17 January 2013 | Amon Cohen
What lies ahead for corporate travel buyers in 2013? Amon Cohen takes a look at a turbulent market.
Wyndham Hotels received 23 per cent more requests for proposal for corporate contracts in 2013 compared with 2012. Global sales boss Ross Hosking would like to credit the jump to the brilliance of his sales team, but he agrees something else must be going on to explain this big number.
The answer, he believes, is that the Wyndham group includes mid-range brands such as Ramada, which have proved particularly attractive to the corporate market in the current negotiating season. “Hotels have pushed for really big-rate growth, so customers are looking for ways to meet their goals for travel spend,” he says. “In certain markets, they have decided to take out upscale properties and are looking more at the midscale.”
Advito, the consulting wing of travel management company BCD Travel, noted as far back as September last year in its Industry Forecast 2013 hotel suppliers intended to get very tough with corporate customers this time around. The basis of hoteliers’ confidence was a long-term scarcity of new supply in most cities.
Buyers saw the situation differently. Although demand for hotels has held up reasonably well over the past three years, the global economy is not exactly fighting fit at present. In consequence, Advito observed: “2013 looks set for the fiercest negotiations between hotel companies and their corporate clients in many years. The gap in expectations between seller and buyer is extremely wide.”
So who won – supplier or buyer? Most observers have called it a draw. In September, Advito said that while the big hotel chains were looking for average rate increases of 8-9 per cent for 2013, it expected prices to end up 4-5 per cent higher on average globally, (although only 2-4 per cent higher in euro crisis-hit Europe). Issuing a quarterly update of its forecast in December, Advito said it saw no reason to change its earlier prediction.
Margaret Bowler, director of global hotel relations for HRG, concurs. “Hotels pushed for high single-digit or low double-digit increases, but ended up with 4-5 per cent on average,” she says. As always, the headline figures disguise wide variations. Rates continue to accelerate faster in the world’s major cities. London has been saved from the worst of this trend, owing to the 2012 Olympics prompting several new hotel openings, but in cities such as Moscow and New York, says Bowler, hoteliers have been so confident of filling their rooms they have turned away corporate business. “A lot of hotels have come back with no-bids in those cities,” says Bowler. “They don’t want corporate clients at the rates they were getting before. Their revenue management systems [which forecast with great accuracy how much hotels can charge on each night of the year] are making them very bullish.”
Hosking has also observed hotel chains giving little quarter in gateway cities – not necessarily to the extent of refusing any deals, but in sticking to high rate demands – while compromising elsewhere. “Hotel companies will draw a line in the sand for hotels where demand is greatest and then concentrate on giving customers better discounts in secondary and tertiary cities,” he says.
In such a tough buying environment, there are few easy ways to prevent budgets being affected. The Advito forecast offers some tips, and others tend to agree with them. As Hosking has also mentioned, downtrading to lower-quality accommodation is one answer, while Bowler says that HRG is concentrating in some cities on negotiating deals at newly opened properties, which tend to be hungrier for corporate business.
But perhaps the most important strategic decision buyers need to make is how many preferred hotels they should have in each city. If they include too many hotels, buyers risk spreading their spend too thinly. Too few and they risk their preferred hotels being sold out on busy nights, leaving them having to pay market rates. Another TMC, Egencia, suggests a company’s preferred hotel programme should feature one property for every 500 room nights or $10,000 (£6,235) of spend per city. However, it stresses this is only a rule of thumb. Detailed work is needed to understand the appropriate number per city for the business’s precise requirements.
Turning to air, the other major expense for travel buyers, the supply and demand picture has not been dissimilar. According to Advito, demand for flights “held up remarkably well” in 2012 and is expected to grow in 2013, albeit on a lesser trajectory. Supply has remained stable among traditional Western carriers, which have restrained capacity more conservatively than at any time in living memory.
With supply flat and demand up, one might expect some stinging air fare rises in 2013, but in fact, TMC forecasters only predict rises of 2-3 per cent for Europe. The main constraint on price growth, say both Advito and Egencia, is competition. On short-haul routes, it is provided once again by low-cost carriers, which have hit mainstream airlines so hard that Air France, Lufthansa and Iberia are all shifting services to budget subsidiaries over the next few months. However, Advito and Egencia also both identify emerging competition on long-haul routes in the form of an ever-strengthening trio of Gulf carriers. “Emirates, Etihad and Qatar Airways have reached a stage of maturity with their route networks where it makes strong sense to add agreements with one or two of them to existing deals based around the three global alliances,” says Advito. “Not only are they keenly priced, but they are very helpful for avoiding giving too much market share to other groupings and keeping corporate pricing competitive.”
Another carrier worth watching is Turkish Airlines. Its passenger and seat capacity figures have grown 40 per cent over two years to make it the eighth-largest airline in the world for international flights, according to the Centre for Asia Pacific Aviation. It now operates more direct flights between Europe and Asia than any carrier other than Lufthansa, tapping into the same east-meets-west market the Gulf carriers have exploited so significantly. In November, the Turkish government revealed a potential tie-up for its flag-carrier with Lufthansa, including cross-shareholdings. It could prove a powerful combination.
In the UK, air buyers have had two major concerns. One is the continual hiking of Air Passenger Duty, which the chancellor confirmed in December 2012’s Autumn Statement will rise another 2.5 per cent in April. Adding as much as £188 to the cost of a flight for premium passengers, the duty is enough to make companies think twice whether a trip is worthwhile.
The other worry has been the elimination of competition for British Airways from bmi British Midland, which BA acquired in 2012. BA was forced to surrender take-off and landing slots at Heathrow in return. Some have been snapped up by Virgin Atlantic, which will launch domestic flights for the first time this year to Manchester, Edinburgh and Aberdeen. Until December, Virgin provided resolute independent competition on transatlantic routes that were otherwise almost entirely in the hands of three joint-ventures: BA/Iberia/American Airlines; the Lufthansa Group/United Airlines, and Delta Airlines/Air France-KLM/Alitalia. Now Singapore Airlines has sold its 49 per cent stake in Sir Richard Branson’s carrier to Delta. Virgin and Delta are consequently forming another transatlantic joint-venture. Between them, they will have a 36 per cent share of the London-New York/Newark market. The patchwork of airline suppliers that travel buyers work with has undergone more re-stitching and is looking more threadbare than a few short weeks ago.
Latin America is travel buyers’ new pain point.
Unlike the rest of the world, much of Latin America is flourishing economically. That means more business travellers flocking in, but relatively few hotels to accommodate them.
Advito forecasts average rate increases of 8-14 per cent for the region in 2013, with star performer Brazil expected to jump as much as 20 per cent for a second year in succession.
New hotels are now being built, according to HRG, but relief from expanded supply is still a couple of years off. Latin America is also expected to experience the highest air fare increases in 2013 – up 6-7 per cent, according to Advito.
Negotiating tips for hotel buying
Understand your buying power in better detail. It will be unrealistic to refuse all rate increases, but don’t give in completely to hotels’ higher rate demands either. Better data analysis will help you identify where you can stand firm and where you should give way.
● Look again at supplier consolidation, perhaps reducing to only one property in less important locations in your programme.
● Conversely, consider expanding the number of properties you use in high-demand markets to improve the likelihood of booking availability.
● Continue to negotiate free breakfasts and Wi-Fi.
● Watch out for hotel negotiating ploys, such as giving discounts on standard rooms when no rooms at the property are designated as ‘standard’.
● Look for internal savings, such as minor downgrades in accommodation standards or setting price caps per city.