Giving Hotels the Business

A typical business trip in 2007 will cost 4.5% more. But if the economy slows, business travel could once again stumble

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It's a good thing the economy is doing so well these days, otherwise companies wouldn't be able to afford the rising cost of business travel.

As anyone who has to suffer through the ordeals and delays of modern air travel knows, the travel industry is booming. Airlines are emerging from bankruptcy, and new hotels are popping up in every corner of the globe, with many more in the pipeline. In its 2007 business travel forecast, American Express (AXP) expects that corporate travel costs will continue to rise, though at a slower pace than in 2006.

Mike Streit, vice-president and global leader for American Express Business Travel Advisory Services, predicts that "an average domestic North America trip, inclusive of airfare, car rental, and hotel stay, will increase $46, or 4.5%, in 2007, and an average international trip with airfare and hotel will increase $180, or 4.6%."

Buffered Against Belt-Tightening

The reason for the increase can be traced to rising buyer demand, tightened inventories, and higher supplier operating costs. American Express predicts that global airfares will rise between 3% and 5% for a domestic economy flight and 3% to 7% for international business routes. Hotels, despite the building boom of the past few years, are also expected to hike their rates. In North America, rate increases could be from 2% to 6% for midrange hotels and 3% to 8% for premium and luxury properties. Overseas, increases will be commensurate. The Latin American market, which has been soft, will see prices go up as a result of improving economic conditions.

The downside, of course, is that these increased costs may lead many companies to require their people to travel on a tighter budget or curtail business travel entirely. Some large hotel chains, such as InterContinental (IHG) and Marriott (MAR), are buffered against such belt-tightening because they have properties targeting nearly every price range. InterContinental, for example, owns its eponymous InterContinental luxury chain but also operates more moderate lines such as Holiday Inn, Crowne Plaza, and Staybridge, while Marriott has the upscale Ritz-Carlton as well as its flagship Marriott line and others.

Despite rising costs, the consensus is that CEOs and other senior executives will continue to patronize high-end hotels, especially those with aggressive corporate discounting policies and rewards programs. Luxury hotels also enjoy a fair amount of insulation against cyclical rises and falls in pricing because they tend to cater largely to a clientele that has enough money to weather changing conditions.

Business vs. Leisure

Still, it is very hard to nail down just exactly how much of every travel dollar is spent on business, as opposed to leisure, travel. Bobby Bowers of Smith Travel Research in Hendersonville, Tenn., points out that a rough way to estimate the total would be to break down the numbers into dollars spent during the week and during the weekend, working from the assumption that people travel for business during the week and travel for pleasure on the weekend.

"There was about $100 billion spent on room rates in North America in 2006, with about 70% during the week," says Bowers. "But sometimes business travelers tack on a couple of extra days to play golf or they bring along their families so the numbers get real fuzzy. But the best back-of-the-envelope guess is that about $70 billion was spent last year in the U.S. on hotel visits alone. Factoring in airfare? Shoot, that's even trickier."

Consumers may be putting away their wallets (see BusinessWeek.com 5/17/07, "Consumer Spending Could Be Out of Gas"), but companies are still spending, so now is a good time to take advantage of T&E accounts. Take a look at BusinessWeek's lineup of the best new business hotels. With a little luck, you'll be able to stay at one of these properties on your next business trip.