By Bruno Despujol, Anne Pruvot and Scot Hornick
Bruno is the world leader in the hospitality industry and Oliver Wyman’s services and a partner in the practice of transport and services. Anne is a transport and services partner specializing in rail and tourism. Scot is the leader in the hotel and service industry in the Americas and a transportation and service partner.
When Covid-19 shut down economies around the world last spring, it also halted all travel by business leaders to customers, suppliers, conventions, trade shows and their corporate offices. Almost overnight, millions of people around the world started working from home and using video conferencing technology to get to meetings and negotiate deals.
Eight months later, the situation has not changed dramatically when it comes to business travel. And, there is growing evidence that the category – the most profitable for airlines and other hotel companies – may never fully replenish itself. At the very least, we expect business travel to remain depressed through 2023.
The greatest disruption is expected in the domestic travel category which accounts for 40% of business travel. This includes travel between offices within a company or to conventions and trade shows. We forecast a long-term contraction of up to 10% in business travel overall, as employers and employees increasingly feel more comfortable doing business through video conferencing apps. Another factor holding back business travel is the reluctance to fly abroad and recent blockages in major European cities.
In Oliver Wyman’s second traveler sentiment survey, 43% of the more than 2,500 business travelers surveyed said they expected to travel less for business even after the disappearance of Covid-19. That response was 16 percentage points higher than the 27% who said in the May survey that they expected to travel less – a clearly troubling increase from the perspective of anyone dependent on those incomes.
Respondents cited two reasons for the expected behavior change: 34% had health and safety concerns, and 31% said teleconferencing and remote working arrangements were as effective as being in the office and travel. While health concerns about travel would likely dissipate with the development and release of a vaccine, respondents’ desire to work from home and use video conferencing suggests that a slowdown in business travel could persist long after the Covid conquest.
Particularly difficult is the fact that customers of elite airlines and hotels, who take a large portion of business travel, are the most likely to be able to work from home after the pandemic and rely on video conferencing. Nonetheless, our survey shows that it is recognized that while videoconferencing is a viable alternative for maintaining relationships, it is less effective for establishing new ones.
Another potential obstacle to the return of business travel is the recession triggered by the coronavirus which has prompted many companies to cut their travel budgets. Survey respondents cited tighter travel budgets as the third reason they expect to travel less on business in the future. Even before the coronavirus crisis, companies had determined they could meet the same goals with travel budgets 6% lower, according to American Express
Sentiment on videoconferencing resembles the responses given in another survey by Oliver Wyman on the sustainability of videoconferencing. In that research, 61% of 6,900 people surveyed said they would use video conferencing more after the pandemic because it was as effective as in-person meetings and saved time. The travel and technology surveys both sampled people in multiple countries, including the United States, China, the United Kingdom, France, and several other European countries. The travel survey focused on people who traveled, especially for work.
In addition, the Traveler Sentiment Survey also shows continued reluctance to attend conferences or any large gatherings as potential supercast events. Where respondents would be relatively comfortable dining out, taking a flight and staying in a hotel, 43% said they would be uncomfortable attending a conference or trade show. Until that number drops significantly, conference organizers are unlikely to experience live events, either by sticking to the virtual or postponing after the development of a Covid vaccine.
Less travel for senior executives
There is also some evidence that the current crop of business travel appears to involve fewer senior managers and more categories of essential workers like engineers or systems analysts. Where the activities of senior executives can often be handled by video conferencing, workers involved in installing a key part of a manufacturing plant or glazing an office building are needed in person.
The magnitude of the decline in executive travel is suggested by trends in occupancy rates and average room rates at hotels in larger cities. For example, a comparison of those in the top 25 urban areas of the United States versus those in mid-sized cities shows a substantial drop in both occupancy and rates in larger cities starting in March. In August, hotels in mid-sized cities – which normally follow their larger city counterparts – were doing the same or better than those in larger metropolitan areas.
The resilience of extended stay hotels versus hotels where typical stays are one or two nights also suggests that the bulk of business travelers during Covid may come from mid-level professionals involved in ongoing project work. . Stays of this type of business traveler are often longer and involve smaller budgets. As of March, revenue per available room in extended-stay hotels exceeded revenue in non-extended-stay hotels, while the reverse is generally the case.
What would a drop in business travel mean for the travel industry? Business travelers are those who buy business class and first class seats on airlines. They are the ones who are most likely to have last-minute needs to fly somewhere, which means they pay the highest fares more often. Executives also tend to stay at upscale hotels that offer amenities like fitness and business centers, meeting rooms, and top-rated on-site restaurants. Or they stay in larger hotels where the conventions they attend are held. They also spend money on items like catering, car and taxi services, theater, and other cultural and sporting events.
In essence, any decline in business travel means less for the industry’s most valuable customers. This may require restructuring of airfares to replace lost revenue. Obviously, some restaurants and even some hotels may see their income drop or even be forced to close.
There is also the less direct impact of business travel. Business travelers often extend their business trips for sightseeing and shopping. Some cities like Paris, Cannes, San Francisco and London – the sites of many business conferences – depend on it to raise municipal sales taxes and tourism. Places like Orlando Florida and Las Vegas were basically built around this kind of spending.
Collection of leisure shows
An interesting thing is the contrast we see with pleasure travel where there is a real pent-up desire to return to visit friends and family. Although air traffic is still well below 2019 levels, it has continued to increase over the months with small spikes in the summer and Labor Day weekend. A substantial increase in demand can be expected with the development and dissemination of a vaccine. After the global financial crisis of 2009, tourist travel jumped 11%; after the SARS epidemic in 2003, it jumped 9%.
Of course, as long as Covid-19 remains a real threat, it is difficult to anticipate to what extent people and businesses will change their behavior. We also cannot know the attitude of people once a vaccine is readily available. But with video conferencing as a viable alternative, there’s no doubt that businesses will seriously rethink the number of trips required.
Grant Alport and Scott Boland-Krouse, both directors of Oliver Wyman’s Transportation and Service Practice, contributed to the research and ideas that made this article possible.