Travel & Transportation: Cabin Pressure

The skies are clearing for the U.S. airline industry. After five years of bankruptcies, layoffs, and losses, the major carriers are slowly returning to profitability. This year, American Airlines is expected to report its first annual profit since the year 2000. In 2006, United Airlines saw two consecutive profitable quarters after emerging from bankruptcy protection in February, and both Continental Airlines and Delta Air Lines posted increased earnings.

While this is good news for the long-suffering "legacy" carriers,

Domestic airfares have reached their highest level since 2001, according to American Express Business Travel. A recent poll on MiMegasite.com revealed that rising airfares are a central cause for concern among meeting planners. Forty-three percent of respondents said that airfares are currently a strong factor in destination choices. Another 40 percent said that if airfares continue to rise they will become a strong factor in selecting destinations for meetings. Only 15 percent of respondents said that airfares are not near a level that will make them a strong factor in destination choice.

But industry research indicates that even that level may not be far off. In the second quarter of 2006, domestic airfares increased by 13 percent year-over-year; international fares rose by six percent during the same time period, according to American Express Business Travel. And the trend is set to continue. In 2007, domestic/short-haul economy fares are expected to increase by between three and five percent, with international/long-haul business fares set to rise by three to seven percent, according to the American Express Business Travel Forecast released in October 2006. "Keeping executives on the road while holding budgets in check will be a challenge for organizations in 2007," said Mike Streit, vice president and global leader of advisory services for American Express Business Travel, in a statement.

But it's a challenge planners of corporate travel are prepared to meet. The National Business Travel Association's (NBTA) 2007 Business Travel Overview and Cost Forecast found that 67.7 percent of travel managers surveyed expect their companies' travelers to take more trips in 2007 than in 2006 despite higher costs (74.1 percent anticipate higher airfares). Despite rising airfares, third-party planning companies such as New York City-based Ultramar Travel Management, whose clients include apparel companies Tommy Hilfiger and Kenneth Cole and investment firm The Blackstone Group, are still seeing an increase in meetings both domestically and internationally. "Rising airfare does have an impact on the bottom line, and that is definitely costing more, but we have not seen any pullback in meetings," says Ultramar President Peter Kelbanow. According to Kelbanow, clients are willing to work around the rising cost of airfare, because they "realize that hotel and air are just line items, and that the real concern is the total cost of the event." As a result, he says, his clients are prepared to be more flexible on the individual components of the total meeting cost, such as travel dates and hotel choice.

"People are being very smart about knowing all of the parameters that go into the total expense of the meeting. They realize that by traveling at off-peak times, they can get a good deal on the hotel which can well offset some of the increased flight costs," he says. "They used to focus on a place and a time and then make everything else happen around that," he says. "The cost of airfare is definitely impacting destination choices."

Christina Wilkes, senior practice leader, advisory services, for American Express Business Travel, agrees, noting that "planners are looking at the total cost of the meeting, and we're seeing an increasing willingness to be more [flexible] on where they're going to hold it, and companies are starting to look more at second-tier cities." Unfortunately, deals are harder to come by in the hotel market, and there's little indication that room rates will relax in the immediate future. American Express Business Travel predicts that hotel rates at mid-range properties in North America will increase between two and six percent in 2007. And Wilkes says room rates are not expected to level off until sometime in 2008, and even then, she says, "I think the seller's market will stay around for a while."

Companies are trying to mitigate the impact of higher prices through several strategies, according to NBTA's 2007 Overview and Forecast. Among them: increased use of online booking tools, reducing the number of preferred suppliers, negotiating longer contracts, using mid-tier hotels and alternatives to commercial air travel, and implementing enterprise-wide meeting policies and practices.

And some, according to Ultramar's Kelbanow, are simply taking the increases as they come. "I think most people today really understand that the airlines have been struggling and that even with the rising cost of fuel, airfares overall have been deflationary over such a long period of time. There's just a general acceptance that prices are rising and that it's necessary, from an economic point of view."

Originally published Jan. 01, 2007

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