In a battered travel industry, which way will prices go? There are strong arguments for both up and down. Tony O’Connor, managing director of the Butler Caroye consultancy, lays out several of them.
Some travel buyers are hoping for deep discounts and big bargains from travel suppliers desperately competing for business when travel demand recovers. I can think of three things that might apply downward pressure on prices for a short while, and two more that could reduce costs over the longer term. I can also think of 11 things that will drive higher fees, fares and rates.
Pushing Travel Prices Down: Shorter Term
Excess perishable stock
This is a fancy way of saying that if an airline has empty seats, it may as well sell them cheaply to at least get something. Ditto for empty hotel rooms and rental cars. Of course, the drastic reduction in supply caused by Covid-19 will limit the amount of distressed inventory for some time. However, there might be some good last-minute spot bargains to be had.
Retaking market share
This will be the suppliers’ priority when travel volumes are clearly trending upward. With everything reset and up for grabs, early gains in 2021 and 2022 will set up suppliers for success in the years ahead.
More immediately, the messy chicken-and-egg nature of the travel recovery will mean many suppliers will need to pre-commit to the costs of marginal increases in supply and then scramble for customers with bargains to fill the space.
Pushing Airfares Down: Longer Term
One good thing you can say about a recession is that the price of oil should be relatively low.
Decreased union power and airline wage costs
Ditto for real wage costs. For airlines with significantly unionized workforces, their embattled staff will likely have less job security and collective bargaining power, and subsequently lower wages. Many returnees could be forced to accept less remunerative employment terms.
Pushing Travel Prices Up
At the macro level, there will be fewer airlines and hotels overall, but still sufficient numbers to drive competition. After all, it only takes two, right? That’s not how it works. With air travel, competition can collapse on specific routes. Single-carrier domination of busy routes and corridors is of particular concern. With accommodation, the same can happen in a neighborhood or market niche. Car rental pricing is heavily commoditized, but in North America, with Hertz reorganizing in bankruptcy and Advantage fading in bankruptcy, the market dynamics will change.
Dis-economies of scale
Again, capital-intensive hotels and particularly airlines are the main concern. The dominant factor is the proportion of costs that are fixed or “sticky-down.” You can greatly reduce staff numbers and other variable inputs, but there’s a solid, irreducible base of property and equipment costs required for existence.
New health and safety costs
Every plane, hotel room and rental car must be demonstrably safe. The same goes for every airport, taxi and meeting room. The costs of cleaning and safeguarding travelers’ well-being will feed into fees, fares and rates.
There will probably be a strong demand for proof of systematic safety and good practice. Accreditation systems and services will surely arise. Given the need for ethical and credible ones, they are unlikely to be cheap. The cost of proving safe practice will also feed into pricing.
In some or perhaps many places, the confused and erratic regulatory environment will settle back into some regime of lasting restrictions on travel. This is the area where travel recovery optimism is most misplaced; we should not assume previous freedoms will return in full. Such restrictions on trade, however necessary and beneficial, can only increase costs.
Already there are dozens of suits filed against big-name companies and employers based on forced risk of viral exposure. That none have yet targeted business travel is probably due to there being so very little of it. Even if airlines, hotels or TMCs don’t get hit with big, out-of-court settlements, there will be new operating costs arising from preventing and provisioning for them.
Where to start? In order to survive, insurance companies obviously cover higher risk with higher premiums. If encountering that risk is likely or particularly impactful, premiums can increase many times before a company decides to bear the risk. With the whole travel experience soaked in new risk, insurance costs will have to climb.
New operating costs
It will cost airlines to reinstate services. Bringing aircraft back from the desert and recalling staff will be neither easy nor cheap. A more lasting burden: many of the surviving travel suppliers will be saddled with new debt and large repayment costs.
Because the regulatory environment will be more complex and pricing structures will evolve, companies will demand really skilled trip management. Instead of just a booking service with travel policy applied, corporate travelers will require a much more careful and intensive service that tests for and avoids risks in the itinerary and travel products. Whether this enhanced service comes from a rebuilt TMC or an entirely new entity, it will cost clients a lot more. Also, since this will be beyond the capabilities of online booking tools, expensive humans will handle more bookings manually.
The time has finally come for good pre-booking approval systems. The industry found itself sorely lacking in this area right when it was needed, and now TMCs are scrambling to find quick solutions. Before a travel request even gets to the TMC or OBT, it should be filtered for a range of risks and, ideally, ROI. Previously this was a nice-to-have. Now it’s a necessity. Given the need and the expensive and unacceptable things they can help prevent, approvals systems are unlikely to be cheap.
Surfacing sunk costs
Strictly speaking, these aren’t new. They are hidden costs embedded in fares and rates that may now see the light of scrutiny. In particular, I am talking about commissions, especially TMC commissions. TMCs receive about 70 percent of their income from sales commissions paid by airlines, hotels, car rental firms and even global distribution system operators. The largest chunk comes from airlines. Conflicts of interest resulting from this model for many years have been swept under the marketing carpet. Prior to the pandemic, airlines were deep into their campaign to restructure the expensive distribution system via NDC. The cost-sensitive airlines that survive are now presented with an unexpected and historic opportunity to push ahead against weakened intermediaries that may have pushed back against new distribution strategies. I expect commissions to crumble. And so TMCs, or whatever arises in their place, will have to charge clients a lot more for the services they provide. Don’t be surprised if fees more than double.
My crystal ball has been on the fritz recently, but my guess is that the eleven drivers of upward pricing pressure will easily outweigh the five downward ones. While a lot more of our time will be taken up by risk management and traveler care, we also need to navigate through a Potemkin Village of a supply chain.