Business travel and event costs have soared during the past year but that price growth is set to moderate, according to a global study of airfares, hotel costs and rental car charges.
The report finds that red-hot demand led to “meteoric price rises” in the past year. For example, the price of an economy air ticket was up by more than 54 per cent while, on average globally, a midscale hotel room was up by 24 per cent. The findings are in line with Stats NZ figures, which showed the price of domestic tickets was up by a similar percentage in this country.
The 2024 Global Business Travel Forecast by CWT, the business travel and meetings specialist, and the Global Business Travel Association (GBTA), one of the world’s largest business travel trade organisations, finds that prices far surpassed what was forecast.
Rising fuel prices, labour shortages and supply chain challenges, coupled with that strong demand, have been blamed for the steep increases.
“Price growth will likely be muted as the global economy loses momentum and there are looming economic uncertainties at play,” says the report.
The rebound in business travel continues to lag the recovery in leisure trips.
For example, current US air bookings are down 25 per cent for business, compared with 2019 figures, versus 9 per cent for leisure travel bookings, according to the Centre for Aviation.
Yet businesses are still booking flights, as they seek to drive sales and build relationships in a post-Covid world.
This demand, coupled with inflationary pressures including higher interest rates and rising oil prices, have helped fuel price inflation for corporate trips as they compete for the seats being sold to leisure customers.
“Right now, most travel sector companies report strong growth – thanks largely to the phenomenon of ‘revenge travel’,” the report says.
The question is whether leisure travel will remain strong in the year ahead, given the prevailing economic headwinds. The continued shift towards people buying experiences rather than products will further push up leisure travel demand, putting extra upward pressure on prices.
“But if global demand for leisure is crimped by inflationary and economic headwinds, will this lead to a flattening of prices, with corporate trips filling the gap?”
Suppliers are now in greater control when it comes to pricing, which means the point at which discounting occurs has shifted, and they are unlikely to give up their pricing power quickly.
“They’ve also learned the lessons of the global financial crisis – if you discount quickly, it’s difficult to regain pricing power, and with supply constrained, they don’t have to. Travel suppliers are also now able to attach greater importance to their loyalty programmes.”
The report is based on data from more than 70 million flights, 125 million hotel room night bookings and more than 30 million car hires, covering data from 2018 to now.
Global economy is losing momentum
The International Monetary Fund projects global economic growth will average just 3 per cent over the next five years, its lowest medium-term forecast in more than 30 years. A slowdown will dampen price rises for business travel.
Strong leisure demand influences pricing
A strong labour market is still fuelling consumer spending on travel. Household budgets are healthy, despite a squeeze in disposable income in many countries. Nearly three-quarters (71 per cent) of consumers plan to sustain or increase spending on travel, according to an Accenture survey in 16 countries.
Stubborn inflation lifts costs
High inflation has increased operating costs for travel suppliers, which have to some extent been passed to travellers. Looking forward to late 2023-24, global inflation is forecast to slow, according to the IMF, but will remain stubbornly high.
Interest rates dampen growth
Most countries in the G20 group have raised interest rates sharply since 2021. Higher rates increase the costs suppliers pay for their debt, whether it’s for leasing planes, vehicles or hotels. These rate increases are likely to play out over the next two years for travel, which will affect pricing.
Volatile energy prices hit bottom line
Jet fuel prices peaked last year at more than twice that of 2019. Fuel prices have trended down this year, but continuing high energy bills have eaten into earnings for airlines, hotels and ground transportation providers.
Labour constraints plague market
This is a global phenomenon, pushing up the price of wages and therefore travel. Human capital is vital to the global service sector, which is sensitive to workers’ pay.
Airfares rose dramatically in 2022, experiencing a record price increase, which was much more than expected. The average ticket price rose by 72 per cent. Global figures for this year show price growth is likely to be more modest at 2.3 per cent in 2023, albeit from an already high base. The same is true for 2024, when 1.8 per cent growth in prices is expected. Passenger numbers are quickly approaching pre-pandemic levels, according to the International Air Transport Association (Iata), with airlines expecting to carry 4.35 billion passengers this year – just below the 4.54 billion passengers in 2019.
However, airline capacity continues to be constrained by industry-wide supply challenges, elevating costs.
“Pent-up demand from leisure travel means airlines can sell flights at higher prices. At the same time, many corporate buyers now have less leverage to negotiate with airlines, as their travel volumes remain below pre-pandemic levels.”
Growth in prices is now moderating, but they still remain high. The report says global airline capacity has not kept pace with the recovery in demand, partly becuase of labour shortages affecting many parts of the aviation value chain, as well as supply-chain issues affecting aircraft manufacturing, maintenance, repair and overhaul.
Many aircraft were retired during the pandemic - Air NZ quit its eight Boeing 777-200s - and it has not been economical to bring them back because of high fuel and other operating costs.
Airlines cannot get hold of new, more efficient aircraft as quickly as they would like to, with Airbus and Boeing delaying delivery. There is also a global shortage of pilots, with the shortfall expected to grow to 34,000 pilots by 2025.
The strong appreciation in the US dollar since 2022 has also hit pricing. Many expenses, including aircraft leases and fuel, are paid in dollars, which has curtailed investment. This is compounded by higher interest rates. The closure of Russian airspace has also added fuel costs on flights between many Asian destinations and Europe.
On the flip side, the cost of jet fuel has continued to decline after recording a 14-year high in the second quarter of last year soon after the invasion of Ukraine.
But Iata expects that fuel costs will account for 28 per cent of airlines’ average cost structure in 2023, which is still above 2019′s average of 24 per cent.
As for hotels, the global average daily room rate defied predictions and rose to US$161 ($237) in the past year, representing an increase of 29.8 per cent year-over-year.
These “extraordinary” rises are mirrored by similar reports from hotel brands, particularly upscale properties. Several cities across the globe have reported their highest average daily rates on record, such as Miami, London and Singapore. In this country, a Horwath HTL report showed average daily rates (ADR) around the country were $226 a night compared to about $192 a night in 2019 and $210 a night last year. In July, Queenstown hotels reported their highest average room rate at $334, and four- to five-star hotels were at $412, 45 per cent above average rates for comparable hotels in Auckland.
“Across the globe, hotels have increased rates - in some cases considerably - since last year. Yet, these elevated rates are largely offset by higher costs and inflation,” says the report. “Demand for rooms is only likely to surpass pre-pandemic levels later this year.”
Rates are driven by increased wages, and in some cases a cap on hotel occupancy as operators struggled to find enough workers.
Global car rental prices rose last year by a record 9.8 per cent to an average of US$45 per day. Prices will again be elevated this year, with a forecast growth rate of 6.7 per cent driving prices up to an average of $48, says the Global Business Travel Forecast.
Next year the expected rate of growth will fall to 2.1 per cent, for an average daily rate of US$49.
Grant Bradley has been working at the Herald since 1993. He is the Business Herald’s deputy editor and covers aviation and tourism.
The airline sold its last slots at Heathrow in 2020.