Business Travel Outlook for 2009:
Uncertain, Tumultuous Times
David Grossman
June 17, 2009
Copyright 2009 by David Grossman
Business Travel in Tumultuous Times
2009
2008
Economic Crisis
Oil Crisis
What does it mean for business travelers?
June 17, 2009
Outlook for Business Travel in 2009
Copyright 2009 David Grossman
2
The Recession of 2009
Declining Travel Demand
Airline Passenger Traffic Falls
March 2009 vs. March 2008
• -10% U.S.
• -11.1% International
April 2009 vs. April 2008
• -3.1% International
Source: Air Transport Association (ATA)
International Air Transport Association (IATA)
June 17, 2009
Outlook for Business Travel in 2009
Copyright 2009 David Grossman
3
From the Airline Perspective:
“This is the most difficult situation
the industry has faced. After
September 11th, revenues fell by
7%. It took three years to recover.
This time we face a 15% drop.”
--Giovanni Bisignani, Director General,
International Air Transport Association
June 8, 2009
June 17, 2009
Outlook for Business Travel in 2009
Copyright 2009 David Grossman
4
From the Airline Perspective:
“Things have certainly not
improved. It would be foolish to
think that things are going to get
better anytime soon.”
--Gary Kelly, CEO, Southwest Airlines,
speaking at AAAE Meeting June 15, 2009
June 17, 2009
Outlook for Business Travel in 2009
Copyright 2009 David Grossman
5
The Recession of 2009
International Business Travel Decline
•
•
Premium (first and business class)
passengers declined by approximately 18%
Economy class passengers down by 8.3%
Source: IATA Premium Traffic Monitor Feb 2009
(Feb 2009 vs. Feb 2008)
June 17, 2009
Outlook for Business Travel in 2009
Copyright 2009 David Grossman
6
The Recession of 2009
Business Travel Decline
•
•
Passenger traffic across the Pacific to Asia
declined by 27.3%
Passenger traffic across the North Atlantic
fell by 22.5%
Source: IATA Premium Traffic Monitor Feb 2009
(Feb 2009 vs. Feb 2008)
June 17, 2009
Outlook for Business Travel in 2009
Copyright 2009 David Grossman
7
Most corporate buyers have cut
spending 20% to 30% since the
beginning of the recession
-- David Meyer, Editor in Chief,
Business Travel News
June 17, 2009
Outlook for Business Travel in 2009
Copyright 2009 David Grossman
8
The Recession of 2009
Corporate Travel Departments React
•
•
•
•
Meetings, particularly internal, take hit
Increased demand management
Travel policy changes
Some corporations downgrading
– Business/first class to coach
– Lower hotel class
• Increased use of virtual meetings
June 17, 2009
Outlook for Business Travel in 2009
Copyright 2009 David Grossman
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Many business travelers are
chained to their desks
June 17, 2009
Outlook for Business Travel in 2009
Copyright 2009 David Grossman
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Road warriors become
conference call warriors
June 17, 2009
Outlook for Business Travel in 2009
Copyright 2009 David Grossman
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June 17, 2009
Outlook for Business Travel in 2009
Copyright 2009 David Grossman
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The “AIG” Effect:
“fun” destinations take biggest hit
Some meetings move to urban business centers
June 17, 2009
Outlook for Business Travel in 2009
Copyright 2009 David Grossman
13
The Recession of 2009
Travel Suppliers React
to Shrinking Demand
•
•
•
•
•
Airlines cut capacity/ground planes
Airlines and hoteliers slash prices
Some hoteliers reduce amenities
Some hoteliers charge for amenities or
services formerly included in room price
All suppliers pursue business travelers
June 17, 2009
Outlook for Business Travel in 2009
Copyright 2009 David Grossman
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Source : Air Transport Association
June 17, 2009
Outlook for Business Travel in 2009
Copyright 2009 David Grossman
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Source : Air Transport Association
June 17, 2009
Outlook for Business Travel in 2009
Copyright 2009 David Grossman
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Capacity Cuts vs. Slumping Demand
(Change year/year Jan-May 09/08)
Fewer Seats for Even Fewer Passengers
Avail Seat
Miles
AA
CO
DL/NW
UA
US
WN
June 17, 2009
Rev Psgr
Miles
Load
Factor
Psgrs
Flown
-7.8%
-10.5%
-2.4%
-10.6%
-7.5%
-6.9%
-11.9%
-3.4%
-8.7%
-9.2%
-14.4%
-5.2%
-1.1%
-2.1%
-2.3%
+0.5%
-11.5%
-8.9%
-16.2%
-7.8%
-3.5%
-2.2%
+0.9%
-6.8%
Outlook for Business Travel in 2009
Copyright 2009 David Grossman
17
Some New Capacity Cuts
Announced Last Week
•
•
•
•
•
AA domestic from 6.5% to 7.5%
AA international from 5.5% to 15% over
past two years
DL domestic from 6%-8% to 10%
DL international from 10% to 15%
FL will cut 7%-8% in 2Q09
June 17, 2009
Outlook for Business Travel in 2009
Copyright 2009 David Grossman
18
Local Impact of Capacity Cuts
(July 09/July 08)
•
•
•
•
•
•
-6.9%
-6.9%
-5.1%
-1.1%
-.6%
+1.6%
Pennsylvania – State (26th highest)
National Avg. (@ 300 airports)
PHL
ABE
MDT
AVP
Source: USA Today/Official Airline Guide
June 17, 2009
Outlook for Business Travel in 2009
Copyright 2009 David Grossman
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PHL Enplaned Passengers
x 1,000
Source: DOT Statistics
June 17, 2009
Outlook for Business Travel in 2009
Copyright 2009 David Grossman
20
Capacity Cuts: Who Loses?
•
Smaller communities
•
High frequency routes
•
Smaller, redundant hubs
•
Leisure/vacation destinations
•
Secondary airports in large cities
•
Competitive routes with multiple carriers
•
Communities served by smaller regional jets
June 17, 2009
Outlook for Business Travel in 2009
Copyright 2009 David Grossman
21
Capacity Cuts Impact Secondary
Airports in Multiple Airport Cities
OAK -19%
SJC -16%
SFO -3%
FLL -11%
MIA -2%
PBI -11%
BOS -3%
MHT -15%
PVD -9%
BUR -14% ONT -18%
LAX -7% SNA +1%
LGB -8%
Source: USA Today/Official Airline Guide – July 09 vs. July 08
June 17, 2009
Outlook for Business Travel in 2009
Copyright 2009 David Grossman
22
Smaller Hubs in Top 15 Capacity Cuts
•
•
•
•
24.3%
18.1%
15.2%
12.3%
Cincinnati (DL)
Cleveland (CO)
Pittsburgh (US)
St. Louis (AA)
6.9% nat’l avg. July 2009/July 2008
Source: USA Today/Official Airline Guide
June 17, 2009
Outlook for Business Travel in 2009
Copyright 2009 David Grossman
23
Impact of Capacity Cuts
•
Fewer options for business travelers
•
Increased travel times
•
Longer waits
•
Canceled flights
•
Longer drives to smaller
communities
•
87 smaller U.S. airports lost all
commercial service in 2008
(Source: Air Transport Association)
June 17, 2009
Outlook for Business Travel in 2009
Copyright 2009 David Grossman
24
Additional Impact of Capacity Cuts
•
New aircraft orders deferred
•
Squeezing into smaller aircraft
–
A319 Transcons
–
RJs on BOS/NY/DC
shuttles
–
Narrow body 757s on
transoceanic flights
June 17, 2009
Outlook for Business Travel in 2009
Copyright 2009 David Grossman
25
The Bright Side of Capacity Cuts
•
Fewer flight delays
•
Fewer cancellations
•
Fewer lost bags
•
Older aircraft retired
June 17, 2009
Outlook for Business Travel in 2009
Copyright 2009 David Grossman
26
The International Party is Over
Capacity cuts are not limited to domestic flights
In last few years U.S. airlines moved 10% to 15%
of capacity to international markets to avoid
LCCs and capitalize on global economic boom
Now airlines are shrinking international
capacity in global economic crisis and
deferring start of new hard-fought routes
June 17, 2009
Outlook for Business Travel in 2009
Copyright 2009 David Grossman
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June 17, 2009
Outlook for Business Travel in 2009
Copyright 2009 David Grossman
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June 17, 2009
Outlook for Business Travel in 2009
Copyright 2009 David Grossman
29
International Capacity Cuts
Airline
Year/Year
AA
(-5.9%)
CO
(-0.5%)
DL
(-6.9%)
NW
(-15.4%)
UA
(-8.2%)
US
+14.8%
AF
(-4.1%)
BA
(-0.6%)
LH
(-3.8%)
June 17, 2009
Outlook for Business Travel in 2009
Seats from U.S.
to foreign
destinations
Mar 09/Mar 08
The international
party is over
Source: USA Today
and Official Airline Guide
Copyright 2009 David Grossman
30
Will Capacity Cuts Last?
•
•
•
•
•
Low Cost Carriers (LCCs) traditionally move
to fill the capacity void
In 2008 $150/barrel forced LCCs to abandon
growth and enter survival mode
When oil prices dropped to $50-$60/barrel
LCCs resumed expansion
In recession price matters to the customer –
travelers purchase the cheapest ticket
Continued LCC growth depends on oil prices
June 17, 2009
Outlook for Business Travel in 2009
Copyright 2009 David Grossman
31
The Recession of 2009
Does slumping
travel demand
translate to
lower airfares?
June 17, 2009
Outlook for Business Travel in 2009
Copyright 2009 David Grossman
32
Air Fare Ups and Downs
Plummeting travel demand has reversed
the two year cycle of fare increases
• 2007: 17 successful fare increases
• 2008: 15 fare hikes through July
• 2009: more than 25 fare sales
(Source: FareCompare.com)
June 17, 2009
Outlook for Business Travel in 2009
Copyright 2009 David Grossman
33
Air Fares Decline
(June 2009 vs. June 2008)
U.S. national average ticket
•
$275 is 19% lower than $339
Average ticket price for PHL
•
$270 down 14% from $314
Source: Farecast.com
June 17, 2009
Outlook for Business Travel in 2009
Copyright 2009 David Grossman
34
Philadelphia Air Fare Trends in 2009
•
Highest average air fare was $272 as of
June 14th
•
Lowest average air fare was $216 in
early January
•
Average fare rose 19% from $226 on
January 1st to $270 on June 15th
Source: Farecast.com
June 17, 2009
Outlook for Business Travel in 2009
Copyright 2009 David Grossman
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Source: Farecast.com
June 17, 2009
Outlook for Business Travel in 2009
Copyright 2009 David Grossman
36
Philadelphia Air Fare Trends
(June 2009 vs. June 2008)
Top Losers
•
PHL-CLT down 50%
•
PHL-CLE down 34%
•
PHL-SAN down 31%
Top Gainers
•
PHL-JAX up 22%
•
PHL-TPA up 11%
•
PHL-CMH up 11%
Source: Farecast.com
June 17, 2009
Outlook for Business Travel in 2009
Copyright 2009 David Grossman
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International Premium Seat Glut
Premium ticket prices declined by 6% in 2008
(Source: IATA)
The international business class seat glut
caused by:
• Recession
• Stronger U.S. dollar
• Business travelers downgrading to coach
June 17, 2009
Outlook for Business Travel in 2009
Copyright 2009 David Grossman
38
International Premium Seat Glut
Business Class Bargains Abound
• NYC-LON $1,829
• IAD-MOW $2,519
• LAX-SEL $2,602
• LAX-SYD $4,089
Source: Orbitz.com
June 17, 2009
Outlook for Business Travel in 2009
Copyright 2009 David Grossman
39
Will Air Fares Remain Low?
Capacity
Demand
It all depends on capacity vs. demand
June 17, 2009
Outlook for Business Travel in 2009
Copyright 2009 David Grossman
40
Air Fares Will Stay Low or Decline if:
•
Oil prices remain low
•
Travel demand continues to soften
•
Capacity cuts can’t keep pace with
slumping demand
•
June 17, 2009
LCCs continue expansion
Outlook for Business Travel in 2009
Copyright 2009 David Grossman
41
Will airlines reverse their move to a la
carte (unbundled) pricing?
•Checked bags
•Seat selection
•Food/Drink
•Headsets/Entertainment
•Pillows
•In-Flight Wifi…and more
June 17, 2009
Outlook for Business Travel in 2009
Copyright 2009 David Grossman
42
June 17, 2009
Outlook for Business Travel in 2009
Copyright 2009 David Grossman
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June 17, 2009
Outlook for Business Travel in 2009
Copyright 2009 David Grossman
44
Airline addiction
to surcharges and ancillary fees
•
•
•
•
•
JP Morgan Chase says new fees will generate $3
billion annually
UA projects $1.2 billion from fees in 2009
Continental is the lone airline still serving free
meals in coach
Only Southwest has refrained from adding most
fees…so far
Fuel surcharges are the most likely fee to go
…until fuel prices rise again
June 17, 2009
Outlook for Business Travel in 2009
Copyright 2009 David Grossman
45
Source: Air Transport Association
June 17, 2009
Outlook for Business Travel in 2009
Copyright 2009 David Grossman
46
2008: Red Ink Returns
Airline
Net Loss x $1m
Cash x $1b
Debt x $1b
WN
B6
$178
($76)
$2.0
$.8
$3.7
$3.2
FL
CO
AA
($274)
($585)
($2,071)
$.3
$2.6
$3.6
$.9
$5.8
$15.1
US
UA
DL/NW
($2,210)
($5,438)
($8,922)
$3.0
$2.3
$6.1
$4.0
$6.8
$16.6
($19,398)
$20.4
$55.2
Totals
June 17, 2009
Outlook for Business Travel in 2009
Copyright 2009 David Grossman
47
1Q 2009: Red Ink Continues for
Network Airlines
Airline
US
CO
AA
UA
DL/NW
Totals
June 17, 2009
Net Loss x $1m
Cash x $1b
Cost/Seat
Mile (cents)
($103)
($136)
($375)
$2.1
$2.7
$3.6
11.1
10.6
11.8
($579)
($794)
($1,987)
$2.5
$5.0
11.1
11.7
Outlook for Business Travel in 2009
Copyright 2009 David Grossman
48
2009 Airline Industry Loss Projections
Region
North America
Latin America
Europe
Middle East
Asia-Pacific
Africa
Totals
x $1b
$1.0
$.9
$1.8
$1.5
$3.3
$.5
$9.0
IATA doubled
projected loss
last week
U.S. airlines already lost $2b in 1Q09
June 17, 2009
Outlook for Business Travel in 2009
Copyright 2009 David Grossman
49
How long can they last?
Source: Airline Weekly
June 17, 2009
Outlook for Business Travel in 2009
Copyright 2009 David Grossman
50
1Q 2009: Red Ink
Around the World
Airline
Net Loss x
$1m
Airline
Net Loss x
$1m
AF/KL
BA
($656)
($525)
ANA
JAL
($137)
($616)
LH
easyJet
($332)
($130)
KE
MH
($413)
($199)
Ryanair
($190)
SQ
$43
Source: Airline Weekly
June 17, 2009
Outlook for Business Travel in 2009
Copyright 2009 David Grossman
51
1Q 2009: LCCs Recover
with Lower Fuel Prices
Airline
Net Loss x $1m
Cash x $1m Cost/Seat
Mile (cents)
WN
B6
($91)
$12
$2,100
$634
10.0
9.1
FL
F9
$29
($161)
$315
$70
9.2
8.5
VG
($40)
$38
9.5
If oil prices continue to rise LCCs will be forced to
scrap expansion plans and raise fares to survive
June 17, 2009
Outlook for Business Travel in 2009
Copyright 2009 David Grossman
52
Low Cost Carriers Are Growing Again
•
•
•
•
AirTran: Allentown, Asheville (NC), Atlantic City,
Branson (MO), Charleston (WV), Harrisburg,
Knoxville, Portland (ME), building hubs in MCO
and MKE
jetBlue: Barbados, Columbia, Costa Rica,
Jamaica, LAX, Saint Lucia, SFO
Southwest: BOS, LGA, MKE, MSP, code share
to Canada and Mexico
Virgin America: BOS, LAS, SNA – nine
destinations in first two years of operation
June 17, 2009
Outlook for Business Travel in 2009
Copyright 2009 David Grossman
53
Southwest’s Oil Hedge Problem
Profit / (Loss)
(x $1 million)
2006 2007 1Q08 2Q08 3Q08 4Q08
1Q09
$499 $645
($91)
$37 $529 ($205) ($83)
69 consecutive profitable quarters, now 3 losses
4Q08 would have been +$61m without hedges
Southwest is dumping fuel hedges, but still has
nearly $1b in liability.
June 17, 2009
Outlook for Business Travel in 2009
Copyright 2009 David Grossman
54
Southwest’s Oil Hedge Problem
When oil prices were high
Southwest made money
because they were still
purchasing fuel at 33%
of the market price
…an ingenious strategy…
June 17, 2009
Outlook for Business Travel in 2009
Copyright 2009 David Grossman
55
Southwest’s Oil Hedge Problem
Year Hedged Hedge Price
2005
2006
85%
73%
$26
$36
2007
2008
95%
70%
$50
$51
2009
2010
75%
50%
$73
$90
2011
2012
40%
35%
$93
$90
Southwest kept
other airlines
prices in check
…that allowed Southwest to make money
while others couldn’t.
June 17, 2009
Outlook for Business Travel in 2009
Copyright 2009 David Grossman
56
WN Pursues Business Travelers
•
•
•
•
•
•
•
•
•
Priority boarding for full fare customers
Families board later
Drink coupons for full fare customers
Power/USB hookups in gate areas
No change fees or other fees
Pursuing business destinations
Using major airports
Galileo distribution arrangement
WestJet and Volaris alliances
June 17, 2009
Outlook for Business Travel in 2009
Copyright 2009 David Grossman
57
Southwest Airlines Continues to Grow
Mkt
Entry
Date
PHL
PIT
DEN
IAD
SFO
BOS
LGA
MKE
MSP
2004
2005
2006
2006
2007
2009
2009
2009
2009
June 17, 2009
Mkt Share Mkt Share Current
12/06
3/09
Rank
12.1%
11.6%
3.5%
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Outlook for Business Travel in 2009
14.8%
17.4%
11.7%
4.5%
7.8%
???
???
???
???
2nd
2nd
3rd
5th
3rd
???
???
???
???
Copyright 2009 David Grossman
58
Next for Southwest?
•
•
•
•
Rapid expansion at BOS, DEN, LGA,
MKE, MSP, SFO
Entry into Northeast shuttle market
Entry into CVG and MEM as Delta
refocuses after NW absorption
ATL and CLT – it’s only a matter of time
June 17, 2009
Outlook for Business Travel in 2009
Copyright 2009 David Grossman
59
Oil Prices on the Rise Again
June 17, 2009
Outlook for Business Travel in 2009
Copyright 2009 David Grossman
60
Network/Legacy Airlines Still
Disadvantaged
•
•
•
Even with capacity cuts, ancillary fees,
and fare hikes of the last two years
network/legacy airlines are still losing
money in the global recession
Even after bankruptcies and
restructuring network/legacy airlines still
have higher cost structures than LCCs
LCCs are driving prices down again
June 17, 2009
Outlook for Business Travel in 2009
Copyright 2009 David Grossman
61
Airline Fleet Types
WN
FL
B6
CO
AA
UA
US
DL + NW
1
2
2
4
6
6
6
Even after bankruptcies
and years of cost cutting,
LCCs still have cost
advantage over legacy
airlines with multiple
aircraft types
9 or 10
Excludes commuter affiliates and regional jets with <90 seats
June 17, 2009
Outlook for Business Travel in 2009
Copyright 2009 David Grossman
62
The Aging U.S. Fleet
Airline
jetBlue
AirTran
Southwest
Continental
US Airways
United
Delta
American
Northwest
June 17, 2009
Years
Outlook for Business Travel in 2009
3
4
10
10
12
13
14
15
18
A problem that
will outlast
the recession
Copyright 2009 David Grossman
63
Likely Candidates for Retirement
Airline
Aircraft Type
DL/US
757-200
Avg Age
(Years)
163
16-18
AA/DL
MD80
417
18
248
16-20
CO/UA/US 737-(200-500)
# in
Fleet
AA
767-200
15
21
NW
DC9
94
36
June 17, 2009
Outlook for Business Travel in 2009
Copyright 2009 David Grossman
64
Other Aviation Trends
•
•
•
•
•
•
Consolidation (particularly in Europe, LCCs)
DL/NW “realignment” (downsizing)
Open skies
Alliance switching
Long range aircraft over-flying traditional hubs
Center of commerce shifts east
June 17, 2009
Outlook for Business Travel in 2009
Copyright 2009 David Grossman
65
Over-flying Traditional Hubs
•
•
New aircraft allow super long flights
New non-stop routes:
–
–
–
–
–
–
•
JFK, IAH, SFO, LAX to Dubai
JFK to Abu Dhabi
IAD to Doha
ORD to Delhi
JFK to Mumbai
SFO to Bangalore
The losers will be AMS, CDG, FRA, and LHR
June 17, 2009
Outlook for Business Travel in 2009
Copyright 2009 David Grossman
66
U.S. Hotel Industry Metrics
Avg Rate/Day
April 2009
$98.37
Change
(-9.4%)
56.4%
(-11.1%)
May 2009
Change
4,744,971
+3.1%
522,778
(-22.2%)
Occupancy
Existing Rooms
In “Pipeline”
Source: Smith Travel Research (year over year))
June 17, 2009
Outlook for Business Travel in 2009
Copyright 2009 David Grossman
67
Hotel Industry Metrics
•
Bookings down 3% in 4th quarter 2008*
•
NYC hotels selling for <$125/night*
•
Rising hotel participation in Priceline distressed
inventory booking product
•
Global hotel prices dropped by 12% last year**
Sources: Carlson Wagonlit Travel*, Priceline and Hotels.com**
June 17, 2009
Outlook for Business Travel in 2009
Copyright 2009 David Grossman
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U.S. Hotel Projections
Avg Daily Rate (ADR)
2009
2010
$102.89 $104.41
ADR change Y/Y
-3.6%
+1.5
Occupancy Rate
56.5%
56.5%
Source: Smith Travel Research (STR) (April 2009)
June 17, 2009
Outlook for Business Travel in 2009
Copyright 2009 David Grossman
69
Hotel Trends
•
1 less air booking = .4 fewer hotel stays*
•
Luxury brands hurting as
more travelers downgrade
•
Some hotels are removing amenities from
rooms, coffee, snacks from lobby, etc., and
charging for Internet access
*Carlson Wagonlit Travel and Pegasus
June 17, 2009
Outlook for Business Travel in 2009
Copyright 2009 David Grossman
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The Problem With Car Rental Rates
Rental cars should lose
customers proportionately
to air and hotel, but any
savings may be buried
in taxes and fees assessed
in many cities
June 17, 2009
Outlook for Business Travel in 2009
Copyright 2009 David Grossman
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Travel Industry in Recession:
Open Questions
•
•
•
•
•
•
Are business trips postponed or lost?
Are increased webinar, video, conferencing
permanent changes?
Is downgrading policy permanent?
Will capacity keep pace with demand?
Will prices stay low or decline more?
Will business travel recover before the
recession is over?
June 17, 2009
Outlook for Business Travel in 2009
Copyright 2009 David Grossman
72
Recommendations in a Recession
1.
2.
3.
4.
5.
6.
7.
A good time to travel if you have funds
Renegotiate corporate contracts
Consolidate meetings spend in travel dept.
Practice demand management
Reduce travel for internal meetings
Use more computer/teleconferencing
Watch for last minute specials and price
reductions and seek credits and refunds
June 17, 2009
Outlook for Business Travel in 2009
Copyright 2009 David Grossman
73
Recommendations in a Recession
7. Leverage preferred relationships
8. Avoid ancillary fees with WN, elite status,
packing light
9. Stay at hotels with free breakfast,
Internet access, business center, parking
10. Consolidate multiple stops on one trip
11. Encourage more day trips
12. Strong $ dollar = bargains abroad
June 17, 2009
Outlook for Business Travel in 2009
Copyright 2009 David Grossman
74
Business Travel Outlook for 2009:
Uncertain, Tumultuous Times
David Grossman
June 17, 2009
Questions?
Copyright 2009 by David Grossman