United States-based corporations received an early gift this past December when the House and Senate passed significant changes to the tax code, including a deep cut into the highest corporate rates.
The details of the legislation are plentiful and nuanced. But the top-line numbers are this: The maximum possible corporate tax rate has been cut to 21 percent from its previous 35 percent.
How will businesses spend their tax savings?
That remains to be seen, though many are predicting they will invest in new equipment and facilities, expand their workforces or increase dividends to shareholders. Some legacy corporations are facing shortfalls in pension funding that this tax bill will help cover.
But one financial institution is predicting an under-the-radar impact the tax bill will have: an increase in business travel.
A Big Bank Bets on Airlines
In January, Bank of America Merrill Lynch predicted shares in the largest U.S.-based airlines will see an uptick in the wake of the tax bill. The investment bank had previously rated American Airlines as “underperform,” but has now switched that rating to “buy.” It also restated its “buy” ratings for Delta and United.
“We view this tax reform as a significant positive for corporate spending,” Analyst Andrew Didora wrote, “and we believe this can drive a pickup in corporate travel pricing.”
The S&P 500 outperformed each of the three airlines in 2017. But, given that about two-thirds of their revenue comes from business travel, an increase in corporate travel could reverse that trend.
Will International Travel Cut Into Domestic?
Bank of America Merrill Lynch didn’t provide the same rosy outlook for all U.S.-based airlines. It actually downgraded Southwest, Alaska and JetBlue from previous “buy” ratings.
Why? The theory holds that any increase in corporate travel will include more international trips. This increase in international travel will come at the expense of domestic trips, according to Bank of America Merrill Lynch.
That means carriers with more international routes (American, Delta, United) will enjoy the benefits of tax reform while those focused on domestic routes (Southwest, Alaska, JetBlue) may suffer.
Applause From the Travel Industry
Predictions from the financial sector align with reactions to the tax bill from the travel industry. The president and CEO of Best Western Hotels & Resorts said that “we applaud the passage of the tax reform legislation,” and a statement from Hilton suggested “tax changes were positive for hotel owners and builders.”
Even the president and CEO of the American Hotel & Lodging Association said that “our industry is proud to support legislation that will reform U.S. tax policies.”
So, while Bank of America Merrill Lynch focused on airlines, expectations are that the tax bill will be a positive throughout the travel industry.
How Will Tax Cuts Change Your Spending?
Of course, predictions by Bank of America Merrill Lynch are just that — predictions. The market will determine the true impact of tax cuts over the span of the coming months and years.
How do you anticipate tax cuts will change your company’s spending and the way you manage travel? You may choose to seize opportunities by approving more business trips. But that doesn’t mean you need to spend indiscriminately on corporate travel.
At JTB Business Travel, we provide comprehensive corporate travel services rooted in common sense. When you’re looking to seize more opportunities, our products and services help you make the most of your investment in business travel.