Hotel Congress is being held this June in London, at the Millennium Hotel, Mayfair, where rack rates range from £130 a night to a distinctly non-budget £690.

If Millennium Hotels can attract the budget hoteliers' flagship event, maybe those centripetal forces will turn out to be less of a threat than CAPA's Peter Harbison thinks.