Business travelers may catch a price break in 2009
— -- With oil prices plunging as fast as the latest economic indicators, many business travelers are wondering if travel costs may tumble as well in the year ahead. The answer will depend on a number of factors yet to be determined, but there are good reasons to believe that business travelers may catch a break in 2009, and may even find some bargains in their travel shopping.
Fewer seats, fewer passengers
A six-year global economic expansion drove a 40% increase in airline passengers worldwide, according to the International Air Transport Association (IATA). Rising demand usually pushes prices upward, and during that same period IATA reported an 80% increase in world airline passenger revenues. Concurrently, U.S. domestic airline ticket prices surged 14%, according to the National Business Travel Association (NBTA) — excluding all those new, ancillary fees and surcharges. Since the beginning of 2007 U.S. airlines successfully raised airfares at least 30 times, according to Farecompare.com .
Now in the throes of global recession, travel demand is declining for the first time since the period following the 9/11 attacks. From July to November, travelers on the top seven U.S. airlines declined by 15%. The Air Transport Association projects U.S. airlines will carry 9% fewer travelers this holiday season than last year, as Americans postpone trips or stay closer to home. More importantly, IATA reports that premium, high-end, worldwide passenger traffic, which is almost exclusively business travel, declined 8% in 2008.
Just one year ago, skyrocketing oil prices forced many smaller airlines out of business. Surviving carriers grounded unprofitable flights and gas guzzling jets. With U.S. domestic capacity trimmed by 10% or 15%, airplanes flew full and airlines successfully raised fares and imposed fees and surcharges. Now many consumers have curbed spending and some will make fewer trips at any price in this still-unfolding economic crisis. If the current situation continues – and there is every reason to believe it will, at least through 2009 – many U.S. airlines may slash capacity again, but slumping travel demand may push prices downward anyway.
Expert sources are split on the fate of airfares in 2009. NBTA projects airfares to rise by 7% to 10% excluding ancillary fees, which could add another 5% to the price of an airline ticket. Travel Leaders (formerly Carlson Wagonlit Travel Associates) forecasts a 5% to 8% increase in domestic airfares and a 3% to 5% bump in international airfares.
In contrast, Egencia (formerly Expedia Corporate Travel) projects domestic airfares may decline as much as 16% in some markets and sees a 4% to 17% drop in international airfares. American Express has hedged its bets, projecting 2009 U.S. domestic economy class ticket prices to cost between -5% to +5% of 2008 prices and international long-haul business class fares to increase between 1% and 6%.
More rooms at the inn
Like airfares during the recent economic boom, hotel room rates rose 15% between 2004 and 2007, according to NBTA. Now, with waning travel demand, hotels are also pinched and will likely struggle in 2009. The average U.S. hotel occupancy rate declined to 61.2% in 2008, a 3% drop, according to Smith Travel Research (STR), a research firm specializing in the lodging industry.
Some empty rooms may be attributed to the travel downturn, but new hotel construction is also a factor. While ground is broken on most new hotel properties in good times, the economic climate is often very different when that hotel finally opens its doors for business. According to STR, U.S. hotel room supply increased by 2.5% in 2008 and a similar bump will occur in the coming year, yet occupancy rates will drop to 59.1%, the lowest since 2003.
Despite this glut of new rooms, NBTA and Travel Leaders forecast hotel rate increases of 1% to 4% and 4% to 8%, respectively. In contrast, Egencia projects a decline in hotel rates up to 12% in some U.S. cities and as much as 6% internationally. Once again American Express is in the middle, forecasting U.S. hotel rates to range between -2% to +5.5% of 2008 rates.
With significantly fewer airline seats for sale, declining travel demand and more rooms to sell, Egencia's view that hotels will discount to retain market share seems the most plausible.
Car lot deals
Like hotels, the demand for rental cars will decline proportionately with fewer airline seats and fewer passengers to fill them. Still, NBTA and Travel Leaders are both forecasting a 1% to 3% increase in car rental prices. American Express remains on the fence with car rental prices ranging from a 2% decline to a 3% gain, while Egencia believes the car rental market will slightly favor buyers in 2009, but does not provide a forecast number.
2009: A buyer's market in a somber economy
Despite softening travel demand and the sharp decline in premium air traffic, American Express, NBTA and Travel Leaders all forecast slightly higher business travel costs in the coming year. I find this unlikely. With a global recession that may worsen in the coming months, business and leisure travel demand seems likely to decline in 2009. If travel demand deteriorates further, airlines have two choices: cut prices or cut capacity. I think it's most likely they will do a little of both, particularly if oil is relatively inexpensive.
With a worldwide recession, oil consumption is down and should remain at current levels or lower for the duration of this economic crisis. This will keep a lid on oil prices. At $60 per barrel, IATA projects the U.S. airline industry to turn a tidy profit of $300 million in 2009. As long as U.S. airlines are making money, there is considerably less impetus to attempt additional fare increases, particularly if another increase could further erode travel demand.
With cheap oil, some airlines may reinstate capacity in selected markets even in a poor economy. When oil was expensive, low cost carriers (LCCs), which compete for business on the basis of price, couldn't make money with low fares so they curtailed growth plans and cut capacity like their larger airline counterparts. With lower oil prices, LCCs may again become a major factor in airline pricing and expansion in 2009. Additionally, nearly two-thirds of corporations polled by NBTA said they will encourage the use of LCCs in the coming year if cost savings are achieved.
LCCs are already positioning themselves for expansion. Southwest Airlines will soon serve more than 30 destinations from Denver with well over 100 flights per day, creating havoc for United Airlines and bankrupt Frontier. Southwest also enters Minneapolis this spring to take on the new Delta at this former Northwest Airlines stronghold. AirTran and jetBlue are still adding new cities, albeit at a slower rate than in previous years. As LCCs advance they will put further downward pressure on airfares.
Almost two-thirds of NBTA survey respondents said they will encourage their business travelers to avoid luxury hotel properties in favor of mid-priced hotels, indicating further downward pressure on hotel pricing and business travel spending.
More than half of NBTA survey respondents will also be using more teleconferencing and a third will use more videoconferencing in lieu of some business trips. This is further evidence of declining travel demand. Higher air, car and hotel prices will only discourage travel, which means business travelers are likely to obtain better prices and spend less for those fewer trips they must make in 2009.
Send David your feedback: David Grossman is a veteran business traveler and former airline industry executive. He writes a column every other week on topics of interest and concern to business travelers. E-mail him at travel@usatoday.com.