What externalities should a travel manager be aware of when forecasting and reducing spend? There are a number of factors that can impact a corporation’s spend on business travel – and all are down to the fragile environment in which airlines operate. Changing market conditions for airlines can result in significant price fluctuations, making predicting corporate travel spend more difficult. It’s important to understand all of the issues that may impact air travel costs and to use them to work out a contingency on T&I budgets. Here are the main four:
1. Fluctuating oil prices
When faced with higher operating costs, airlines must raise their fares to compensate. 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 costs rise higher than expected. However, some airlines have lost out on significant savings by being locked into hedging contracts when the cost of oil has gone down. Etihad recently decided against hedging, resulting in a large cost saving when the price of oil suddenly dipped. The airline was subsequently able to lower its fares, resulting in significant 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, as this will help them to 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, occasionally an unforeseen incident can skew regular supply/demand patterns and drastically alter prices. Recently, the worldwide grounding of Boeing 737 Max aircraft Suddenly, supply is drastically decreased, yet demand for seats remains. Prices then encounter a sharp rise as competition for seats increases.
3. Strike action
Strike action is another unexpected event known to impact prices. Airline pricing is heavily influenced by the actions of competitors. 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 that are vulnerable to strike action, as they are likely to add significant travel costs to a corporation.
4. Increased competition
Competition increases both when new airlines launch or when existing airlines penetrate new markets. New market entrants typically launch with drastically reduced fares in order to gain a new customer base and increased market awareness. These rates can even undercut negotiated rates.
Corporations can benefit from this increased competition on for their commonly-used routes, and often prefer flying with the cheaper, new market entrants. So, for travel management companies, this could be a good opportunity 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.