A Rough Road Lies Ahead for Corporate Travel
The travel industry has suffered massive losses because of the COVID-19 pandemic. To get a handle on the situation from the point of view of both providers and corporations, GLG spoke with travel industry expert Peter McFadden, former head of strategic partnerships at Expedia Group. Below are a few select excerpts from our October 19, 2020, industry update teleconference.
When does the industry think business travel will bounce back from the pandemic?
The Airline Reporting Corporation (ARC) announced recently that tickets issued by corporate travel management companies were down 85.7% year over year from 2019. The only bright spot that ARC reported is that over a recent nine-week period, corporate travel bookings grew 50%. So, they went from 10% of 2019 levels to about 16%. The question is, can that be sustainable or is it an anomaly based on some states partially lifting COVID restrictions?
United Airlines CEO Scott Kirby on the company’s Q3 earnings call said he thinks business travel will rebound when the vaccine is out and widely distributed, and clearly stated 2022 will be very different from what United’s leadership otherwise planned. He envisages the new normal in this remote work environment could be a stimulus to business traffic in that workers need to return to the corporate office a few times a month. He closed by saying United is a big believer that business traffic may be different and will return, but not until 2024.
On the more sanguine side, British Airways’ CEO said a few weeks ago that the pandemic is the worst crisis in its history and that there’s no data to support whether it’s a temporary blip for the airline industry, but rather that the data points to the airline industry changing permanently. There are all kinds of different messaging out there in terms of how quickly it will recover and what it will look like. It certainly won’t look like it did before COVID.
What’s the expected recovery time in terms of internal business travel, such as internal conferences or incentive travel?
That is the type of travel that I expect will be the last to return, and it will return at a much smaller percentage than it had been. The reason is that COVID has given start-ups and entrepreneurs an opportunity to build virtual meetings technologies that are night and day better than what we might be accustomed to with Zoom. There’s a company called LSAV, and it’s the most extraordinary meetings transformation I’ve seen. These companies will allow hybrid meetings in which attendees can choose to attend either in person or virtually. Certainly, most of the long-haul attendees, rather than travel on planes for an extended period, will likely choose the virtual option, given the business outcomes and the return on investment of the meeting can be reached, I would project, just as well by attending virtually.
The other part, internal meetings of 20 to 50 people, a department or an organization that reports to a certain executive, will be down materially on a permanent level. Incentive travel, on the other hand — which would be defined as contest winners, typically in a sales or marketing or performance-type function — will likely come back once safety and security challenges are removed because people will want to go with their significant other when they’ve won a trip to a luxury destination. But in the short to medium term, this in-person incentive travel has been replaced by merchandise offerings such as gift cards.
It seems many companies are rethinking corporate travel and expense policies internally. What changes have been commonly rolled out at larger corporations?
Business Travel News once a year comes out with the Corporate Travel 100, which details spending habits of the largest multinationals. The latest revealed details on the seismic reduction of corporate travel. Intel, for example, spent $95 million on U.S. airlines in 2019. This year it projects it will be under $10 million. That’s a 90% drop, which is not an anomaly. Pfizer will go from $95 million to about $20 million, and Merck from $116 million to $25 million.
How are these corporations doing this? The biggest way is through a pre-trip approval that doesn’t allow an employee to make the decision to travel. In the past, there might have been pre-trip approval in which a manager would get an email from the company booking tool or travel management company saying so-and-so employee would like to travel and they booked for next week and here’s the cost, air, hotel, car, and meals. Now they’ve put in these hard stops whereby the travel cannot even be booked unless it’s been preapproved. These new policy controls or throttles may originally have been considered temporary changes, but many companies are performing so well during COVID with reduced travel in place that they’re increasingly viewing the more restrictive policies as a long-term shift in business practice.
How have travel management companies handled this reduction in spending?
The old playbook can be thrown out because everything has changed. Many travel management companies have realized that their contracts were exposed for services that they never expected to have to provide on a great scale, such as massive cancellations, refunds, visa and passport expediting, and/or after-hours calls. Because they may not have been protected in terms of earning any income from those services, those companies have gone back to many of their corporate clients asking for large fee increases. That has reduced the stickiness of these relationships in this remarkable time where CEOs and CFOs are pounding on their managers for every degree of direct and indirect cost reductions they can muster.
Can you give us an overview of the growth of corporate travel management companies in the past couple of years, especially leading up to before COVID hit?
The leading corporate travel management companies in North America, certainly that control more than 90% of the Fortune 100 spend, are American Express Global Business Travel, CWT (formerly Carlson Wagonlit Travel), and BCD Travel. For most of this century pre-COVID, more and more companies of all sizes, but particularly the larger multinationals, have fully consolidated their travel spend with one of these companies. The growth trajectory of those companies was 12% to 18%. There was a high degree of growth. Then there are some disruptors that are more digital, including Trip Actions, which is quite active now and integrates corporate cards and expenses into its system.
What is the magnitude of COVID-related losses for corporate travel management companies?
Staggering. On both sides, the two main revenue streams for these companies are client-paid fees and commissions paid by airlines, hotels, car rental companies, etc. Those are both down more than 85% year over year. Many of the travel management companies have had to go through a painful debt restructuring, with reductions in staffing, accelerated closing or consolidation of offices, and certainly rollbacks on new product and technology road map initiatives. The Airline Reporting Corporation recently reported a prediction that about 25% of all travel management company locations will close. S&P Global Ratings does not expect to reestablish pre-pandemic earnings until the end of 2023 and projects that the recovery of global business travel will lag the recovery of leisure travel. It also downgraded Amex GBT’s credit rating to a B from a B+.
With many of the corporate travel management companies struggling, do you expect any consolidations or M&A in the industry?
Oh, yes. That’s widely expected, but I guess it depends on what the economics of the deals look like. It’s reasonable to think that some owners will look at this and decide to get out of the business. Quite a bit of private equity money has entered the corporate travel space during COVID. So many of these corporate travel management companies have accepted private equity funding and/or board membership. We’ll have to see how that plays out. There was a large acquisition weeks ago where a publicly traded Australian company, Corporate Travel Management, who’s been aggressive in the past few years, purchased a highly regarded company in the U.S. called Travel and Transport. That may open up the till for additional activity in the M&A space.
Any final comments?
I’ve taken only one trip since COVID. We went to rural areas. That’s so common now — the only part of the travel industry that’s showing any legs is on the leisure side: a drive-to-destination trip, staying at a larger home, traveling in bubbles. It changes the definition of hospitality. There really isn’t any hospitality experience at a large hotel right now, or certainly on an airplane. On the corporate travel front, companies are concerned about their insurance and liability risk, and that is the driving force behind whether they’ll allow travelers to go back on the road. I don’t have a lot of optimism to share except for the extended-hotel-stay segment, which has been faring better. It’ll be a very rough next two to three years for the corporate travel ecosystem.
About Peter McFadden
Peter McFadden is currently the owner of Sonoran Services, a consultancy focused on leisure and corporate travel market insights and local vacation rental hosting. Prior to this he was Head of Strategic Partnerships at Expedia. He was in a leadership role in the Americas region for Expedia Partner Solutions. Before joining Expedia, Peter was with BCD Travel as Vice President of Global Sales and led multinational sales teams pursuing the largest 100 organizations worldwide. Before that, he served in Orbitz Strategic Sales Leadership, responsible for the national account prospect portfolio. He also was with American Express, leading national sales and retention performance of the large-market travel business, and Carlson Wagonlit Travel (CWT), in charge of the Midwest Region.
This travel industry article is adapted from the October 19, 2020, GLG industry update teleconference “The Future of Corporate Travel.” If you would like access to this teleconference or would like to speak with travel industry expert Peter McFadden, or any of our more than 700,000 industry update experts, contact us.