The business class paradox

The war between Qantas and Virgin has resulted in unprecedented discounting on business class airfares.
The war between Qantas and Virgin has resulted in unprecedented discounting on business class airfares.

Travel management companies are warning of significant cost increases for the coming year – for business travellers in the Asia Pacific generally and especially those in Australia and New Zealand.

The global financial crisis of 2007-08 also still hangs like a pall over corporate Australia, which now appears to have made permanent the belt-tightening of five years ago in travel spending.

Road warriors are being asked to make greater use of discount fares to cut the airfare bill and to avoid overnighting on the road where possible to cut accommodation bills.

And companies are being warned that, on top of the accommodation bill, they face substantial increases in 2013 for items like car hire.

Some of the travel data that has come out of the past year or two makes for bizarre reading. For example, there have been wild gyrations in domestic airfare levels since the end of 2010 following Virgin Australia’s decision to reinvent itself as a business airline.

The real business class fares people are paying have “fallen off a cliff” in the past 18 months as Virgin’s new business class has triggered unprecented discounting at the pointy end in a market space that had previously been a Qantas monopoly.

Compared with the reference mark of 100 points in July 2003 when the Bureau of Infrastructure, Transport and Regional Economics airfares survey began, business class fares had risen to 107 in November last year but had crashed to 64.2 in July as Virgin and Qantas amped up their business class war and is still at only 64.4.

But there has been a steep increase in the real rates business road warriors are paying at the back of the plane; as business class fares have plummeted, companies paying for economy travel for people to move around for work are finding it harder to score discounts.

The “full economy” index last December was as low as 91.2, but had zoomed up to 122.5 by August and is still at 118.6.

In the background, there is a furious sales campaign underway as Virgin tries to poach Qantas’s big corporate contracts. In these campaigns, one typically woos the others’ customers with discounts of up to 40 per cent off the published fares on any given route.

At the holiday end of the market, a spike in “best fares” – the lead-in discounts – that followed the grounding of Tiger Airways in July and August last year has seen “best discount” rates settling 10-20 per cent dearer than they’d previously been.

In the middle of all that, the carbon tax and higher jet fuel prices have made sub-$50 fares harder to find. Tiger Airways, for example, now tends to add around $10 to its best one-way rate, which is usually around $59 for a typical short interstate route. Last year those specials were $49 or less.

One of the big corporate travel bookers, Carlson Wagonlit Travel (CWT), told the AFR that increases in car rental rates of up to 7 per cent were on the way in 2013.

CWT’s director of program management in Australia and New Zealand, Val Feuell, said car rental operators were facing big increases in their fixed costs. But she believes other suppliers are lifting prices in the Asia Pacific generally -- because they can get away with it.

“I think suppliers doing forecasts still see Asia as being a cash cow,” she said. I suspect Ms Feuell is telling businesses something they already know: if it isn’t already, Australia is close to the most expensive place on the planet to do business.

Not least of the problems for business travellers is the effect of the two-speed economy on hotel rates: according to the AFR survey, the travel bookers are telling their customers they now have to book rooms up to three weeks in advance to be guaranteed of their negotiated corporate rate, especially in the mining capitals, Brisbane and Perth.

In fact, in Perth earlier this year, I heard that it was almost impossible to get a last-minute premium room in one of the big hotels for under $600 per night. Compare that to “normal” economic conditions where a corporate room could be negotiated for $200-$300.

In other capitals, hotels are reporting higher room occupancies, which are pushing up room rates. As the cost of building and running hotels increases, fewer new ones come into the market.

The post-GFC drive to reduce travel costs may or may not last. Airline managers like Virgin’s John Borghetti believe the air travel business will eventually return to full health on the back of a stronger economy.

Even in the current straightened circumstances, there’s a good reason why business travel is ranked many companies’ third largest outlay after wages and bricks and mortar: in business, face-to-face meetings will always be worth their weight in gold in closing deals and generating new trade.

Travel managers say booking ahead, applying a “best fare of the day” policy and bundling different meetings together is a smart way to cut the outlay without reducing overall travel.

This story The business class paradox first appeared on The Sydney Morning Herald.