American Express Stock – In North America, Big Markets Presaged Covid’s Hit on Corporate Travel
Though it wasn’t until mid-March 2020 that Covid-19 fully took hold in North America, corporate travel spending in the region’s major metro areas felt foreshocks of the pandemic earlier in the year, with pricing levels in key U.S. markets plummeting during the first quarter as businesses halted travel to those areas—even as the virus remained largely limited to Asia and Europe.
Canaries in the Coal Mine
Average hotel rates of were down sharply in the first quarter of 2020 in markets such as Boston, Chicago and Philadelphia, all of which saw prices drop by between 15 and 19 percent compared to the final quarter of 2019. New York’s hotel sector was even harder hit, experiencing a 35 percent pricing plummet over the same period.
Given those cities’ status as major business travel destinations—as well as initial infection “hot zones” during the first stages of the virus’ arrival in North America—it’s little surprise they served as canaries in the proverbial coal mine, foreshadowing further pricing collapses throughout the region as the virus spread.
Sure enough, additional North American markets were soon to follow as the true scale of the pandemic set in, with nearly every other significant U.S. and Canadian metro area seeing a double-digit hotel pricing decline during the second quarter of 2020.
In particular, smaller markets that had escaped Q1 pricing pain suffered from devastating delayed effects in the second quarter. For example, Anaheim—which had actually seen hotel prices inch up 4 percent during the first quarter—came crashing back to earth with a 48 percent drop in Q2. A similar pattern took hold in Austin, Phoenix and several Florida markets—all of which were buoyed in Q1 by higher winter pricing rates—as well as Albany, Columbus, Ottawa and White Plains, among many others. Meanwhile, the major cities that had taken the brunt of the demand shock in the early phases of the pandemic were largely spared further significant damage in the second quarter.
For the remainder of 2020, hotel pricing remained drastically depressed across North America as corporate travel remained at a standstill.
On the other hand, car rental rates proved quite resilient despite the pandemic, with supply limitations and increased demand from leisure travelers wary of flying amid the pandemic among the factors shoring up price stability in that sector throughout 2020, observers noted.
“Car rental volumes declined, but to a much smaller extent than air,” said David Reimer, executive vice president, global clients and general manager for the Americas, for American Express Global Business Travel. “Corporates and travelers alike view cars as a relatively safe transportation option that limits exposure and offers greater privacy than other modes.”
But overall, the downward effect of Covid-19 on business travel spending in North America was massive. In its 2021 BTI Outlook report, the Global Business Travel Association calculated a 60 percent year-over-year decline in North American corporate travel spend in 2020—the biggest drop of any region, outpacing Western Europe’s 58 percent downturn. The figures are even more startling when considering only the final three quarters of the year; from April 1 through year’s end, corporate travel spending in North America plummeted by nearly 80 percent, according to the GBTA.
Data from the American Hotel & Lodging Association offers a more granular view of the degree to which the pandemic halted corporate travel. In a January 2021 survey commissioned by the hospitality industry group, 62 percent of U.S. business travelers polled reported taking an average of more than four business trips per year pre-Covid. In 2020, that number dropped sharply, to 27 percent. Further, 73 percent reported taking fewer than three business trips—and 26 percent took no trips at all—in 2020, even when including the first quarter, before the outbreak officially had reached North America.
As the AH&LA’s recent State of the Hotel Industry report starkly put it, U.S. business travel “essentially ceased” in 2020.
Amid the unprecedented industry upheaval, there was at least one area of normalcy in corporate travel for 2020: perennially expensive markets remained that way. Of the 15 cities with the highest per diem cost of combined hotel, rental car and meal expenses in 2019, nine ranked in the Top 15, according to 2020 data as well.
Despite the steep first-quarter hotel pricing drop-off in New York, the Big Apple ranked as the most expensive city in North America for the year—albeit at a per diem $120 lower than in 2019, when it ranked third. San Francisco, which occupied 2019’s top spot, fell to third in 2020, due largely to a nearly $165 year-over-year plummet in average nightly hotel cost—a decline even steeper than New York’s.
Meanwhile, Santa Barbara moved up from eighth in 2019 to rank second on 2020’s list, propelled by resilient hotel pricing, along with upticks in car rental and meal prices which combined to actually increase the city’s per diem average by about $14. The only other markets in 2020’s Top 15 where the average per diem rose last year were Phoenix, Sacramento and Providence.
While the year 2020 drew to a close amid resurgent infection rates and troubling news of more contagious viral variants, there was plenty of cause for optimism as well—most notably, the rollout of long-awaited Covid-19 vaccines.
But corporate travel’s recovery is projected to be a slow process, and the vaccine is just one of the key steps necessary for the industry to get back to full health, observers note. Border entry restrictions, changing supply dynamics and—perhaps most critically—corporate and traveler confidence remain among the critical challenges still to be navigated.
“In alignment with the current travel restrictions landscape, the trend for corporate demand in North America is predominantly domestic with very little international travel,” said American Express GBT’s Reimer. “We see most clients continue to have a business-critical-only travel policy and with senior-level management approval required,” he added.
Among corporate verticals leading way in getting back onto the roads and skies are healthcare, education, natural resources and transportation, with the SME segment “recovering a little faster” than large corporates, according to Reimer—and that uneven recovery has led to a change in demand patterns, he said.
“For domestic flights, airlines have trimmed capacity significantly on traditional heavy corporate markets like New York, Chicago and Boston, which have struggled with the slow recovery of financial services and professional services,” Reimer said. “By comparison, airlines are shifting aircraft and seats to non-traditional corporate markets.”
Carriers have shrunk capacity on traditional mainstay routes like Boston to New York and Chicago to New York by as much as 90 percent year-over-year during the first quarter of 2021, with routes to and from secondary markets gaining share, Reimer noted.
“Who would have imagined that Chicago to Louisville and Louisville to Philadelphia would be among the Top 15 corporate markets right now, as certain industry verticals like transportation, education and health are recovering faster than others?” said Reimer.
In the face of demand shifts, hotel suppliers are taking a wait-and-see approach to pricing strategies, Reimer noted. The increased demand from corporate travel buyers for dual-rate-load models, with a fixed and dynamic pricing in place for each property—has resulted in significant reduction in booked rates, he noted.
“Nearly 90 percent of GBT customers employed the dual-rate-load model for the 2021 contract year, Reimer said. “And given the process efficiencies of this new approach coupled with the continuing uncertainty in corporate travel demand, we expect customers to demand the same or similar approach in 2021 for the 2022 contract year.”
And it’s not just pricing models. Corporates are re-evaluating nearly every other aspect of travel spending as well—including overall budgets. In a fall 2020 study by Flight Centre Travel Management, T&E was the most commonly cited area of planned cost reduction for 2021.
Meanwhile, the drastically increased emphasis on corporate duty-of-care responsibilities post-Covid will lead to further scrutiny on the cost-benefit analysis of any given trip, many observers predict—thereby putting further downward pressure on travel spending.
Long Term Prognosis
With significant progress on vaccine rollouts across North America and globally, sentiment is on the rise that travel will begin to resume in earnest in 2021. Among frequent U.S.-based business travelers polled in the AH&LA study, 29 percent expected their first business conference in the first half of 2021, while 36 percent anticipated that the second half of the year.
But a full recovery to pre-Covid corporate travel level remains years away—and may never return at all in North America. GBTA projects the region to feel the lingering effects of the pandemic on business travel spending longer than any other, with a projected 5.7 percent decline in North American spending through 2024, outpacing Western Europe’s 4.3 percent drop over the same period.
Along with continued vaccine progress, public and economic policy decisions made by the newly installed Biden administration will play a critical role in spurring corporate travel’s recovery in North America and beyond.
The GBTA report cited the liberal trade and immigration policies expected to be pursued under Biden as key drivers of increased business travel activity. The industry group also stressed the importance of implementing a cohesive public strategy to instill in businesses and their employees the confidence necessary to resume travel.
GBT’s Reimer echoed the importance of concerted, cooperative private-public sector action.
“The Biden administration and governments around the world must work with each other, airlines, airports and TMCs to find solutions to safely open up the international trade routes that are so critical to global recovery.”