Sky-High Prices: Budgeting for Corporate Travel in 2016

Categories : Procurement Goals | Set Strategy | Evaluate Supply Market | Save Money Published on : Feb 25 2016

By: ProcurementIQ Analyst, Michelle Hovanetz

Although many professional meetings and transactions can be conducted remotely in 2016, business travelers are still on the go in abundance and the cost of corporate travel is rising accordingly. Corporate demand for travel services has remained elevated as a result of growth in corporate profit, business sentiment and the value businesses place on face-to-face communication and relationship building with colleagues and clients. According to the Global Business Travel Association, corporate travel spending is expected to increase 3.7% in 2016 as the services that corporate travelers use most often, including air travel, hotel rooms and ground transportation, increase in price.

ProcurementIQ projects that prices for these services are forecast to rise because of not only sustained corporate demand, but also rising consumer demand. As per capita disposable income has risen in recent years, consumers have been able to spend more on leisure travel and take more frequent trips. With demand booming and warmer weather on the horizon, price growth is expected to continue, hurting buyers of travel services. As a result, buyers should carefully examine the markets impacting their travel budgets to ensure they make the best purchasing decisions.

Travel Services Benchmark

Air Travel

Corporate travelers often use air travel to reach their destinations because of its accessibility and convenience when traveling long distances. Fortunately for buyers, domestic airline ticket prices have risen at a negligible estimated annualized rate of 0.1% from 2013 to 2016 as falling fuel prices have tempered price growth in the face of rising demand and consolidation among major airlines. Domestic air travel prices are anticipated to continue rising an average of 5.0% per year in the next three years as fuel prices return to growth and demand for air travel swells. In particular, demand from consumers, which is forecast to rise alongside disposable income, will contribute to ticket price growth. Airlines are also continuing to cut complimentary services, such as meals and checked baggage, to buyers’ detriment. To reduce their costs, buyers should inquire about any and all additional fees when booking air travel. Buyers should also book tickets in advance whenever possible because the lowest fares are typically available between 29 and 104 days prior to takeoff. Finally, buyers can improve their purchasing power by taking advantage of loyalty programs that offer points or miles to reduce the cost of future flights.

Hotel Rooms

Regardless of how they reach their destination, corporate travelers need a place to stay once they get there. Hotel rooms are the most common choice for business travelers, especially those on short trips. Unfortunately, hotel room prices have risen at an estimated average annual rate of 3.8% from 2013 to 2016. As a whole, price growth can be attributed to rising demand from both business and leisure travelers. According to data from research firm STR, Inc., the US hotel industry’s occupancy rate rose 1.7% from 2014 to reach 65.6% occupancy at the end of 2015. In addition to demand growth, rising food and beverage prices have increased costs for full-service hotels, further driving price growth. Prices are expected to continue growing at an annualized rate of 4.3% through 2019.

In addition to rising prices, year-on-year, seasonal price swings also harm buyer power. Temporary price spikes due to surging seasonal demand or special events near a hotel make it difficult to negotiate low rates. Furthermore, corporate buyers generally do not have much leeway in terms of when or where they go, limiting their ability to schedule around peak room rates. Fortunately, there are steps corporate travelers can take to reduce hotel costs. Buyers should always look to book early for special events because prices rise as the event gets closer and rooms sell out. Additionally, if buyers can offer a large volume of business to a particular hotel chain, they can often negotiate a reduced corporate rate. Serviced apartments can also be a cost-effective option for business travelers planning an extended stay. Buyers should always ask about additional fees, such as taxes, resort fees and parking costs, to determine the total cost of their stay in order to better compare suppliers. If all else fails, buyers can consider taking daytrips rather than staying overnight or using on-demand lodging, such as Airbnb.

Ground Transportation

While some travelers conduct business at their hotels, others must travel to various meetings or events. Depending on their individual needs and locations, businesses can use taxicab or car rental services to provide their travelers with ground transportation.

According to ProcurementIQ estimates, taxicab service prices and vehicle rental prices have been rising at estimated annualized rates of 3.1% and 4.3%, respectively, from 2013 to 2016. Businesspeople account for an estimated one-third of taxi revenue and 27.0% of vehicle rental revenue, so demand for both services has been swelling as corporate profit has risen. Rising consumer demand has also pushed the price of ground transportation services upward by reducing competitive pressure in both the taxi service and car rental markets. Both rising prices and seasonal variance in rental car rates put buyers at a disadvantage by making it more difficult to budget for recurring expenses. Taxicab service costs are also difficult to plan for because they vary by geographic location, with prices ranging up to 40.0% higher than the national average in areas with heavy regulation and a high cost of living, such as New York City. Finally, buyers should remember to factor additional costs, such as gratuity for taxicab services and gas and optional insurance for vehicle rental, into their budgets.

Although prices are projected to continue rising in the next three years, corporate buyers can utilize certain strategies to minimize their ground transportation travel costs. If they need services regularly, buyers can negotiate corporate discounts with national vehicle rental providers or open a corporate taxi account for taxi services in a given location. Buyers can also leverage the availability of substitutes, such as on-demand ride hailing services like Uber and Lyft, complimentary hotel shuttle services, or limousine and town car services. Ultimately, buyers will benefit most from choosing the mode of ground transportation for their travelers on a case-by-case basis, rather than using a one-size-fits-all approach.

Traveling Smarter

Leveraging substitutes, purchasing in advance and negotiating group discounts can help buyers manage rising travel costs. Buyers may also want to consider purchasing outsourced corporate travel services. Prices for these services have risen at an estimated annualized rate of 0.1% from 2013 to 2016 to reach $35.75 per person per trip; however, the benefits of these services may outweigh the upfront cost. For example, buyers can reduce labor costs related to scheduling travel while also taking advantage of discounted service rates available to corporate travel service suppliers. Buyers should consider utilizing these strategies to combat rising prices. Lower airfare, hotel and ground transportation rates can allow for slimmer travel budgets or even more trips to boost visibility and enhance communication with clients and colleagues.

More from Procurement Insider

  • Tools and Worksheets

Infographic: Digital Technologies in Procurement

  • Set Strategy , Reduce Risk , Digital Procurement, Analytics, Technology
  • Articles & Insights

Procurement Insider's Macroeconomic Update: Q1 2019

  • Set Strategy , Evaluate Supply Market, Identify Suppliers, Negotiate, Reduce Risk , Tariffs, Commodity Trends
  • Articles & Insights

Outsourcing Tasks Could Benefit Procurement

  • Set Strategy , Save Money, Improve Credibility , Staff Management, Outsourcing, Recruiting, Professional Development
  • Market News

All Roads Lead to Price Growth: Navigating Rising Trucking Costs

  • Set Strategy , Save Money, Reduce Risk , Trucking, Transportation, Logistics, ELD Mandate