Feature

The Future Market

After last year's rollercoaster ride, Bob Papworth asks a selection of industry figures to take a punt on 2009 and one thing becomes clear - it's going to be interesting ...

---

According to the Institute and Museum of the History of Science in Florence, Jean Baptiste Le Roy (1720-1800) was a French physicist whose work centred on electrostatics and "issues concerning ventilation in public places", and who devised unspecified improvements to lightning rods.

Leaving aside the nagging question of precisely how many "improvements" can be made to a lightning conductor - just how bad were they before? - Le Roy was also the bloke to whom Benjamin Franklin wrote: "In this world nothing can be said to be certain, except death and taxes."

Without wishing in any way to disparage the reputation of a signatory to the American Constitution (though, by the by, the inventor of the apparently-flawed lightning conductor - so what did he know?), this is precisely the sort of non-committal bet-hedging that gives prognostication a bad name.

Thankfully, the good and great of the UK's travel management industry seem to have no such vacillations about the future. Ask them to forecast how 2009 is going to pan out and, before you know it, you're beating them off with a stick.

Advito, BCD Travel's consulting arm, was first out of the blocks, sticking its predictive neck out way back in early October.

Baseline air fares, the company said, would be six to eight per cent higher in 2009, while "additional fees" would increase the total cost even more. Just to rub it in, Advito vice-president Bob Brindley explained: "Unlike previous years, unbundling of services and the resulting fees are on the rise, and are projected to add another three to five per cent to the total cost of air travel."

Globally, hotel rates will rise by between four and eight per cent, he reckoned, although he acknowledged this was "an average of some extremes", with overnight costs in some Middle East and Asia/Pacific destinations rocketing by anything up to 16 per cent.

This was, however, three months ago, and Brindley and Advito general manager Mary Ellen George was quick to admit that they might be wrong. "We recognise that the current macroeconomic situation is uncertain," she conceded.

However, clouded though her crystal ball may have been, she remained unequivocal. "Any pursuit of savings and cost avoidance requires fact-based analysis of the travel spend and a good understanding of what buyers can offer the suppliers in return," she said. "Given the market's volatility, monitoring the programme on a regular basis will be more crucial than ever, and managing demand as well as booking behaviour will become as important as tracking changes in the business travel marketplace."

In short, two imperatives will hold sway in 2009. First, there will be a greater need for association with, rather than antagonism towards, the supply side. Second, corporates will have to re-double their efforts to put their own houses in order.

Had the Advito boss then added that her competitors would, in time, say much the same thing, she would have gone straight to the top of the prescience class - because that is precisely what they subsequently did.

Launching its Global Business Travel Forecast later that same month, American Express Business Travel fielded not one but two vice-presidents from its Advisory Services arm.

Joakim Johansson, speaking in London to a Europe, Middle East and Africa (EMEA) audience, and Kurt Knackstedt, addressing a Asia/Pacific (APAC) orientated gathering in Shanghai, said much the same thing as BCD - and each other - although Amex's percentage increase predictions are rather more alarming than BCD's.

Companies, they said, should "re-visit" their travel policies "to ensure that travellers have a comprehensive guide to navigate the current travel environment"; and "in addition to a tight travel policy, demand management and an increased focus on traveller compliance can deliver savings".

Or, as BCD had already said, "get your house in order".

American Express also echoed Bob Brindley's concerns about those additional airline fees. It warned: "Business can expect up to an additional 15 per cent added to base fares as a result of airlines continuing to unbundle services such as checked luggage and in-flight refreshments, and fees for amenities such as aisle seating."

Johansson added: "In a difficult economic environment, successful travel and entertainment strategies will be based on the total cost of a business trip, which takes into consideration costs such as parking fees, airline fees, meals, and other related expenses."

Within Europe, Johansson predicted, the average total trip cost will rise two per cent, or €21, to €1,020 this year. Average total trip costs from Europe to other parts of the world are expected to rise 4.8 per cent, or €140, to €3,082.

Amex also expects European domestic and short-haul Economy Class ticket prices to remain static at best, and rise by up to four per cent at worst; long-haul Business Class fares from Europe will rise from anything between one and nine per cent.

Here in the UK, however, both fare types could actually fall by as much as two per cent. For short-haul Economy Class tickets, Amex's worst-case scenario is a one per cent increase; for long-haul Business Class fares, the upper-end increase is just two per cent.

In France and the Nordic region, the equivalent Business Class figure is eight per cent, and in Germany it is nine per cent, so one can confidently hazard that a certain smugness will pervade this side of the Channel in 2009.

Brits can be less happy, however, about hotel price movements. While domestic room rates could go up as much as five per cent (mid-range) and 4.5 per cent (upscale), the Amex forecast is for a higher global average rate rise.

The Far East will be a particularly bad place to go, with mid-range hotel prices heading north by between eight and 12 per cent, and upscale rates rising eight to 13 per cent. Worse still, the biggest price jumps will be in India, Singapore, China and Hong Kong, which pretty much covers most business travel areas.

On the UK domestic scene, and looking at 2009 prospects from the hoteliers' point of view, PricewaterhouseCoopers (PwC) has gone into gloom-and-doom overdrive. It is a tough nut to crack, though. Hotel occupancy levels are declining fast, and have been since September 2008.

In order to keep the cash rolling in, therefore, hotel bosses need to charge fewer people more money. That in turn makes the rates more prohibitive - and so, yet more people back off, pushing prices ever higher. Robert Milburn, PwC's UK hospitality and leisure leader, issued the starkest of warnings.

"The ricochet from continuing turmoil in the financial markets, the sharp global economic slowdown, and the negative consumer and corporate sentiment means that the outlook for travel and hotel demand has deteriorated significantly. But the outlook for 2009 is even more worrying," he said. "Occupancy in London looks set to drop to 70 per cent. The capital has not seen a decline on this scale since 9/11, and before that as far back as 1991, when they fell as low as 65 per cent."

If that wasn't bad enough, Milburn reminded hoteliers of the little matter of inflation. Even if mine hosts manage to maintain rates at 2008 levels - not something that should prompt one to nip out to Ladbrokes - their revenues will still be four per cent down in real terms.

While the decline in consumer and conference business will be almost instantly noticeable, corporate cost-cutting will take longer to filter through, but Liz Hall, PwC's head of hospitality and leisure research, is in no doubt about the probable outcome.

"This blitz on corporate travel spend, rising job losses and the whole confidence issue means that although London has been the powerhouse of UK growth and has seen the biggest boom, it will likely see the biggest fall as well."

Which leads us neatly on to Stewart Harvey, client management director with Hogg Robinson Group (HRG). When asked whether he believed 2009 would turn out to be the year of the price hike, his answer was an emphatic "maybe", and possibly not in many instances.

"I'm not sure that prices will always go northwards, especially where hotels are concerned. What we're seeing now is the emergence of 'micro-climates' in parts of the world, in certain cities, and even parts of cities. For example, we think there will be [hotel] rate decreases in London in Docklands and the Canary Wharf areas, but if you come even a short way west of that, we see prices going up; not by much - maybe two to three per cent - but going up nevertheless."

A similar pattern is emerging in the air transport world. In 2009, Harvey forecasts, more of the smaller carriers will go bust; airline alliances will become closer, and mergers and acquisitions will continue.

Capacity cuts will be required but, particularly at congested airports such as Heathrow, the airlines need to hang on to their slots. Consequently, while they may drop some frequencies or even some routes, they will use the slots to operate "new" flights to in-demand destinations.

"They're taking yield management up a notch, to the route level. There's a lot of route-specific interrogation going on. Frequencies will come down and in some cases routes will go. However, I do see airlines wanting to put up fares, and we expect that to happen where the demand can support that."

Harvey argues that on the supply side, travel providers - hoteliers in particular - panicked after 9/11 and slashed rates to regenerate the shell-shocked market. With hindsight, however, they now appear to have cut rates too far and have been struggling ever since to nudge them up to more commercial levels.

They still haven't got there, and now that the demand is in danger of falling away again, there is much less room for manoeuvre.

The hotel industry may be up to its armpits in deep doo-doo, but it is still head and shoulders above the global airline industry. And if past forecasting records are anything to go by, the situation may be much worse than the casual observer might think.

Consider this. In March last year, the International Air Transport Association (IATA) predicted that the world's airlines would make a 2008 profit of US$4.5 billion. Three months later that figure was revised downwards - to a loss of US$2.3 billion. Three months after that - in September - that predicted loss was revised downwards again, this time to a loss of US$5.2 billion.

In the space of six months, the industry - or at least the forecasts of its fortunes - has executed a US$9.7 billion U-turn.

The truly bad news is that in its "initial outlook" for 2009, also published in September 2008, IATA calculated that the airline industry would this year lose US$4.1 billion.

If their number-crunchers are only half as wrong as they were last year, Stewart Harvey's assertion that "this isn't apocalyptic at the moment" will prove to be well wide of the mark.

Of course, in defence of the hapless forecasters at IATA, it should be pointed out that the stomach-churning rollercoaster that was 2008's oil price was about as unexpected as - well, as something that is totally unexpected.

However, those prognosticators demonstrably failed to take into account yet another certainty that old Ben Franklin missed.

In 1949, the US Air Force commissioned a series of studies on deceleration. One of the researchers, who had a less-than-cordial relationship with many of his fellow aerospace engineers, was a Captain Edward A Murphy, and it was he - or those around him - who enshrined the greatest certainty of all in popular culture's virtual statute book. What has subsequently become known as Murphy's Law states: "Whatever can go wrong, will go wrong, and at the worst possible time, in the worst possible way."

BBT survey results reveal cost is king

Lowest price in class is now the over-riding factor when negotiating with travel suppliers, according to a poll among Buying Business Travel's readers. Two-thirds of respondents - mainly from large to medium-sized organisations, reflecting the magazine's readership - said this was now their main consideration. However, a similar number are not expecting to have to downgrade in terms of airline seats, accommodation or car rental categories. "It appears travellers are not all going to be asked to travel at the back of the bus, to forego four-star comfort for no-frills accommodation, or Mercedes Man becoming Micra Man," says BBT editor Mike Toynbee.

That said, 63 per cent of buyers are anticipating that their travel budgets will be cut by more than 10 per cent during the coming year. Half the respondents now have responsibility for meetings and events and foresee similar budgetary constraints in that area, too. The survey, conducted during November and December in conjunction with destination marketing company Fox Kalomaski, reveals that while buyers have seen marked improvements in the quality of account handling from TMC's, airlines and hotel groups, 68 per cent suggested there has been no improvement at all from car rental companies. TMCs are seen as providing the best value air fares, although the jury seems to be out when it comes to hotel rooms. And 60 per cent of respondents think that when it comes to value, car rental companies have some way to go.

Just over half (56 per cent) of buyers indicate their job role is now defined as 'procurement', with a further two per cent saying that purchasing travel is not their most important role in the company. While it is clear that the procurement professional is now a significant decision maker for travel, they are not necessarily travel specialists.

When prioritising the objectives of their travel buying role, reducing overall spend is seen as the most important consideration by our readers, followed by ensuring the safety of travellers. Finally, green issues, it appears, are no longer a major priority. Sourcing new technologies to help reduce spend is well ahead of reducing the carbon footprint of their organisations.