Costs Rising Faster than Corporate Travel Recovery

Plenty of business travel players have talked about moving into a 'post-Covid' world. I've written it; supplier CEOs have said it in their earnings calls and industry interviews; we all wish for it. The truth of the matter is that there will be no 'post-Covid' world, but that doesn't mean business travel is stuck in a slow-motion recovery pattern forever.

Even as we prepare BTN's 2022 Corporate Travel Index of business travel costs in 200 cities worldwide, the profile of business travel is changing in those cities. South Africa, with two cities in the index was among the first to burn through the crucible of Covid's omicron variant. The country lifted most Covid restrictions in February. The U.K., which covers five cities in our index is lifting all travel restrictions and Covid-19-related travel documentation this week. France has suspended its vaccination requirement to enter the country for U.S. travelers (though a negative test is still required); it has also suspended its vaccination pass to enter restaurants and cultural spaces. Germany also has lifted travel restrictions for travelers from across the Schengen Area and for 'green' third countries—though vaccination or proof of negative test is still required. Canada, which has five cities in the index, no longer requires molecular PCR tests to enter.

In Latin America, case loads now are dropping since an early 2022 spike. Most business travel in the region continues to be domestic but is picking up pace with international business travel emerging. Travel intelligence firm ForwardKeys VP of insights Olivier Ponti, speaking at a Latam travel industry conference this month, projected business travel would return to at least 70 percent of pre-pandemic levels by the end of the second quarter. He noted active leisure travel demand already was filling planes and getting international travelers into the market, driving a quicker recovery and higher hotel rates than most analysts had expected at this point. Most Latin American markets still require proof of vaccination and testing to enter the country.

Likewise, the U.S. continues to require proof of vaccination and a negative test result for international travelers to enter the country, but domestic business travel is recovering again after clearing an early 2022 omicron hurdle. ARC has reported 10 consecutive weeks of sequential gains for corporate travel agency air bookings since the second week of January 2022. Bookings for the week ending Jan. 16 dropped to just 34 percent of 2019 levels but then climbed steadily to 61 percent of 2019 volumes for the week ending March 13.

The U.S. is also reducing local government restrictions. Hawaii—the last of the 50 states to let its mask mandate expire—is set to do so on March 25. And there may be a near future where masks no longer will be required on U.S.-based airplanes and public transportation. The U.S. travel industry will find out April 18, whether the federal government will make that move.

Asia-Pacific markets are loosening restrictions as well. Australia, which had among the world's most restrictive Covid rules in place for nearly 100 weeks began welcoming vaccinated international travelers starting in February. New Zealand has a plan to open its borders more gradually through October. South Korea will lift its quarantine requirement for incoming international travelers on March 21. Japan, which closed its borders to travelers during omicron has targeted April 1 to ease some restrictions, specifically for student and short-term business travel. The rules, however, remain complex.

Even with the good news in across a number of regions, there's a catch: A new Covid-19 "stealth" omicron variant is driving high infection rates in APAC right now, which already had put the region in a more cautionary stance at press time. Australia is on the downside of a February omicron surge. China, which continues to follow a strict zero-covid policy, is in the midst of its worst outbreak since Covid broke through in Wuhan. Though per capita case rates seem small when compared with other countries, China had locked down 37 million people in 21 provinces and municipalities nationwide, including major markets like Beijing, Shanghai and Shenzhen. Hong Kong is struggling to contain a fifth wave of Covid-19 and currently has 300,000 residents quarantining at home. South Korea is battling higher case rates as well.

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So Covid-19 won't exit the corporate travel stage in 2022. Europe, which has been a leading indicator for the U.S. has seen cases rise in recent days as well. How it will affect business travel patterns and volumes remains to be seen. With citizens in many Western countries weary of governments regulating their movements, officials may be loath to re-instate restrictions and likely will look to vaccination rates, treatment availability and hospitalization rates rather than raw case rates to influence their next steps.

What is clear, however, is that demand for travel is high. Hotel occupancy rates are climbing and though they have not reached pre-pandemic levels in most markets, average daily hotel rates nearly have in most regions—and in specific cities they have far exceeded 2019 levels. Copenhagen, Dubai, London, Miami, Paris, Sydney—in all these cities, corporate booked hotel rates have surpassed pre-pandemic highs, according to BTN's Corporate Travel Index.

American commercial real estate firm CBRE has commented on the atypical nature of the hotel industry recovery in the U.S., noting that room rate is leading recovery, rather than occupancy.

"Typically, when recovering from downturns, [average daily rate] growth lags occupancy gains," CBRE head of hotel research and data analytics Rachael Rothman said in a December statement releasing the firm's 2022 forecast. "The trend has reversed this cycle, owing to strong leisure demand and a nascent recovery in corporate and group demand."

But the drivers behind increasing hotel rates—and other per diem business travel costs—will go far beyond demand in 2022.

Supply chain issues in the automobile industry have hampered new car production and impacted availability at car rental companies, many of which sold off older fleet at the beginning of the pandemic as a survival tactic. A subsequent demand boom for drive-to travel—particularly leisure—sent car rental prices soaring and providers in a pinch to source new inventory. With business travel returning, there will more competition to nab the available cars—and rental companies may prove choosier about who gets them at what rate. Longer rentals, which become more profitable for rental firms because of less turn-around demand, have been prioritized, according to travel buyers speaking anecdotally to BTN. Business travel rentals tend to be shorter. That said, preferred negotiated rates may have insulated some business travel customers from the impacts of these car rental challenges. At least so far.

Hotel executives, particularly in earnings calls last fall, commented on labor shortages and the challenge of attracting workers back to the industry after cutting them loose during the pandemic. Increasing wages to get those workers in the door is one obvious strategy. The U.S. Bureau of Labor Statistics shows that hourly average wages for accommodation-services staff in 2021 rose from $15.60 in January 2021 to $18.17 in September. And while hotels also will look for efficiencies in their operations, more competitive wages will continue to drive increased costs in 2022.

Russian military aggression in Ukraine has pushed oil prices to all-time highs, particularly for markets that rely heavily on Russian sources. The effects of oil prices can be far reaching for travel and not always obvious. How oil impacts ground transportation costs, however, is clear. Lyft and Uber introduced fuel surcharges in the U.S. in March, which both companies said would go directly to drivers to offset the rising fuel costs those workers suddenly have shouldered to do their jobs. In Ireland, the National Transport Authority is considering a hike to the maximum allowable taxi fare.

Airlines, of course, are keenly attuned to jet fuel prices, which have doubled since the beginning of 2022. Carriers in the U.S. have not yet gone the route of fuel surcharges, but several have cut routes and capacity, relying on reduced supply to drive up fares. Internationally, European regional carrier Loganair has "realistically no option but to introduce a fuel surcharge on new ticket sales," according to CEO Jonathan Hinkles. AirAsia Malaysia announced new surcharges this month and Japan Airlines has increased its fuel levies.

The impact of rising fuel prices has a long tail that can extend through to food distribution for restaurants and supplies needed by hotels, car rental companies and other travel providers, causing business travel per diems to inch up across the board—sometimes unexpectedly. Companies should plan for this in 2022, and BTN's Corporate Travel Index will track changes throughout the year.

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