Recovery of Business Travel – ‘Everybody Talks but Nobody Knows’

The media, when communicating about the prospects for airlines, aircraft manufactures, the hotels, and vendors that serve these sectors report on the return of business travel to pre-pandemic levels. But nobody knows! It’s reasonable to estimate an upcoming business travel recovery with an abstraction from what occurred after prior recessions, especially the post-financial crisis period. Advancements in telecommunication leading to widespread adoption has erected a sizeable barrier to such abstractions.

Recent hotel demand data or data from business travel spending can provide insight into the volume of guests doing business away from home. Unfortunately, the pandemic is still raising questions about data reliability and the time series are too short for extrapolation. Modeling challenges grow with reports from major corporations rethinking employee travel in attempts to reduce their carbon footprint.

This and the next editions of HOTEL CURRENTS™ present the cases for and against the complete return of business and travel based on conceptual arguments backed by research. A return of business travel to 2019 levels is difficult to foresee, but an increase in future leisure travel to replace a deficit in business travel seems plausible.

Some Notes on Business Travel

Clarifications are in order before launching into the topic of the future of business travel. First, not all business travelers elect hotels for accommodations. The ‘leakage’ from short-term rentals and personal arrangements (i.e., staying with family or friends), for example, probably does not exceed 10%.

Second, hotels accept many alternative ways of categorizing demand segmentation. It is a minefield! For example, there are geographic segmentations (e.g., domestic and international) and, among others, even psychographic segmentations (e.g., lifestyles). Perhaps the most popular delineation is to segment demand by purpose of trip and booking arrangement. The trip purposes include for business, leisure, and meeting/group. The main booking sub-segments of business travel include transient, corporate, and group. We are focusing on business travel, which is transient business plus corporate.

In the U.S., leisure travel historically makes up approximately 55% of demand; business follows with approximately 30%; and meeting/group makes up the balance. Today, leisure is running well above long-run average at 70 plus percent and business well below at 20%. Large group travel is almost nonexistent. Some cities, such as Orlando, have an overweighting of leisure travel demand. Some urban and suburban hotels heavily rely on business travelers. And convention hotels exist in many city centers.

Telecommunication Innovation

From the beginning of the COVID-19 pandemic until now the stock price of Zoom Video Communications, Inc. (ZM) elevated from around $60 to about $375. The company advanced telecommunication technology enough to make human collaborations online a marginally better and more convenient experience.

Exhibit 1 presents a Venn Diagram of intersections among telecommunication innovations (TI), business travel (BT), and remote work (RW).[1]  All four intersections fuel interest in research and have potentially important implications for future BT. Specifically,

1.  Intersection of TI and RW – Many companies today are laser-focused on the future distribution of remote and in-person work time. This interaction during the pandemic likely stimulated considerable leisure travel.

2.  Intersection of TI and BT – If TI creates significant opportunities for businesses to reduce employee trips then BT likely won’t return to pre-pandemic levels.

3.  Intersection of BT and RW – If remote working occurs at increasingly greater distances from offices then occasional trips to offices may create new BT and hotel stays.

4.  Three-way Intersection of TI, BT, and RW – This complicated convergence strikes at the heart of a debate as to whether TI and RW substitute or complement BT, where substitution results in less BT and complementation results in more BT.

EXHIBIT 1: Interactions of Telecommunication Innovation, Work Location, and Business Travel

The Case for Complete Recovery of Business Travel

The case for complete recovery of BT is based on the following arguments:

1.  People believe in face-to-face communication.

2.  People have an innate desire to travel.

3.  The rate of return on BT is high.

Oxford Economics (2009) conducted a detailed study of the rate of return on investments to firms from business travel based on surveys of up to 500 managers. The findings are quite striking. From every $1 invested in business travel, firms realized $12.50 in incremental revenue. In addition, Oxford found that elimination of business travel reduces profits by 17% in the first year.

An insight as to how rates-of-return may be generated from business travel comes in a recent study of labor productivity gains from short-term labor mobility. Piva, et. al. (2018) use data on international business trips across various business sectors to estimate productivity gains from expenditures on business travel. The study has the following conclusion:

“The results suggest that mobility through business visits is an effective mechanism to improve productivity, as we estimate that raising expenditures on business visits by 10% increases productivity by 0.2–0.5%. This effect is about half as large as the corresponding measure found for investing in R&D (p. 1322).”

4.  Endemic Problems with Telecommunications -

Certain interpersonal issues create barriers to wholesale, long-term adoption of telecommunications in place of face-to-face communication. The following issues are among the most researched through human experiments:

• Communication inefficiency caused by the absence of non-verbal cues.
• Hinderances to relationship building and trust.
• Misinterpretations of meanings that lead to conflicts among participants.
• Greater anxiety, financial worry, and loneliness.
• Hinderances to creative thinking and new business development.

5.  Telecommunication Complements BT - The history of research on the effect of telecommunication on face-to-face encounters confirms what seems intuitively obvious – telecommunications substitute for face-to-face communication. Early studies suggesting that telecommunication complement business travel by stimulating more face-to-face meetings were largely dismissed as counterintuitive. The tracings of exactly how telecommunications might translate into more face-to-face meetings remains somewhat vague. Yet, the empirical evidence reviewed by Mokhtarian (2003) suggests that both forms of communication experienced rapid growth during recent decades at the aggregate level. One answer to explain these aggregate results lies in the old saying “all boats rise with the rising tide.” Strong income growth has enabled more travel along with technological advancements. But for physical travel to keep pace, the relative prices must maintain some degree of constancy.

Choo et. al. (2007) model the complex relationship between telecommunication and travel by holding all else constant while isolating the ‘complimentary’ factor. They conclude with, “Our empirical results strongly support the hypothesis that telecommunications and travel are complementary. That is, as telecommunications demand increases, travel demand increases, and vice versa (p. 2).”

Summary

Buying into the conceptual arguments and empirical findings present herein leads to a rational conclusion that business travel will fully recover to pre-COVID-19 levels in the not-too-distant future. Humanistic reasons such as desires for meeting in person and to ‘get away’ coupled with seemingly unresolvable interpersonal deficiencies associated with telecommunications favor traditional travel to conduct business. Business travel has large revenue elasticity and profit implications potentially instigated by labor productivity gains. The relative financial benefits of telecommunication are likely small unless travel costs are excessive, or the economy is in recession. Finally, the findings of coincidental growth of traditional business travel and business meetings over the Internet during periods of general economic growth are heartening for hotels as the U.S. enters an up-phase of the business cycle.

But there is another side of this story to be presented in Part 2 of this blog sequence – The Case Against Complete Recovery of Business Travel.

References

Brown, D. 2021. “Will Holograms be the Next Innovation in the Post-Pandemic Workplace?” Washington Post, February 9.

Choo, et. al., 2007, “Telecommunications and travel demand and supply: Aggregate structural equation models for the US,” Transportation Research Part A-Policy and Practice 41(1), 1-24.

Danstadli, J. M. et. al., 2012, “Video Conferencing as a Mode of Communication: A Comparative Study of the Use of Videoconferencing and Face-to-Face Meetings,” Journal of Business and Telecommunications 26(1), 65-91.

Heller, R. A., 2010, Cost-Benefit Analysis of Face-to-Face and Virtual Communication: Overcoming the Challenges, Cornell University ILR Monograph.

Mokhtarian, P. L., 2003, “Telecommunications and Travel: The Case for Complementarity,” Journal of Industrial Ecology 6(2), 43-57.

Oxford Economics, 2009, The Return on Investment of U.S Business Travel.

Piva, M., et. al., 2018, “Business Visits, Knowledge Diffusion and Productivity,” Journal of Population Economics 31, 1321-1338.

Salomon, I., 1985, "Telecommunications and Travel: Substitution or Modified Behavior?" Journal of Transport Economics and Policy 19(3), 219-235.

Tull, M.T. et. al., 2020, “Psychological Outcomes Associated with Stay-at-Home Orders and the Perceived Impact of COVID-19 on Dailey Life,” Psychiatry Research 289, 1-6.

[1] ‘Remote’ means at home or in other locations away from employees’ main offices.

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HOTEL CURRENTS™
Economics and Hotel Financial Performance

CBRE Hotels Research specializes in translating national and local economic conditions into measures of hospitality market and property- level financial performance.

Contact Jack Corgel at [email protected] for questions and discussion.