What externalities should a travel manager be aware of when forecasting and reducing spending? A number of factors can impact a corporation’s spend on business travel – and all come down to the fragile environment in which airlines and corporate travel management operate. Changing airline market conditions can result in significant price fluctuations, making predicting corporate travel spending more difficult. It’s essential to understand all the issues that may impact air travel costs and use them to work out a contingency on T&I budgets. Here are the main four:
1. Fluctuating oil prices
Airlines must raise their fares to compensate when faced with higher operating costs. Fuel is one of their most significant costs, and when faced with higher oil prices, the extra expense is effectively passed on to travelers. Oil is one of the most volatile expenses and can mean the difference between profit and loss.
Fuel accounts for 10 – 12% of an airline’s operating expenses. As a result, some airlines hedge their fuel costs, buying fixed-term contracts for oil. This can only work in their favor if prices rise higher than expected. However, some airlines have lost out on significant savings by being locked into hedging contracts when oil costs have decreased. Etihad recently decided against hedging, resulting in a substantial cost saving when the price of oil suddenly dipped. The airline subsequently lowered its fares, resulting in substantial savings for corporations using it for business travel.
Corporations have zero control over the cost of oil. However, travel managers should be aware of their airline partners’ hedging contracts, which will help them predict expenses more accurately.
2. Changes in supply and demand
Airline pricing structures are built on a model of supply and demand, which fluctuates based on factors such as seasonality, day of the week, and other elastic factors. However, an unforeseen incident can occasionally skew regular supply/demand patterns and drastically alter prices. Recently, the worldwide grounding of Boeing 737 Max aircraft Suddenly, supply drastically decreased, yet demand for seats remains. Prices then encounter a sharp rise as competition for seat increases.
3. Strike action
Strike action is another unexpected event known to impact prices. The actions of competitors heavily influence airline pricing. Therefore, if a competing carrier is suddenly out of commission due to strikes, an airline may seize the opportunity to surge prices, taking advantage of a decreased supply.
Be aware of routes vulnerable to strike action, as they are likely to add significant travel costs to a corporation.
4. Increased competition
Competition increases when new airlines launch and when existing airlines penetrate new markets. New market entrants typically launch with drastically reduced fares to gain a new customer base and increased market awareness. These rates can even undercut negotiated rates.
Corporations can benefit from this increased competition for their commonly-used routes, and they often prefer flying with cheaper, new market entrants. So, this could be a good opportunity for travel management companies to negotiate new deals with rival airlines.
Though sudden changes in supply and demand are unpredictable, a contingency fund can prepare corporations for any unexpected resulting costs.