View from 30,000 feet
Red hot demand across the board led to meteoric price rises for 2022, defying our previous forecast -- such rises are remarkable, representing a wholesale shift upwards. An economy air ticket was up more than 54% in 2022, on average, globally, with a midscale hotel room, up 24%.
Indeed, government stimulus programs in 2020-21, inflationary pressures, higher interest rates and strong leisure demand have all put pressure on today’s prices. Looking forward, price growth will likely be muted as the global economy loses momentum and there are looming economic uncertainties at play.
The rebound in business travel continues to lag the recovery in leisure trips. For instance, current U.S. air bookings are down 25% for business versus 9% for leisure compared to 2019 according to the Center for Aviation. Yet demand remains strong as corporations seek to drive global sales and build relationships in a post-Covid world. This strong demand coupled with inflationary pressures including higher interest rates and oil prices, have helped fuel price inflation for corporate trips as they compete for the same slots sold to leisure customers.
Right now, most travel sector companies report strong growth – thanks in no small part to the phenomenon of “revenge travel”.
The question is whether leisure travel will remain strong in the year ahead given the prevailing economic headwinds. The continued shift in consumer spending towards experiences over products will further buoy leisure travel demand putting additional upward pressure on prices.
But if global demand for leisure is cramped by inflationary and economic headwinds, will this lead to a flattening of prices and 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 are unlikely to give up their pricing power quickly. They’ve also learnt 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 programs.
The global economy is losing momentumThe IMF projects global economic growth will average just 3% over the next five years, its lowest medium-term forecast in over 30 years. A slowdown will dampen price rises for business travel.
Muscular leisure demand colors pricingA strong labor market is still fueling consumer spending on travel. Household budgets are healthy, despite a squeeze in disposable income in many countries. Nearly three quarters (71%) of consumers plan to sustain or increase spending on travel, according to an Accenture survey in 16 countries.
Stubborn inflation hikes costsHigh inflation has increased operating costs for travel suppliers, which have to some extent been passed to travelers. Looking forwards to late 2023/2024, global inflation is forecasted to dampen, according to the IMF, but will remain stubbornly high.
Interest rates dampen growthMost countries in the G20 have raised interest rates sharply since 2021. Higher rates impact the costs suppliers pay for their debt, whether it’s for leasing airplanes, 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 lineJet fuel prices peaked in 2022 at a level more than twice that of 2019. Fuel prices have trended downwards this year, however high energy bills have eaten into earnings for airline, hotel and ground transportation providers.
Labor constraints plague marketThis 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.
Trip batching gets a boostIn order to save money, many business travelers visit more destinations within a single trip. There’s been a 10% increase in multi-destination journeys compared to pre-pandemic levels. With sustainability topping the business travel agenda for many companies we expect this trend to continue - trip batching helps reduce emissions, saves money and maximizes employees’ travel time.
Blended travel comes to the foreCombined leisure and business trips allow buyers to be more flexible when it comes to timing which helps bring travel prices down. Two in five travel managers reported an increase in blended travel interest among employees, according to a GBTA poll. There’s more openness to blended travel from senior managers as well. This follows a cultural shift from the strains of the pandemic, but also how travel intersects with well-being, employee retention and recruitment, especially for younger travelers.
Carbon budgeting under the spotlightSimilar to travel budgets, counting emissions is gaining traction with more progressive companies, who are also signing up to Scope 3 emissions cuts and science-based targets, which will hit in 2024. The transition to a low-carbon economy will heavily influence future prices and the types of travel booked.
Premiumization pushes pricesThe CWT-GBTA data shows there’s an escalating price increase for premium and upscale business products in air and hotel. In fact, global prices for premium air and hotel are rising higher than for economy or mid-scale. The buoyancy of leisure travel, which is sucking up capacity for lower priced offerings, could force the premiumization of corporate travel.
