Survey Shows Buyers Renegotiating Before Contracts Expire

Michael B. Baker, Jay Boehmer & Seth Harris, Business Travel News, 8/17/2009

While the economic environment has created challenges for corporate travel buyers, it also has offered some opportunities, as many have reported success in renegotiating agreements with travel suppliers before contracts expire, according to a Topaz International survey fielded in late July and early August.

Buyers reported the most success in renegotiating hotel agreements. Of 256 respondents, 82 percent said they got their hotel suppliers back to the negotiating table before the end of their contract. Only 2 percent said they were unable to renegotiate hotel agreements.

The hotel industry's quick about-face from a strong seller's market to a buyer's market left many corporate buyers this year watching rates falling lower than those they negotiated last summer, before witnessing autumn's economic freefall. Analysts consistently have lowered hotel performance expectations throughout the year, and many major markets have seen double-digit percentage year-over-year declines in hotel rates. While some hotels provide automatic mechanisms to adjust corporate rates in line with market declines, for many buyers, 2009 rate negotiations never truly ended.

"Some are on their fourth or fifth round of negotiations," said Margaret Bowler, Hogg Robinson Group's director of global hotel relations. "As markets have opened up, hotels have been happy to take in more volume at those rates as well."

While many analysts have said hotel rates are near their bottom, they still expect slight declines in rates in 2010, so buyers' target will continue to be a moving one.

Although 80 percent of those corporate travel buyers who tried to renegotiate their airline agreements reported success, while about 55 percent of 251 respondents to that question didn't try, that doesn't necessarily mean buyers are tearing up their old airline contracts in favor of completely new ones. Instead, the changing marketplace has prompted widespread reviews, amendments and modifications, analysts said.

"Gone are the days of set-it-and-forget-it airline deals," said Dan Pirnat, general manager of TRX Travel Analytics. "I tell clients they should expect to have a dozen to two dozen amendments with any major airline contract over the course of two years. It's because of the shift in fare ladders and the shift in their ability to be nimble and modify pricing and capacity. It's a much more dynamic marketplace than I've ever seen."

Sources report that airlines have been resistant to bend too far in raising discount levels since airline yields already have been hit hard by a preponderance of leisure passengers traveling on deeply discounted published fares. Still, opportunities remain for buyers seeking to renegotiate.

"Business travel is not likely to increase rapidly, so you'd think that would make opportunities for good negotiations," said Management Alternatives vice president John Heilner. "My general impression is that domestic discounts are not getting better, but for international—where premium traffic is being fought over quite aggressively—there are some opportunities."

Travel management company renegotiation activity surged this year as many companies evaluated their agency financial and service arrangements.

In the survey, 21 percent of 233 travel buyers said they successfully renegotiated TMC agreements prior to the end of the contract term, and only 4 percent said they failed.

Travel management executives began noticing the trend last autumn, following the souring of the global economy, especially among large multinational accounts.

Buyers had the second-highest level of success in renegotiating car rental agreements, with more than 87 percent of the roughly half of the 248 surveyed buyers who tried to renegotiate reporting success.

More than half of that sample did not attempt to renegotiate those agreements. Car rental consultant Neil Abrams, president of Abrams Consulting Group, said car rental companies will take a firmer line in holding rates steady.

Although second-quarter earnings were down for both Hertz Global Holdings and Avis Budget Group, Abrams said the companies' cost-cutting measures and fleet reductions have left them better prepared to weather the economic downturn.

"From a corporate standpoint, there aren't going to be any deals too good to be true, and there's not going to be a significant sacrifice to maintain long-standing relationships," Abrams said. "I think you'll see flat or marginal increases in upcoming negotiations."

To see graphical results from the Topaz Summer Survey, please click here.