If being impacted by lockdowns and coronavirus restrictions wasn’t enough, businesses are also having to contend with materials and component shortages and inflation.
We all know the impact COVID had on businesses, but what about inflation?
How is the rising cost of fuel, accommodation, cars and literally everything impacting business travel?
What will 2023 look like for business travel and will it impact demand?
Key takeaways of inflationary impact on business travel
There are more challenging times ahead for business travel. This time it’s not about availability, lack of carriers or lockdowns.
It’s all about the money.
“Corporates can expect travel prices to continue rising for the rest of 2022 and throughout 2023, according to the annual price forecast from travel management company CWT and the Global Business Travel Association (GBTA).”
We appreciate this is telling you nothing new, but we think it’s important to know this is a global situation, not just an American one.
Here are some key facts around business travel in 2022/23:
- 5% – The percentage rise of air fares in 2022
- 45% – The percentage rise of air fares in 2023
- 5% – The percentage rise of hotel rooms in 2022
- 2% – The percentage rise of hotel rooms in 2023
- 3% – The percentage rise of car hire in 2022
- 8% – The percentage rise of car hire in 2023
“Globally, hotel daily rates reached their highest levels in April and May 2022, reaching a +60% YoY compared to last year. Compared to pre-pandemic levels, lodging inflation is at +17%, considerably lower than airfare inflation.” (Source)
“After experiencing a +50% YoY (year-on-year) peak in the middle of 2022, prices have dropped to an increase of +26% YoY at present. The chaos the business travel industry experienced in 2022 is now stabilizing.”
What does all this tell us? That the huge price hikes of 2022 are a thing of the past but inflation is still making its presence known.
Post-pandemic business travel
During the COVID pandemic, business travel hit almost zero. Only the most urgent or necessary travel was allowed and the industry had to go into survival mode.
Once the lockdowns were eased, there was a huge appetite for renewing business travel once more.
Fears that organizations would stick to Zoom meetings were unfounded and people were packing their suitcases in earnest once again.
Patrick Andersen, chief executive officer at CWT, said: “Demand for business travel and meetings is back with a vengeance, of that there is absolutely no doubt.
Tickets were more expensive, hotel rooms were more expensive and even getting to the airport was more expensive.
But the appetite for business travel was such that it really didn’t matter. Organizations just wanted to get out there and meet face to face again.
Current causes of inflation in 2023
Inflation is normal and not usually something to concern ourselves with. The U.S. Federal Reserve aims for a 2% increase in prices each year and most other institutions follow that model.
But 2022/23 has been different.
“The Labor Department reported that the consumer price index (CPI) rose 7.1% in November, down from a 7.7% gain in October and less than the 7.3% increase economists were expecting. On a monthly basis, the CPI was up just 0.1%, below estimates for a 0.3% gain.”
We have seen high inflation across the United States and the rest of the world. Prices are rising steadily across the board, with everything from food to fuel going up all the time.
But what caused this current surge in inflation?
#1 Housing shortages
The current housing situation across the United States is helping to drive inflation.
“Home prices rose a blistering 18.8 percent in 2021, and rent has climbed 17.6 percent nationwide in 2022.” (Source)
This is mainly caused by more demand than supply, where housebuilding slowed during the pandemic and is struggling to ramp up to pre-pandemic levels.
Add materials and manpower shortages, increasing prices and you have a self-sustaining inflation driver in one market.
“The housing shortage is going to push up the overall [consumer price index] to uncomfortable positions for the Federal Reserve,” National Association of Realtors chief economist Lawrence Yun said.
“Consequently, this high inflation that we have is certainly not transitory, and it’s going to remain stubbornly high through the end of the year.”
#2 Supply chain disruptions
One key factor was the disruption of the supply chain during the pandemic. Every company, from mining to satellite manufacture had to shut down or scale back production.
Once restrictions were eased, there was a backlog of orders that firms wanted to satisfy, which saw a surge in productivity and in demand for materials.
#3 Demand-pull inflation
Demand-pull inflation is when there’s more money around than goods to buy. Those fortunate enough to come out of the pandemic with more money in savings began spending again.
Combined with a shortage in the supply chain, there ended up being too much money chasing too few goods.
This caused a demand spiral and an increase in prices.
#4 Energy prices
The war between Russia and Ukraine has driven up energy prices significantly. While the U.S. was insulated to a degree thanks to domestic production and arrangements with other suppliers, it has hit the global economy.
This has a knock-on effect on us.
Components and materials sourced overseas are more expensive because the energy to produce them costs more.
Shipping and transporting goods is more expensive and there is high demand globally for common components such as superconductors, which makes them more expensive.
Rising demand and continued price rises on jet fuel, which have seen prices more than double in some markets.
Prices hit to over $160 per barrel according to S&P Global, which put upward pressure on ticket prices.
#5 Wage rise demands
Wage rise demands also contributes to inflation. As prices go up, workers demand pay rises to help keep up with inflation. Normally, this is in balance, as rates are low so requests for wage rises are low.
In times of high inflation, it isn’t unusual for employees or unions to demand double figure pay rises.
While it’s unavoidable that an employee wants to get richer and not poorer for their efforts, it feeds the cycle of inflation and needs to be controlled.
Inflation and its impact on business travel in 2023
The picture for 2023 is more positive than the previous couple of years, but the cost trend still points upwards.
There is a widespread belief that costs will continue to rise throughout 2023 but the rate will slow.
The 2022/23 stats outlined above show that’s already the case. We think the trend will continue throughout 2023 and into 2024.
We also think the overall business travel market will become slightly more predictable, with more even price rises throughout the year and a steadying of supply and demand.
The initial burst of activity after the pandemic is easing and business is getting back into its rhythm again.
This should ease off throughout this year.
It should provide a similar picture to pre-2019 levels where there are longer lead times for events and meetings and businesses are planning much further in advance.
So what will the impact be on businesses?
The need for travel is still present, so businesses are just going to have to pay more and shift the way they approach travel to save a little money.
The established pattern of using a single travel partner is likely to change. As is the mindset of some staff of having a car take them to the airport, flying business class and enjoying the perks of business travel.
Everyone is going to have to contribute to helping business save money on travel, from the very top all the way to the factory floor.
Will inflation impact the demand for business travel in 2023?
In a word, no. While we all adapted to video conferences and will likely retain them for some functions, there is no substitute for doing business in person.
We have always known this but have had the lesson reinforced in a most fundamental way over the past couple of years.
That disconnect we feel when in video meetings is still there. The inability to properly read a room, look into a colleague’s eye and assess the firmness of a handshake is still there.
As is the fact that most business is done over dinner or drinks rather than meetings.
Video conferencing helped business survive the pandemic but it isn’t how business is done.
While that fact remains, there will continue to be significant need for business travel.
Business travel isn’t all about meetings and doing deals
We mustn’t forget that business travel isn’t just about meetings and securing contracts.
Business travel is also necessary for training, secondment, changing duty station, peripatetic staff, construction workers, oil and gas workers and the thousands of Americans who travel for work.
Training has moved online but some courses can only be completed in person. Enterprise is always going to need to fill manpower gaps by moving people around or use temporary staff.
Our law enforcement and military personnel are always going to change duty station and travel for their own organization’s needs.
Construction staff and oil and gas workers will always need to travel to the next project, as are the hundreds of other peripatetic staff we have in this country.
None of which can be done without business travel.
New reasons for business travel
The established reasons for traveling for business remain, but there are also a few new ones to add to the mix.
The rise of the homeworker and digital nomad means more people than ever are working from home. Couple this with the exodus from the cities into the suburbs and you have more staff traveling to an office to help maintain culture.
For thousands of employees across the country, the morning commute of 20-30 miles has morphed into a much longer, less frequent commute across the country to the office.
The cost is likely borne by the employee but the demand for flights and accommodation remains.
This is just one of many examples where societal changes may impact business travel going forward.
What does the future hold for business travel?
We have an idea of what the rest of 2023 looks like, but what about further in the future? What does 2024 hold?
We suspect more of the same.
Slower prices rises with inflation easing to more manageable levels should help businesses manage travel costs.
The Fed is predicting inflation above 5% into 2024 but the CBO predicts somewhere closer to 1.1-3.6%.
We consider the Fed’s assessment to be the more likely scenario given how Q1 2023 has been so far.
There are no big changes on the horizon and nothing we can see that will lessen inflationary pressure enough to lower it to anywhere close to 3.6%.
Continued appetite for business travel
We know that business travel isn’t going anywhere. There’s a new appreciation for meeting face to face and being in the same room.
Plus, as we discussed earlier, business travel is about so much more than meetings.
None of that is going to change over the coming year.
“Business travel is here to stay but it’s no longer just a transaction — it’s about making and strengthening connections, growing businesses, economies, careers and people. And companies, travel managers and travel suppliers are reimagining and planning how they need to adapt and serve for the next era of business travel and business travelers.” (Source)
Humans are social animals and even in business, we can get a lot done when we’re in the same room as other people.
That fact was brought firmly into focus during the pandemic and we think this lesson is going to stick with us for a while.
We do think there will be shift more towards work-life balance and overall wellness. This may impact the frequency and duration of business trips, but the overall demand for them will remain.
5 Actionable strategies for minimizing inflationary impact on business travel
The demand for business travel will remain and perhaps even increase, but it may take different forms than before.
The impact of inflation on business travel is total and global. Prices are rising everywhere we travel and impact everything we buy.
There are opportunities to minimize that impact, even a little bit though:
1. Use corporate apartments rather than hotels
According to Money.com, “U.S. hotel prices averaged $212 per night in January 2023 — that’s 54% higher than the same month in 2022.”
To mitigate those rises, use a corporate apartment for stays of 30 days or more. Even before inflation and the pandemic, a corporate rental was, on average 50% cheaper than a comparable hotel room.
Consider that you also get more space, more amenities, access to most facilities and much more privacy, that’s great value!
2. Flexible scheduling
Use flexible scheduling and open tickets to travel at cheaper times. Most of us know that travel costs can vary massively depending on what times, days or dates you travel.
If the nature of your business allows for more flexible scheduling, you could save a lot on travel and accommodation.
Being prepared to travel at weekends or on the red eye, not traveling to vacation areas at peak times and other scheduling tricks can also save.
3. Use technology to compare prices
Many organizations use a preferred travel partner or platform to manage bookings. Perhaps it’s time to change that.
Use comparison websites and apps like Kayak, Expedia or Travelocity for flights. Use corporate housing partners with national presence to help with accommodation and mix and match as required.
It will mean more work for travel managers, but it could significantly lower the cost of business travel.
4. Fly coach
Business class is the way to travel but coach also has benefits for corporate travelers.
Flying coach typically means more security lines, faster boarding and faster exit. Even though business class gets to board first, they only use one door and gets very busy at times!
Add the savings you’ll make on ticket prices and time saved throughout the whole process and that can quickly add up. Some staff may not like the lack of legroom but should appreciate a more streamlined experience.
5. Be clever with ground transport
Our final tip is to be clever with ground transport. Consider using a train, carpool, use an Uber instead of airport parking or book your airport parking ahead of time for the discount.
Depending on gas prices, you could also suggest driving shorter distances or taking the train or bus.
We appreciate that management and C-level staff won’t want to consider that, but it can save a lot of money.
The impact of high inflation on business travel
As you have seen, we think the main impact on business travel is higher cost.
Some companies may scale back their travel plans but overall, we expect demand to increase over the next year.
Deals still need to be done, meetings still need to happen, people still need to travel to work and staff will still need training and development.
All those things, plus those new travel motivations will help keep the business travel industry strong.
It may look a little different in years to come but it will still be a significant part of doing business.
Guest Post By Barry M. Goodknight
Posted in City Spotlight On