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Impacts of the supply/demand squeeze on the cost of business travel


Business travel costs squeeze - colourised pig image

Hopes that the UK economy would grow by 4% in 2022 have been dashed by inflation hitting 9% as fears of a major recession grow.


Inflation, driven by spiralling energy prices is driving up living costs for employees and across the supply chain. Labour shortages are exacerbating the problem, forcing employers to pay higher wages to attract and retain staff.


In business travel, 90% of TMCs and 88% of suppliers reported bookings for April 2022 to be up 45% on February levels. 41% of travel managers have increased travel spending for flights and 34% for hotel stays because of inflation.[1]


In this blog, we will assess the supply/demand squeeze, why hotel, airline and ground transport costs are rising, and how travel managers are reacting.


Hotels

With hotel energy costs up by 50%, laundry by 12%, food & beverage by 8 - 10%, and overall staff wages by 7%, margins have evaporated – and it doesn’t end there.


Since 2021, housekeeping salaries have risen by 20 - 30%, whilst the cost of setting up an individual hotel room are up 34.3%, adding £32.53 per room to operating costs.[1] Understandably, hoteliers want to pass these costs – or as much as they can - onto their customers.[2]


10% of jobs – around 200,000 – remain vacant across the UK hospitality sector.[3] As a result, an estimated 27% of London hotels[4] are yet to fully re-open after the pandemic as operators cap occupancy to manage services and amenities. Rising costs and labour shortages have contributed significantly towards a predicted 13% rise in UK hotel rates in 2022 and a further 10% in 2023.[5]


Airlines

Whilst the picture is much the same in aviation, the challenges are more operational than financial: - recruiting and training more staff, sickness, pilots having to increase their flying hours because they hadn't kept their flying hours up during the pandemic, and fuel costs.

Between February and March 2022, jet fuel costs rocketed by over 35% and by 75% year-on-year.[7] Many carriers now avoid flying over Russian airspace and around the Ukraine, making those affected journeys longer and consuming more fuel.


At airports, security staff shortages mean passengers are boarding flights late, but their luggage isn’t. So, airlines have to re-unite luggage and passenger at their own cost.

Having recruited a new staff member, getting them trained and security cleared can take up to six months because of the background checks required. The same applies to catering companies, delivery drivers and cleaners.


Although further disruption is still a possibility. Whilst British Airways have avoided strike action and agreed a deal with 700 workers - mostly check-in staff they now face further talks with the pilot’s union, Balpa. Ryanair and easyJet have also faced strike action in Europe, with more to come, yet the public perception that the chaos is all down to the airline is not entirely fair.


Instead, multiple factors have converged to create a perfect storm. As a result, airlines are reducing their schedules to avoid last minute cancellations. The outcome seems inevitable. Global airlines are expected to post a $9.7 billion loss in 2022, a sharp improvement on $42.1 billion in 2021.[8] Flight prices inevitably will rise, especially as airport passenger caps at Heathrow and Schiphol further exacerbate demand.[9] But anticipated rises don’t tell the whole story, with business travel airfares having fallen over 12% in 2020 from 2019, followed by an additional 26% decline in 2021. Prices are expected to rise 48.5% in 2022, but even with this steep price increase, prices are expected to remain below pre-pandemic levels until 2023.[10]


Rail and Ground Transport

The supply/demand squeeze affects the rail sector differently. Although government regulates rail fares, which rose by 3.8% in March 2022, the sector faces significant challenges in stimulating demand and enticing business travellers, back on to the Railways.


During the pandemic, rail companies received £16 billion of taxpayers’ money, so government handed responsibility back to the rail companies for dealing with rail union demands for a 7% pay increase. As we are now seeing, this is resulting in the biggest rail strike since the 1970s and is not helping Rail’s ambitions to drive business travellers away from their cars.


Traditionally volume based, with demand and pricing little changed over a 10-year period, car rental prices have increased by 15 – 20% since the pandemic. This is mainly due to demand outstripping supply as rental companies ‘de-fleeted’ to survive during the pandemic, but other factors can be attributed, such as staffing and fuel costs. With demand continuing to outstrip supply, some rental companies are aligning corporate and availability-driven retail rates.


Lastly, the private hire industry, including chauffeurs are currently suffering from driver shortages which are helping to drive rates up significantly. With many drivers self-employed, the industry is still recovering from losing a significant number of drivers during the pandemic and like Car Rental, demand is outstripping supply. Recent estimates reveal a 21% reduction in drivers across the UK although this is higher in areas such as London.


What happens next?

Although travel managers understand the pressures air, hotel and rail suppliers, a point will be reached when they refuse to accept further price increases.


Procurement managers are seeing costs rise across the supply chain. Inflation is at its highest since 1982[11] so corporates are bound to look at ways to mitigate the extra costs, including whether a business trip is necessary, the mode of travel and the distances involved.


In previous recessions, suppliers have dumped inventory and slashed rates, then waited years for revenues to recover. Has the travel industry learned its lessons? If so, and coupled with added inflationary pressures, we expect most vendors will take a more measured approach.

This time around, things are different because post-pandemic corporate demand remains unknown. In previous recessions, corporates knew the extent of their buying power, so leveraged accordingly.


Travel Managers’ task is to cascade their understanding of the pressures facing vendors down to colleagues making bookings and experiencing trip disruption first-hand. However, human nature makes it inevitable that consumer patience will be exhausted and a return to normality demanded.


We are yet to see whether travel policies are adjusted, rate caps and allowances raised, either temporarily or permanently. Or the degree to which sustainability and wellbeing considerations override cost, and whether vendors seek to recover the costs of a more sustainable product.


To date, we haven’t seen customers switching to what they perceive to be cheaper accommodation alternatives, such as serviced apartments or Airbnb, although the RFP season may prove otherwise. We are seeing increased demand for hotels with electric vehicle charging points, and less for short haul travel, either because people don’t want to travel or are making smarter decisions when booking.


Summary

All suppliers face cost pressures, but how realistic is it to expect them to take the long-term view when comes to pricing? For example, airlines lost $168 billion during 2020 alone[12] and are expected to top $200 billion by the end of 2022, wiping out nine years of profit.[13]

Compromise is the most likely outcome of the supply/demand squeeze. Booming leisure demand provides an effective buffer by sustaining vendors, whilst extending two years of loss making is not sustainable. Unless buyers meet suppliers halfway, availability will be reduced even more.


As the demand from leisure tapers off and becomes normalised, the remaining gap will then need to be filled, most likely by price rises. We may see travel managers offered the choice of either route deals tied to market share targets, or standard business rates. Nothing new there, but the difference is that those targets will have to be achieved, or they will be withdrawn.

Across the supply chain, if customers are spending less overall, they will need to commit to concentrate that spend on fewer suppliers to mitigate inevitable price increases.

 

[11] Office for National Statistics

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