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Year Of The Dragon Business travel in China continues to grow, but there are bumps in the road ahead By:Richard D’Ambrosio
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BTE June 2012
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According to the Chinese calendar, 2012 is a year represented by the powerful and benevolent Dragon. The symbolism is potent; in Chinese mythology, the Dragon is an auspicious sign of authority and good luck. Recently, however, other signs have been pointing in a less promising direction for the global economy and with it, the continued growth of China on the world stage. Nonetheless, there’s no doubt that what’s happening in the Middle Kingdom today is creating vast changes – and challenges – for global business and managed travel.
China conducts more than $3 trillion in trade with the rest of the world, according to the Bureau of Statistics for the People’s Republic. This has led to a business travel boom to and from China, as much as $62 billion worth in 2010, reports the World Travel & Tourism Council.
Meanwhile, last year the Civil Aviation Administration (CAA) of China predicted there will be 450 million person-trips in China by 2015. The CAA also forecasts that China will become the world’s largest aviation market by 2020.
Despite this rapid growth, travel is fairly unmanaged by Chinese companies and the market remains a riddle to many western observers. In a report published in 2010, the Association of Corporate Travel Executives (ACTE), in conjunction with AirPlus International, painted a picture of a Chinese travel management industry in its infancy. Contracted deals with suppliers are rare. Few Chinese national companies have full-time dedicated travel managers, and corporate cards are an uncommon sight (used mostly by foreigners because the government-run banks tightly control who is issued credit).
As a result, western travel management executives and business travelers face both problems and opportunities when doing business in this enigmatic country.
Access Denied
The first test has to do with a lack of access to travel inventory. TravelSky is the only officially designated GDS in China for issuing airline tickets, points out Benson Tang, ACTE’s Asia Director, and is not user-friendly. In addition, “domestic brand name hotels are not GDS bookable, especially in the secondary cities. Fax or phone calls are required to make a booking,” says Tang.
Jerry Lang is president of House of Travel, in Aventura, FL, an agency that serves small and mid-sized business. When seat inventory is not available via GDS, Lang’s firm has to buy client tickets online or through an agency in China. “The problem is we have no control over the record. So if the client wants to make a change, we either have to go online or wait for the agency there to open,” Lang says.
Downstream, lack of access to inventory becomes an even bigger issue. “TravelSky has limited capability to communicate with the back office systems of international travel management companies,” Tang says. This results in added expense in accommodating data transfers to create accurate and comprehensive travel management reporting. Because of the workarounds, data also can be lost. “It’s is a huge challenge,” says Tang.
“That’s where the role of the TMC has become so much more critical,” says Maureen Brady, senior vice president of Global Business Solutions, BCD Travel. If a corporation has significant bookings through TravelSky (typically multi-national companies with native Chinese employees who travel) it is critical that a corporation’s travel partners be able to consolidate data.
Brady, who supervises sales and account management in Asia for BCD Travel, says that TravelSky doesn’t have the ability to hold some data elements found in western GDSs. “So sometimes,” he says, “you won’t have cost centers, reason codes, or other data fields common in the other GDS.”
A bigger headache, says Brady, is how some Chinese airlines offer exclusive fares through TravelSky. “We have made a significant IT investment in China, creating a proprietary tool with a direct connect to Travelsky. It applies programming and algorithms to bring forward the best fares,” she notes.
Observers like Brady believe that as the Chinese market matures, and the need to better manage costs becomes more acute, these problems will gradually self-correct.
Seats To Fill, Nights To Book
The gold rush to do business in China also has led to a flood of investment from airlines and lodging companies, both domestic and foreign-owned. In March, domestic China capacity rose 11.8 percent, according to the International Air Transport Association (IATA), but traffic increased more slowly leading to a dip in load factors to 80.5 percent.
To win market share some airlines have been discounting fares. Price wars can be short lived on certain routes, or directed by the opening of new service or added capacity to certain destinations. Steve Koo, general manager, marketing and alliances for Asiana Airlines, believes some of these low fares are temporary. “It’s very difficult for airlines to maintain operating expenses at these prices,” Koo says.
The competition to fill seats is partly to blame for the recent red ink at some of China’s national carriers. China Southern Airlines Ltd., the country’s biggest carrier by number of passengers, said its profit in the three months ended March 31 tumbled 74 percent from a year earlier. Beijing-based Air China Ltd. said its quarterly profit sank 85 percent. An aggressive expansion to the US, while the economies of both countries slowed, led to a 2.4 point decrease in load factor for its North American routes, the airline added.
A similar situation exists in lodging. Jones Lang LaSalle Hotels reports that the number of internationally branded hotel rooms has grown more than 62 percent in the past five years.
Hilton has 30 hotels open in China on its way to 100 by 2015. The company had only five hotels about five years ago. Intercontinental Hotels Group (IHG), which operates or manages 170 hotels and nearly 56,000 rooms in China, added nine hotels in the first quarter, representing 2,716 new rooms. IHG has another 155 hotels and more than 51,000 rooms planned for China in the next three to five years.
Starwood Hotels & Resorts Worldwide opened eight hotels in China in the first quarter of 2012, with plans to open 15 additional hotels by the end of this year. Nine of the new hotels will be Sheratons, including what will be Starwood’s largest hotel in the world, the 3,863-room Sheraton Macao Hotel, Cotai Central.
While China’s recent economic slowdown isn’t helping, “the current supply additions are in some cases a bigger concern than the economy,” says Konstanze Auernheimer, director of marketing and analysis at STR Global. Auernheimer reports that Shanghai filled only 53 percent of its rooms during the first quarter of 2012. Average daily rate (ADR) dropped by 2.3 percent.
Jones Lang LaSalle believes the industry could find itself in an overcapacity situation for the next three to four years, a potential boon for business travelers as rates are already extremely affordable. For the quarter just ended, IHG reported ADR across its brands in China was only $98. For its five-star China hotels, ADR was $172.77. At the 720-room Marriott City Center, opened in Shanghai in January close to People’s Square, a standard room costs approximately $185 going into the summer season. Prices are even more competitive elsewhere, like Tianjin, a port city located southeast of Beijing, where occupancy rates languish below 50 percent.
However, hotels are extracting higher rates during peak demand. Beijing, a more mature market, recorded a 62 percent occupancy rate. With a higher percentage of rooms filled, Beijing hotels were able to sustain a 7.8 percent ADR increase during the first quarter, STR Global reports.
Shreyans Parekh, a director with online wedding retailer, Koyal Wholesale, says his Los Angeles-based company travels to China twice a year to source and purchase wedding reception supplies and favors. During peak trade shows his company has been paying about $250 a night for a hotel in Guangzhou and approximately $350 in Beijing or Shanghai.
Parekh and his team have been traveling to China for three years, and have established connections with local properties. He highly recommends establishing strong local relationships with hotel sales staff and managers in order to obtain better rates.
Growing Pains
More fallout from the rapid growth in travel can be seen in China’s infrastructure, as air and ground transportation has struggled to keep up. City streets and highways are notorious for epic traffic jams. Airport delays are all too common.
According to the CAA, 23.5 percent of China’s flights were delayed last year. The CAA declares a flight late based on the time a plane door is closed, not when an aircraft actually takes off. By comparison, 15 percent of US flights arrived late last year, according to the US Department of Transportation.
IATA director general and CEO Tony Tyler, speaking recently in China, pointed out how the lack of capacity is “leading to frustration and delays for airline passengers. The more flexibility we have in how we use and share airspace with the military as well as between domestic and international flights, the better we will be able to manage growth and meet passenger expectations.”
year for which figures are available. That’s a growth in traffic of over 13.1 percent. At that rate, Beijing Capital is likely to surpass Hartsfield-Jackson Atlanta International as the world’s busiest airport in the near future.
But PEK has only three runways, and with other transportation options lagging even further behind, domestic Chinese air traffic is booming. “On time performance is a big issue,” says Benson Tang at ACTE.
The answer may lie some 30 miles to the south of the capital, as a new megaport at Daxing is set to begin construction at the end of 2012. Designed to handle upwards of 200 million passengers per year, the new airport could have as many as nine runways. Linked to the city by high-speed rail, the massive new facility would supplant Beijing Capital as the primary air terminal.
Other noteworthy infrastructure projects are already bearing fruit. Andrew Schrage, co-owner of Money Crashers, a Chicago-based company that operates a personal finance web site, uses China’s modern intra-city high-speed rail service as an alternative to air travel because of its convenience and comfort.
“It’s world-class. I can get from Shanghai to Beijing in less than five hours, and it only costs about $65 USD. I just took the high-speed train in Guangzhou last month, and it reached over 300 kilometers per hour, but it felt like I wasn’t even moving,” Schrage says.
Digital Espionage
While travel managers and executives benefit from the low cost of travel to China, one area where more companies are paying attention is digital espionage.
“As a corporate travel manager, reliability and safety are more the focus and concern,” Tang says. With the proliferation of digital tools, including smartphones and iPads, corporations and business owners need to heighten their attention to this potential liability.
“It’s very difficult to quantify the problem,” says Tom Davidson, vice president of sales for On Call International, which provides international assistance and medical emergency services. “Many organizations are unaware for weeks, months, even years, that their technology tools have been compromised.”
In October 2011, the US Office of the National Counterintelligence Executive, reported to Congress about digital espionage. Part of its study found that German companies reported laptops stolen while their executives were traveling in China.
On Call International recently launched a service called “SearchLight” which can help corporations with travelers visiting sensitive destinations like China. “When travel is booked, employees get an e-mail about the destination,” Davidson says. “The e-mail can include the company’s policy related to traveling with electronic equipment. Some companies say to take a loaner laptop (where company sensitive information has been removed). For others, it could be a clear-cut ‘do not carry’ rule.”
IT and security departments have become more engaged in helping employees protect sensitive data by ensuring devices can be locked with PINs or passwords and that whole disk encryption software has been loaded on laptops, Davidson says. Other experts advise being mindful of software programs that try to connect to the Internet. Schrage recommends that travelers access the Internet through a virtual private network (VPN), encrypting communications.
At the time this report was being filed, the Chinese government had issued several warnings about weakness in China’s growth. A highly-respected senior economist and advisor to the Chinese government went so far as to say that China’s economy was experiencing a “sharp slowdown.”
China Auto Rental, the country’s largest rental car firm, earlier this year failed to raise even half of the $138 million it was looking for from its IPO. Analysts blamed the failure in part on skepticism about China’s future rate of economic growth.
Still others say that while China’s economy is demonstrating new signs of weakness, it remains a vibrant business destination and will continue to grow. “Despite the current turmoil we’re seeing,” Asiana’s Koo says, “the China travel market is still growing because the demand to do business there is still growing.”
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