Tackling inflation in 2023: Higher prices; Bigger stakes
Recently, we sat down with Aurelie Duprez, Founding Partner, at AREKA to discuss the impact of inflation across the industry. In the interview below, she shares advice on how to manage through high prices and how Areka can help.
Areka: How has inflation impacted business travel and travel programs in the past 12 months?
AD: Following several years of lower prices during the pandemic, inflation soared in 2022 and remains high today in 2023, with business travel not exempt from the rising costs. Compared to 2019, when both traffic and capacity were still running at typical levels, we’ve seen an increase of 20-40% in average ticket price (ATP) on our client’s top routes, and an increase of 10-20% for hotels. Routes with only one direct flight option available, such as Paris to Houston or Houston to Rio for example, have seen the largest increase in fares, with routes between Europe and Asia also seeing significant increases due to capacity to Asia not yet fully recovered. We expect prices to keep rising in 2024.
Unfortunately, travel buyers often face the brunt of the dissatisfaction from travelers trying to protect their budgets. To complicate it even more, there is often confusion between the travel program competitiveness, the TMC efficiency and the inflated published price. However, quite surprisingly, we’ve seen little elasticity of demand to price. In most cases, travelers are not canceling a trip because the price is 10% more than the year before. Instead, the rationale to travel is linked to the business needs and therefore the travel budget is justified.
Areka: Is there anything travel managers and travel buyers can do about inflation?
AD: When it comes to inflation in business travel, there are two main drivers: published fare inflation, and discount / negotiated rate downgrades.
Both levers are used by suppliers when the supply demand balance is in the suppliers’ favor. While travel buyers can’t do anything about published fare inflation, they can definitely act on the pricing conditions at the negotiation table. Likewise, travel managers can act on the demand levels by influencing the traveler community.
Areka: Do you have any advice on how to take control of the spend without compromising traveler’s expectations?
AD: There are three key things you can do to help ease the impact of inflation, including:
- Educate the traveler community on the current market environment. Communicate clearly and regularly to help travelers understand why fares are higher than they were in the past, what the travel management team is doing to mitigate these increases and how the traveler’s behaviors (usage of restrictive tickets, advanced booking) can make a difference.
- Push alternatives to travel. Some of our clients have implemented decision trees to help travelers identify whether it makes sense for them to travel for the business. As a matter of fact, to truly maintain a very specific budget, the best option remains to travel less and to instead consider alternative options to travel. Recommended alternatives can be shared through your typical internal communication channels or directly to travelers.
- Consider reshaping the travel policy if, and only if, the potential changes are in line with your long-term vision. For instance, some companies have changed their traveler categories from business class to premium economy to contain the travel budgets and reach their sustainability goals, as carbon emissions are lower on premium economy cabin. Others have elected to reshape their advance booking rules as a way to mitigate price increases.
Areka: Do you have any advice on how to take control of the spend without compromising traveler’s expectations?
AD: There are three key things you can do to help ease the impact of inflation, including:
- Educate the traveler community on the current market environment. Communicate clearly and regularly to help travelers understand why fares are higher than they were in the past, what the travel management team is doing to mitigate these increases and how the traveler’s behaviors (usage of restrictive tickets, advanced booking) can make a difference.
- Push alternatives to travel. Some of our clients have implemented decision trees to help travelers identify whether it makes sense for them to travel for the business. As a matter of fact, to truly maintain a very specific budget, the best option remains to travel less and to instead consider alternative options to travel. Recommended alternatives can be shared through your typical internal communication channels or directly to travelers.
- Consider reshaping the travel policy if, and only if, the potential changes are in line with your long-term vision. For instance, some companies have changed their traveler categories from business class to premium economy to contain the travel budgets and reach their sustainability goals, as carbon emissions are lower on premium economy cabin. Others have elected to reshape their advance booking rules as a way to mitigate price increases.
Areka: What are some of the levers you can use with suppliers to stay within your budget?
AD: First, reinforce the partnerships you have with key suppliers. With the negotiation power having changed sides, it is time to talk about your long-term vision and global deals. Interestingly, we are seeing the U.S. carriers, for instance, reacting in very different ways to that partnership approach these days. For example, the pricing conditions on a captive route can be improved when negotiated together with competitive routes. Additionally, you can help reinforce your partnerships by:
- Taking the time to explain the means you have implemented offline and online to steer market shares.
- Explaining your long-term vision on sustainability and how suppliers are included in that vision. The more suppliers feel part of your long-term strategy, the more open they will be to mitigate the downgrades on your negotiated conditions.
- Engaging in continuous and close supplier relationship management (requires robust reporting).
Second, you can maximize the coverage of your spend by playing with the mix of pricing instruments at your disposal. For instance, in the hotel field, you can mix chain-wide discounts with fixed rates on your top hotels to ease the overall cost.
Finally, keep your focus on the top impacting suppliers in your program. Air and hotel programs are very resource intensive and require travel buyers to deal with sometimes up to 50 airlines or 1000 hotels. During the spend discovery phase, we often see that 20-30% of the suppliers cover 70-80% of the spend. These suppliers should be your main focus, and the governance of your travel team and the management of the category should be organized to reflect this focus.
Areka: How can Areka Consulting help?
AD: At AREKA, we have the depth and breadth of experience that allows us to challenge you in a constructive way and recommend innovative negotiation tactics or sourcing approaches. We have tools that allow you to calculate the impacts of your air, hotel and car sourcing events in a granular and auditable way – and therefore show your success to internal stakeholders despite a challenging market context.
Whether we help you create the right savings methodologies that make the difference between market impact and procurement efforts, or we build reporting dashboards that allow you to monitor your top routes ATP and top properties ARR evolution, we can help you identify the key issues to act fast with suppliers and the traveler community. This is what we do for our clients around the world every day. Definitely reach out to me or any of our knowledgeable Areka team members to see how we can help.
