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American Express study reveals business travel costs continue to rise on a global basis

Travel News Asia 4 November 2002

The American Express Global Travel Trends Study, issued today, reveals business travel costs are continuing to rise on a global basis. Premium (fully refundable) airfares have increased and lodging rates are fluctuating depending on the market. Next year, corporations can again expect to see rising air prices, but can mitigate the impact by using leisure fares and "spot-buying."

Companies pay a higher premium for Premium fares

Premium airfares (classified as refundable First, Business and Full Economy) have increased (2Q year over year) in all regions. Full Economy fares in Europe rose 1.5% year over year with First-class fares for international flights from North America rising just over 7% year over year. This increase comes despite recorded slow-down in the economies of these regions.

Furthermore, the gap between Premium and Discount fares is widening. First and Business class fares posted the highest increases, followed by Full Economy. Discount fares in Asia Pacific and Europe were almost flat, decreasing 1%. Following the trend, excursion or leisure fares in the US and Asia Pacific decreased, down 0.7% in Asia Pacific and down 6.5% in the U.S. The decrease in Asia Pacific is primarily due to the lingering effects of a price war in Q3 2001 between domestic carriers prior to the collapse of Ansett, the Australian airline as well as an expansion of service by Virgin Blue. In Europe several traditional carriers have restructured fares in economy class to compete with the low-cost carriers.

Matthew Davis, Director, Global Consulting Services, American Express commented: "This decrease in leisure fares is due to the traditional carriers restructuring their pricing in order to compete with the low-cost carriers, which are becoming increasingly prominent in the U.S., Europe and Australia. It is also an attempt on behalf of the whole airline industry to stimulate leisure travel in the post-September 11 environment." He continued: "It is likely the Premium travel rates are continuing to rise to offset airline revenue decline from the discounted fares they are offering. In the case of Asia Pacific, it could be related to additional services and features such as flat beds on long haul flights".

"The trends emerging from the American Express Global Travel Trends Study reveal that while Premium fares are increasing, leisure fares are falling," said Davis. "At the same time corporations have never had to spend so much on travel and related expenses." In the U.S., for example, there continues to be a wide gap between the typical business fare and the leisure fare for the same flight, with these typical business (i.e. 3-day advance purchase) tickets now more than six times the leisure fare. "One could argue that the airline industry is expecting corporate travel buyers to subsidize leisure travelers, particularly on long-haul flights," said Davis.

Low-cost carriers have a high impact

One of the major trends identified in the study is the growth of low-cost carriers. Low-cost carriers are continuing to gain market share from the flag carriers with many becoming significant and established players in their marketplace. For example, Ryanair recently surpassed Lufthansa to become Europe's largest carrier in terms of market capitalization. In the US, Southwest is the now the sixth largest carrier. Share of passengers carried by low-cost carriers has grown in the past 10 years from 5% to 15% in the US and from zero to 20% market share in the UK.

Low-cost carriers have begun to influence both airline and corporate behaviour. In some markets, low-cost carriers such as Jet Blue in the U.S and easyJet in the UK, are claiming that business travel represents more than 50% of their revenues. In some markets (including Germany and New Zealand), mainstream carriers are adopting low-cost carrier strategies to survive. Southwest in the U.S recently lowered its one-way fares by 25% in a move to attract more business travelers.

Furthermore, low-cost carriers are seeing a need to work with travel management companies. And, in the face of a slow economic recovery, corporations are increasingly including low-cost carriers in their travel policies as well as moving to "spot buying" to take advantage of lower fares where appropriate.

"Increasingly, corporations are noticing that it can be cheaper to use the lowest logical fare approach to purchasing air tickets rather than relying on their preferred suppliers' negotiated rates," said Davis. "This situation has arisen as a result of the emergence of low-cost carriers, which in turn has led to the traditional airlines offering promotional fares or restructuring their whole fare base."

"This illustrates the airline industry's need to get travelers back on planes and the willingness of business travelers to take advantage of the discounts being offered in the Lowest Discount fare category, as well as a continued effort on the part of large corporations to reduce T&E spend," noted Davis.

In the US, the Average Fare Paid by American Express business travel customers on domestic US routes fell during Q2 by 9% when compared with the same period in 2001. This reduction is based not only on the increase in business travel on low-fare airlines, but also the fact that US business travelers are accessing more non-refundable fares that represent a significant savings.

Consolidation of the airline industry

In light of the weakening economic environment, the study reveals that consolidation in the airline industry is likely to increase. In Asia, the Chinese airline industry is being restructured, reducing the number of carriers from 15 to three. The merger of Japan Airlines and Japan Air Systems will create the world's sixth largest airline and could see a cut in domestic fares by around 10% in a bid to rival All Nippon Airways.

Airline alliances are also looking at initiatives to strengthen the bond between member carriers to offset current difficulties within the airline industry. The members of the One World alliance are considering extending the scope of their activities and developing a co-operation in the areas of cargo, engineering and maintenance services. The Star Alliance has approved the addition of LOT Polish Airlines, Asiana and Spanair during 2003.

Hotel sector remains stable

Overall, global hotel rates have remained stable. The industry witnessed stability in Asia Pacific and Europe with some decline in North America. Most extreme fluctuations were witnessed in Latin America with premium hotel rates dropping by 6% year over year, due to oversupply and reduced demand. Generally upper range or premium hotels are feeling the effects of the economic downturn with business travelers seeking to reduce T&E costs by using more mid- and lower-range hotels. Reduced travel within the US has produced a decline in hotel rates in key business cities such as New York (-4%), Washington (-18%) and Los Angeles (-2%).

Davis noted: "With lower occupancy rates in many key business cities, corporations should expect to be offered attractive rates during the negotiations for their 2003 travel programs."

"To some extent this is a good time to be a corporate travel buyer. There are bargains to be had with hotels because of oversupply, and if their business travelers can be flexible with their arrangements, the opportunity exists to do spot purchasing and get some good bargains on discounted fares."

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