2010 will continue to be a challenging year for the travel industry. As airlines face rising fuel costs and take steps to reduce capacity,
hotels have their own set of issues, including expanded new room inventory, and moderate hotel occupancy. While it can mean more ambiguity at the
negotiating table this year, there is room for optimism as travel buyers who can deliver increased share have greater buying power.
Airline Overview
Market Factors
- Throughout 2009, airlines have turned to the price-sensitive leisure traveler and lowered fares to counteract declines in demand from business travelers. Domestic average ticket prices in the second quarter of 2009 were down 16 percent year over year, a figure influenced by a decline in the record fuel prices of 2008.
- Fare decreases are expected to taper off in the second half and turn into increases in 2010, as a direct result of rising oil prices, further capacity reductions, airline consolidation and increased demand due to economic recovery.
- In July domestic system traffic showed a record load factor of 87.5 percent, up 2.8 points from last year. U.S. airlines raised domestic fares three times beginning in May, and July was the first month there was some sign of price stability although lower than year-over-year levels.
Considerations for the travel buyer
- Airlines are more agreeable to negotiating discounts if bookings are consolidated, supported by strong policy tools and backed by reporting and historical data. Airline partners will want a concrete demonstration that travel buyers have implemented strong policy controls to increase share and target incentive goals, allowing corporations to shift business to preferred partners.
- While buyers should ask for increased discounts for consolidated share, current trends have created an environment where airlines are less willing to expand existing discounts without expanded share.
- In addition to fares, consider negotiating airline amenities and perks, such as waived baggage fees, status matches, cabin upgrades, and soft-dollar funds.
- Companies with international business may want to seek lane fares and/or flat fares, which allow for a better discount than standard percentage discounts. Most recently, United and Air Canada began offering clients flat rates between international points of sale. Negotiating for flat rates may be especially valuable as current indicators point to an increase in corporate travel pricing next year.
Summary
- If a company can bring incremental revenue opportunities to a carrier, increased discounts are possible, though 2010 will be a challenging year. For successful negotiations, travel managers must have a good understanding of their travel spend, use strong policy tools, and have historical data in place to manage their travel program. While not all classes of service will receive discounts, travel managers should look to other areas to find value, such as waived fees, upgrades and status matches.
Hotel Overview
Market Factors
- With room rates and occupancy in major cities at their lowest, the buyer's market will continue into 2010, generally speaking. Some large markets, such as New York will remain competitive.
- According to Smith Travel Research (STR), there are 159,000 new hotel rooms in construction and 66,000 new hotel rooms in the final planning stage (May 08-09). The 2009 occupancy rate could hit a record low of 55.3 percent and level out in 2010.
- Industry indicators suggest an increase in occupancy versus 2009 at about +.4 percent and increased demand at 1.7 percent; but with increased capacity and RevPar still down, current estimates are that Average Daily Rates (ADR) will remain flat to slightly down.
Considerations for the travel buyer
- Expect hotels to be more resistant to lower rates as most market rates are either at or near the bottom. However, there are still opportunities for additional discounts and to negotiate for extra amenities. Free breakfast or Internet access can add up to powerful savings.
- Strict policy management can assist in negotiations. By demonstrating a consistent effort to drive share towards preferred suppliers, corporate travel buyers have a stronger place at the bargaining table. Mandating bookings via an agency of record can aid in this discussion. Also, collect reason codes for non-compliance and use those in quarterly negotiations to demonstrate program knowledge.
- When considering consolidation towards a preferred supplier, analyze your total hotel spend in each market and on a regional basis. A common best practice is to try and consolidate one hotel for every 500 room nights.
- While the hotel landscape is changing, companies may want to take advantage of the current hotel market and consider negotiating multi-year contracts. It will be important to demonstrate that you can bring strong demand when looking for these longer contracts.
- Timing plays an important role. You’ll have more favorable results when you time the negotiation during a slower period for the hotel.
- Consider independent hotels for your negotiated program. Because independent hotels do not have to subsidize costly loyalty programs, you can often find better rates and amenities at these premium properties.
- Keep in mind that hotels initiate new budgets that affect pricing at the beginning of the year. This can result in a 10-15 percent bump in January rates. So, when auditing rates it is important to time the comparisons at or around early February when prices begin to stabilize. Be prepared to audit at least one date in each of the seasons negotiated for accuracy.
Summary
- Travel buyers have an opportunity to negotiate hotel savings and added traveler amenities as demand has yet to rebound or catch up with the current increase in hotel rooms.
Car Rental Overview
Market Factors
- Car rental rates have been on the rise in 2009. In the first two quarters of 2009, the Rate per Day (RPD) has increased at least 14 percent year over year, driven by the convergence of several factors.
-Severe economic conditions and a drop in the demand placed several major car rental companies on the brink of bankruptcy (Advantage Rent-a-Car actually went bankrupt in December of 2008), which made already difficult financing for new cars almost impossible.
-Furthermore, bankruptcies of General Motors and Chrysler meant the practice of at- or below-cost fleet sales to rental companies had to stop. All of this translated to the drop in inventory supply that far outpaced the demand.
- Rates are expected to stabilize in the second half of 2009, as rental companies regain their footing and good credit ratings. This will allow them to replenish their inventory while cutting costs and optimizing operations.
Considerations for the travel buyer
- Even with the improved environment, car companies will demand value from accounts in exchange for discounts. If companies cannot meet their revenue commitment, discounts will be reduced. But if a company can bring additional business to the table, the buyer is in a very good position to negotiate.
- In addition to focusing on discounts, buyers should also prepare data that allows a company to negotiate additional cost savings. Insurance, drop-off fees, and surcharges are all areas that deserve additional focus. Buyers should also compare fees across vendors and use the data in negotiations.
- Leverage multiple data sources. Typically, expense systems only provide the amount spent and the location, but will not provide all the details needed for negotiations with vendors.
Summary
- Driving policy enforcement and mandating car rental bookings will allow corporate accounts to realize savings through compliance and by negotiating better preferred vendor agreements.
Contact your account manager for further assistance with your next contract negotiation.