Worry, But Don't Panic

How miserable will the economy get, and how will it affect companies' business travel and meetings?

In the latter part of January and into early February, it seemed likely that the economy could get very miserable indeed. On January 21, stock markets across the world took a massive tumble. In Europe, more than $300 billion was wiped off the books over fears the U.S. was headed toward recession. In response, the Federal Reserve cut its benchmark interest rate by three-quarters of a percentage point, the first time it has cut rates that sharply since 1982.

And according to the Institute of Supply Management's January 2008 Non-Manufacturing Index, nonmanufacturing business activity contracted for the first time since March 2003. Fourteen nonmanufacturing industries, including accommodation and food services, reported contraction.

So, the sky is falling, right?

Not so fast, says Jan Freitag, vice president for global development at Smith Travel Research in Nashville. “We don't think the impact [of an economic downturn] will be as stark as people are making out,” says Freitag. “There's an interesting disconnect here. The sentiment of the investment community and bankers seems to be very dire, yet for hotel operators things don't appear quite so bad. They are cautiously pessimistic. They are waiting for something to hit them, but they don't see it in their group bookings. And when in doubt, we listen to the operators.”

Business Meetings and Travel Hum Along

Meeting Professionals International recently released FutureWatch 2008, the trends study for the meetings industry. According to the survey, which closed in November 2007, planners expect both costs and budgets to increase, but are worried about the economy. After discussions with numerous planners at the recent MPI Professional Education Conference-North America in Houston, Bruce MacMillan, MPI president and CEO, concluded that while concerns about the economy remain universal among planners, “anecdotal evidence suggests there has not yet been any increase in cancellations or downturn in attendance.”

“However,” he added, “we do see some delays or deferrals — people might hold off making commitments on future meetings. And there is some evidence that budgets are being reduced. There is some uncertainty out there, and planners are hedging their bets a little, but they aren't panicking, and we aren't seeing any knee-jerk reactions.”

“We're definitely not in the sky-is-falling crowd,” agreed Bill Connors, executive director and chief operating officer of the National Business Travel Association. In early February, NBTA began a Web-based survey to see if members were getting pressure or directives from upper management to change travel policies or budgets because of recent publicity about a possible recession or economic downturn.

According to Connors, during the initial stages of the survey, 38 percent of respondents said they were receiving pressure to change travel policies and/or budgets; another 38 percent said they were not; and 22 percent reported no changes, but that this could change if the economy worsened.

“So clearly 60 percent of companies are not overly concerned,” said Connors.

Airline Bookings Stable

Major airlines all have been reporting that future bookings remain stable.

In an earnings call accompanying the release of Continental Airlines' fourth quarter 2007 earnings report January 17, Larry Kellner, Continental chairman and CEO, sounded optimistic. “Looking at 2008, there had been numerous reports that the U.S. is on the cusp of an economic recession,” he said. “We are watching our future bookings closely and do not expect to be slowed down based on our current booking levels.”

In the same call, Jeff Smisek, Continental president, said the airline has met with about 50 top corporate accounts who “generally indicated to us that they expected their international travel would be up slightly versus 2007 and that their domestic travel would be about the same level as 2007.”

And in a call announcing fourth-quarter 2007 earnings, J. Scott Kirby, U.S. Airlines president, said that while the airline “remains concerned about the economy … it's hard to find any evidence of a booking slowdown.”

Time Will Tell

Bjorn Hanson, PhD, hospitality and leisure group principal for Pricewaterhouse-Coopers, is not as sanguine about the future.

“We think things are going to happen in two phases,” says Hanson. “First, concern about corporate profits will cause CEOs and CFOs to ask travel managers to look for ways to travel with less cost.” This, says Hanson, could mean anything from trading down in hotels to limiting holiday parties.

“In short, they'll be asked to be aware, to be careful with spending,” adds Hanson. “That will lead to a second phase, because we think the first quarter [of 2008] will be a surprisingly weak quarter in the hotel industry and that word will get around.”

This second phase, Hanson predicts, will be marked by directives to travel managers to do such things as try to renegotiate rates and minimums on corporate hotel contracts. “And as we get into the negotiating season for 2009 — September, October, and November — we'll see a real different kind of attitude,” Hanson predicts. “There will be a reduction in travel budgets. Not a crisis kind of reduction, but a stepping back a couple of years in volume.”

Ironically, the financial turmoil of the last several months comes on the heels of a survey of planners (taken during the third quarter of 2007) by PKF Hospitality, Atlanta, that found that the improved fiscal health of corporations and associations was putting less pressure on meeting planners to curb costs.

Robert Mandelbaum, PKF's director of research information services, said that even with evidence that a seller's market would persist, the survey suggested that “rising room rates, attrition clauses, and second-tier cities are no longer the hot-button issues that they once were.”

For example, from 2004 through 2006, the percentage of planners asked to consider a second- or third-tier city in an effort to control costs rose from 31.5 percent to 40.3 percent. In 2007, that trend went into reverse — only 30.8 percent said they had pressure to select a less expensive meeting destination.

“The 2007 survey certainly took place before we got hit with the heavy recession news,” says Mandelbaum. “Our outlook for the hotel industry was more optimistic then. Our forecasts have been downgraded to a degree. It's still going to be a seller's market, but not as strong as people were thinking a few months ago.”

What Can Planners Do?

Still, a downward trend could open up opportunities for planners, even as budgets come under pressure. Like Hanson, Freitag agrees that if the economy deteriorates, small meetings will be the first to go. At the same time, a softening of demand, Freitag said, could help planners find deals with hotels that try to recoup lost group business.

Yet for planners looking to cut costs, booking top-tier destinations will continue to be problematic. Demand will remain high in many of those cities, as well as for high-end, luxury properties. A better strategy, says Freitag, will be to keep an eye on hotels coming online, creating competition that could benefit the planner.

The good news, according to Connors, is that while corporate travel departments used to take the brunt of spending reductions during bad economic times, that is no longer the case. “I think it has changed over the last few years, based on the global nature of the economy,” says Connors. “If corporations don't have people out there traveling, and buying, and selling, there will be consequences.”