September 2009 - Corporate executives during the past year continually have sliced and diced their businesses and budgets to better position themselves against the relentless economic conditions and their suppliers' own survival tactics, upending the traditional use of historical expenditure data for travel budgeting. Without knowing how much market share they can commit, travel purchasers are finding it extremely difficult to forecast next year's travel budgets and are facing a murky negotiating environment as a result.
"It's been very, very challenging," said Ellina Arakelova, manager of travel operations for Santa Clara, Calif.-based Align Technology. "With airlines reducing capacity, raising rates, adding fuel surcharges and baggage fees, and car rental companies introducing new surcharges at the airports--there are so many components that we didn't have to tackle before. You never know what is going to happen next week. It's hard to commit to volumes and contracts.
"Companies have to closely manage travel expenditures this year and maybe even review the entire approach to creating the travel budget, such as being more flexible with the travel policy," Arakelova continued. "A flexible travel policy allows corporations to quickly adjust to an unsteady travel market and adopt lowest logical fares and rates. Supported by visibility of choices through online booking applications, visual guilt and managerial oversight ensures travelers are keeping costs down."
For example, Arakelova said, a company could mandate "one particular car company, or even three of five," but at some point "while reviewing the numbers and metrics" they realize "that sticking to that doesn't bring cost reduction compared to other low-cost, non-contract options."
Align isn't the only company having a hard time forecasting a travel budget this year. According to a July
Procurement.travel survey, 51 percent of 101 travel buyers said budgeting would be "more difficult than ever" for next year and only 3 percent expected it to be "easy."
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"There are so many components that we didn't have to tackle before. You never know what's going to happen next week. It's hard to commit to volumes and contracts."
— Ellina Arakelova, Align Technology manager of travel operations
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"We hear things are going to get better, but buyers are being challenged in this environment to figure out what their budgets are going to look like," Michael Lyons, then National Business Travel Association vice president, said in July. "They cut back and cut back, where else are they going to cut?"
Even though buyers may be finding it difficult to meet their marketshare commitments, they are retaining high expectations from their suppliers and want their shortfalls seen in the larger context of the troubled economy, said Neysa Silver, director of hotel and ground solutions for Carlson Wagonlit Travel's CWT Solutions Group consulting arm.
"Our clients realize that travel is lower. But even if they go from 1,000 room nights with a supplier to 500, they aren't willing to accept a rate that's one-and-a-half times higher," Silver said.
To add to travel managers' frustrations, many suppliers have offered promotional prices far below negotiated rates to book any business. Buyers face a tough choice: maintain a strict policy and drive market share to preferred suppliers, or let travelers take advantage of rock-bottom deals designed to lure leisure travelers.
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"Budgets are more organic than they ever have been. A buyer has to be walking in lockstep with their organization's financial group."
— Michael Lyons, Past National Business Travel Association VP
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"This is a problem particularly in our secondary cities," said Priscilla Campbell, corporate travel manager for Natick, Mass.-based The MathWorks. "Our travelers and our agency have been advised that due to the volatility of the hotel industry, MathWorks rates should be considered a ceiling price and that, typically, a lower price can be obtained."
For companies with an agency partner, promotional rates and lower-than negotiated published rates tend to be a "non-issue," said Silver. Most agencies will automatically use the lowest available and logical rates when booking travel, and the data is compiled and incorporated into negotiations with preferred suppliers. During the past two years, CWT has seen a trend toward dynamic hotel pricing contracts for corporate travel, Silver said, and many hotels have even begun developing technology to support such flexibility in rate loading and booking tools.
On the air side, where dynamic pricing has already been established as the norm, the challenge is in capacity cuts, said Dale Eastlund, senior director and air solutions project leader for CWT Solutions Group. CWT expects operational reductions to continue in 2010 based on the latest report of airline losses. "Forecasting is a challenge when capacity is way down," Eastlund said.
'Organic' Budgeting
For many buyers, historical travel data has become nearly useless in predicting market commitments for 2010, Lyons said. Some companies have made fundamental changes, sold off nonperforming lines of business or consolidated operations. "If you're going to look at historical data, look at the last couple years," Lyons advised. "If you were riding high three years ago, look at how deeply it has fallen and whether that is tied to internal or external factors. Be fair and honest about that, and get the big picture."
Once buyers have their budgets all worked out for next year, they should be prepared to change them. "Budgets are more organic than they ever have been," Lyons said. "A buyer has to be walking in lockstep with their organization's financial group."
A survey of financial executives indicated that many companies will continue to regularly revise their budgets throughout 2010 as they search for solid financial ground. The second-quarter 2009 CFO Outlook Survey of 266 CFOs from public and private U.S. companies--polled by the Financial Executives International association and Baruch College's Zicklin School of Business--found that finance leaders see signs of an improving national economy but remain pessimistic about their own companies' performances. CFOs will continue to initiate cutbacks in the areas of capital spending, hiring and product pricing during the next 12 months, according to the survey.
Marie Hollein, CEO and president of FEI, said while there are some positive signs for the economy, "it is clear that the road to recovery is far from over."
Align Technology is feeling the uncertainty. "We have to be able to react to the dynamics in the travel industry and to reflect it in the budget accordingly," Arakelova said. "Travel benchmarking used to be done once a quarter, and now it's done once a month."
Nickel and Dimed
In addition to such internal pressures as budget cuts, travel buyers also are navigating a new world of fees and surcharges while drafting their budgets for 2010. Airlines continue to add new surcharges to bring in additional revenue without raising base rates, and state and city governments have figured out that nickel-and-diming visitors is a way to make up budget shortfalls without raising taxes on constituents.
For example, the new state budget of Wisconsin includes a provision that would allow fees on car rentals to rise by as much as 800 percent, from $2 per rental to $18. Neil Abrams, president of Purchase, N.Y.-based car rental advisory firm Abrams Consulting Group, said the recession is only worsening the proliferation of such fees. "This is absolutely a challenge in budgeting," Abrams said. "The rental companies have no say over it. We can negotiate rates and fees, but a tax is nonnegotiable and uncontrollable."
"It seems like every day there is a new fee or tax on the car rental industry," Abrams said, adding that in some markets the cost of fees and surcharges exceeds 40 percent of the rental rate.
More than $6.5 billion has been raised in car rental taxes during the past several years, he said. Travel buyers must absorb that in their budgets, in addition to what PricewaterhouseCoopers estimated at $1.65 billion collected in hotel fees.
Airlines this year are expected to collect billions of dollars from new fees for baggage, premium seats or other services now considered "ancillary revenues." United Airlines in July said it expected to generate ancillary revenue of $1.1 billion in 2009, $200 million more than in 2008. US Airways said its a la carte pricing initiatives produced more than $100 million in ancillary revenue during the second quarter of 2009. Delta Air Lines said its fee increase--to $20 for the first bag and $30 for the second--to check bags in airport lobbies was expected to generate $125 million in incremental revenue annually. Continental Airlines raised by $5 fees for domestic checked baggage--except when prepaid online--and reservations booked by phone.
Industry forecasts for 2010 corporate rates still are being developed, for the most part, but Smith Travel Research predicted that average daily hotel rates will drop 3.4 percent in 2010, occupancy will drop by 0.3 percent and revenue per available room will fall 3.7 percent. Airfares are likely to increase in 2010, and capacity will remain tight, said consultants. Airline industry insider and co-founder of FareCompare.com Rick Seaney predicted that airfares had bottomed out in June when carriers banded together for a fare hike.
Solutions And Strategies
So, what's a beleaguered travel buyer to do in these times of uncertainty? The solutions are as cloudy as the economic forecast. Data from suppliers clearly indicate a buyer's market, Lyons said, but taking a tough line in negotiations may be a mistake.
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"Our clients realize that travel in general is lower. But even if they go from 1,000 room nights with a supplier to 500, they aren't willing to accept a rate that's one-and-a-half times higher."
— Neysa Silver, CWT Solutions Group director of hotel and ground solutions
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"It's not a time to take advantage of the situation," he said. "It's a great time to be partnering together and to realize that the suppliers are in a tough situation, too."
For airline and hotel negotiations, Lyons advised "creative contracting" for 2010. Buyers should seek to establish flat discounts that aren't tied to specific market volume commitments, fee waivers, upgrades, club memberships and any number of items that were "off the table before, like point of sale or class of service," he said. "So many [buyers] with significant layoffs are stuck with nonrefundables. Give them a way to effectively use those!"
Some airlines are offering more tiered discounts to customers unsure of how much volume they can commit, said CWT's Eastlund. For example, a 50 percent market share might net a buyer a 10 percent flat discount, but if the share drops to 40 percent the discount would be 5 percent. "Waivers and favors" on fees and upgrades are definitely on the negotiating table, but "at the end of the day customers are most concerned about price," he said.
For hotels, CWT increasingly is focused on "total cost of stay," said Silver, adding that negotiating free parking, Internet and breakfast tend to be the most common strategies to lower costs.
Buyers also say they are finding a willingness among suppliers to be flexible on rates and amenities.
"So far, all our key hotels have either lowered their rates or offered additional amenities, such as complimentary breakfast and/or transportation from the initial 2009 negotiated rate," said The MathWorks' Priscilla Campbell.
While buyers may find it difficult to meet their previous market commitments this year, Campbell has not heard of any suppliers cracking down on contract penalties. "My experience has been that our preferred suppliers are understanding of the fact that our travel budget has been deeply cut. It goes without saying that tough times like these are where the value of strong preferred partnerships shine," she said.
Gartner global travel director Susan Osterberg said the downturn has enabled her company to negotiate a multiyear contract with its agency and renegotiate hotel contracts midyear for "significantly" lower rates. In fact, "hotels are coming to us lowering rates," Osterberg said. "This works well for policy as we [mandate] lowest logical fare and lowest mid-tier hotel. Hotel [rates] we update in the GDS, and if we see lower airfares than negotiated we are programmed to take those."
For car rental contracts, little can be done about taxes, Abrams said, but buyers should conduct due diligence on their top 20 markets and keep a close eye on what legislation is pending. For surcharges, strict policies can protect companies from the most exorbitant fees, he said. For example, the charge a rental company levies for refueling a vehicle can be three times as much as prices at the pump, adding as much as $45 to the overall cost of a rental. Corporate policy can mandate that travelers not be reimbursed for that charge, he said.
"Look at the cost of a GPS system. It's $10 a day when a good, old-fashioned map provided by the rental company costs nothing," Abrams said. "I wouldn't ban it, but I would certainly limit the use of them."
Using off-airport rentals and off-brand rental companies can also save substantial dollars for corporate travel budgets, he said. "When companies are making a lot of money, management looks the other way," Abrams said, "but these days companies are holding their employees more accountable."
Overall, compliance issues may not make a huge difference to the budget--many companies have already worked those issues out--but "we need to be pulling out every tool in the toolbox," Lyons said.
It's true that crisis and opportunity often go hand-in-hand, and budget cuts can give buyers the footing they need to push through unpopular changes to travel policy.
For some companies, the best solution may be more flexibility. "We have to adapt more quickly to changing market conditions," Align's Arakelova said. "Every month we have to look at how much we could save and how much we did not save. That helps determine where the policy needs to be tightened or given more flexibility."
During difficult economic times with high unemployment rates, policy compliance can be effectively driven by employee responsibility and management awareness, Arakelova added. Performance measurement is critical in these economic conditions, she noted, as it enforces the policy and gives visibility of traveler behavior. Delivering detailed reports showing policy compliance, adoption of lowest rates and cost reduction rewards travelers for making the right choices, Arakelova said, adding: "Recognition, even if it's not financial recognition, is very important."
