Biz Travel Costs Keep Climbing, as Demand Outpaces Supply

A slow and steady increase in demand for travel is fueling a steady upward creep in air and hotel pricing.

“Capacity is still very tightly controlled,” said Bob Brindley, vice president at Advito, the consulting arm of BCD Travel. “Prices are going up, fees are going up.”

Advito recently updated its 2013 travel industry forecast based on slower than expected demand for business travel. Five years ago, a modest drop in demand would likely have produced outsized decreases in pricing as suppliers competed for market share.

The problem for corporate travel today is that airlines and hotels have learned the same lesson from the last recession. Controlling capacity keeps prices and profits healthy.

Airlines have been quick to pull seats from any and every market at the slightest sign of softening demand. Load factors remain at all-time highs and carriers are in no rush to ease the seat crunch with additional capacity.

Demand slower than projected
The one bright spot is that demand is growing less rapidly than projected at the end of 2012.

“We are not expecting a huge number of changes from our original projections, but air has been scaled back by 1% to 2% for the U.S. and Latin America,” Brindley said.

The latest projections call for fare increases of about 3% for regional flights in North America and 2% for international travel out of North America compared to 2012 prices. Projected increases for Latin America fell slightly to 4% compared to last year.

The slower growth in American fare increases is based on a projected slowing in corporate travel demand. Corporate profits are healthy, Brindley said, but economic and political uncertainty is translating into less hiring and expansion than was projected six months ago. Companies are pushing hard to grow profits without growing headcounts and facilities.

Slow progress on recovery
“Instead of the rapid recovery that everyone expected, we are seeing very slow progress,” he said. “We see the current pattern as the wave of the future, with supply stable in air and prices rising based on demand.”

Lower than expected price increases in the Americas stands in sharp contrast to the Middle East. Advito is projecting air increases of 9% over 2012, up from 5% in the original forecast. Growing demand takes the blame.

Hubs in the Middle East are growing in importance as an alternative to Europe for flight connections to Asia. International passengers connecting in places like Dubai and Abu Dhabi are filling more seats and driving up local point-of-sale fares.

Good situation for hotels  
While less robust growth has tamped demand for air travel, there has been no similar effect on hotels. Hotels are in the happy position of experiencing growing demand with no significant increase in supply in the near future.

And, since hotel development is a long process from planning to opening, hotels should continue to enjoy a seller’s market for some time to come.

“Hotel prices are still increasing as originally projected,” Brindley said. “But there are some markets that are doing much better than that average. San Francisco and Chicago are two of the strongest markets in the country, with rate growth outpacing even New York.”