Business Travel Pricing in the post Covid era
After the lull of COVID-induced lockdowns, corporate travel is finally started to look up again, with domestic travel already reaching 75% of pre-COVID levels in some geographies. Understandably, international travel is still lagging and is not due to fully recover till 2023, according to leading business travel associations.
So, what does this mean to your corporate contracts and what can we expect to see in terms of pricing and discounts from travel suppliers? To start, suppliers are now beginning to come out of their hibernation and looking at ways they can begin to recover the huge losses recorded since the pandemic effectively shut down the industry.
Changes to corporate discounts
During the past 2 years, corporate contracts with suppliers have remained almost untouched, with suppliers happy to extend the old terms and pricing/discounts to maintain a continued relationship with the clients.
This is likely to change now, as suppliers will begin seeking volume or market share commitments from their clients – commitments that most clients are currently unable to make. While travel patterns are showing an upward tick, corporates are still formalising travel plans for the near future so it can be considered highly improbable for clients to promise pre-COVID level volumes.
Subsequently, suppliers will be looking to reduce discounts or even remove them without these volumes.
Ancillary costs for value-adds, such as baggage allowance, preferred seating, and in-house food and beverages, have long been an avenue for travel vendors to increase revenues. Such ancillary costs can be as much as 15% - 20% of the total travel expenses for travel programs. These discounts are also being trimmed down to help increase profitability for suppliers who have been hard hit
While competition has been generally high between suppliers with clients being able to use this leverage previously, most suppliers are applying similar conditions in their contracts, thereby limiting competition.
Pricing will go up
While the market is providing discounted offers to stimulate travel resurgence, these will slowly dwindle as traveller sentiment returns to normal.
As heavily indebted suppliers look to recoup lost revenue and combat rising supply chain and other inflationary costs, they will have no choice but to hike prices. These costs will most likely be incorporated into the base pricing, unlike previous years where these were reflected as “temporary surcharges”.
Broadly, suppliers arrive at the contracted corporate pricing by issuing a discount on the public rates. Hence, any increase in public pricing will eventually be reflected in corporate programs as their rate of discount will have a lesser cost negation impact.
Impact to availability
Suppliers are heavily scrutinising their ROI on specific services and will be more ruthless in cutting back areas that may not be meeting the targets for metrics such as RevPAR (Revenue per Available Room) or RASM (Revenue per Available Seat Mile). Resultantly, there will be reduced scheduling for certain routes, with some routes being cut completely. Suppliers will minimise value-added services or start charging for the previously “free” ancillaries or start converting “mothball” floors into rental apartments.
Some suppliers have not survived the downturn and shut their doors, which will further impact travel availability. Consolidation amongst suppliers is escalating, especially among Travel Management Companies (TMCs), which are faced with large workforce issues due to high attrition. While costs attributed to TMC are generally less than 5% of the overall travel costs, it is anticipated to increase substantially. The reason is the higher salaries needed to retain/hire consultants – which amount to ~70% of a TMC’s operating expenses. A premium will be charged to beat the queue.
In short, travellers will need to be ready to compromise the flexibility business air travel previously earlier offered, and factor in these changes in their travel plans. Travel Managers and corporate will have to start budgeting the surging costs into their P&L’s. We are yet to see how long this state will last, but with heavy losses incurred by the travel industry in the past few years, it is not coming to an end anytime soon. Better to be prepared than to get caught off guard!