Summary:In 2000, the U.S. travel industry represented 7% of GDP, expenditures of $584 billion, 7.8 million jobs, and $100 billion in tax revenues. From 1997 to 2000, revenues grew dramatically, then fell in 2001 even before events of 9/11. How did 9/11 affect trends in air travel and the leisure trade?
According to Gary Wilson, with the exception of Southwest Air, all carriers lost 15-20% of traffic. Since then, our yield has not improved and business travel is returning very slowly. U.S. carriers lost $2.5-3 billion in the first quarter of 2002, a very sharp loss.
Barry Sternlicht added that his industry mirrored Wilson′s — business travel is not there. Instead, Saturday night is now the biggest night of the week, showing the dominance of the leisure traveler. Group travel increased in the past 60 days since February 2002.
The high end of international business fell 75%, and domestic fell 50% after 9/11, Terrence Lanni noted, but casino markets with drive-in customers were up by as much as 25%. Prior to 9/11, convention business was well ahead of 2001, and after the immediate fall-off, there were no losses since January 1st, 2002. In fact, according to Lanni, more rooms were being booked than previously.
Fred Kleisner added that by year end, they were back to pre-recessionary trends. Curbside to gateside travelers faced few delays in major cities but experienced more problems in secondary and tertiary cities.
Kleisner and Sternlicht agree there is "segment" loyalty if not "brand" loyalty: upscale travelers are staying in 5-star hotels that have not lowered quoted rates, but may throw in a free night for each four or five stayed.
On the issue of international travel, Lanni found that the fall scare stories in the international press (e.g., "anthrax epidemic sweeps U.S.") reinforced the image of the U.S. as a dangerous destination. Wilson added that Asian travelers, particularly the Japanese, were wary of travel to North America, including Hawaii, a major U.S. travel destination.
American air carriers were suffering greatly, much more so than foreign carriers, whose planes were not involved in 9/11. Intra-European travel was also doing better. Sternlicht commented that 30% of its earnings were earned off-shore and its European holdings were doing well with Europeans staying within Europe. Since Europeans are not as discount-conscious as Americans, he added, they were not yet using the Internet as extensively, keeping hotel rates up. But in Asia and Latin America, their rates remain low.
In New York, however, hotels dependent upon international travelers, were suffering post-9/11.
Kleisner noted that their Caribbean properties were benefiting from group cancellations to the Middle East.
How has the Internet changed things? 31% of business travelers and 25% of leisure travelers bought tickets on-line; nearly twice as many plan to.
According to Wilson, the Internet clearly cuts distribution costs and runs much higher load factors as evidenced by its 1st quarter 2001 which had highest load factor ever. The Internet also adds more pricing flexibility and efficiency for the consumer but it′s still unclear whether this is a net gain or loss to airlines.
Sternlicht noted that its web sites were reporting record bookings on a daily basis. 50% of Internet users are seeking travel information. The hotel industry does not yet know how to exploit this as they don′t have reliable estimates of price elasticity in different markets. Consumers comparison shop from web site to web site, inevitably creating a pricing arbitrage as airline agents, travel agents, and web sites seek to compete with each other. Kleisner added that they were trying to be smarter in their use of the Internet.
Commenting on Orbitz, Wilson stated that six airlines formed Orbitz nine months previous and enjoyed a market share equal to that of Travelocity and Expedia. Travel agencies are also consolidating and charging customer fees and they still book over 50% of airline seats.
There is a greater focus on working together, said Kleisner. Hyatt, Bass, Hilton, Marriott, and Starwood are now collaborating.
What about longer-term forecasts?
According to Lanni, the post-9/11 the gaming industry examined overhead and permanently restructured involving major management level layoffs that he says will not be replaced. Kleisner added that Wyndham also downsided.
Wilson said the airlines faced tougher issues since the break-even point for airline load factors has risen higher and if the traffic isn′t there, it is costly to mothball airplanes. With raising revenues the only way to get out of a financial bind, prices would have to go up if volume didn′t return, he stated. Until now, the business traveler had subsidized the leisure traveler by as much as 10 to 1 but Wilson was not optimistic about the return of the business traveler.
Sternlicht however, was more optimistic than Wilson. He sees the hospitality industry stabilizing. The companies that are growing are the small companies, not the Fortune 500s, and they are still traveling. He sees enormous potential in the future Chinese, Indian, even Japanese market. On the development side construction of hotel rooms has not kept up and the supply of new rooms is leveling off, which may raise occupancy rates. The three main forces in the industry today are pricing, the Internet, and scale — how big is big?
All panelists saw consolidation as a necessity and none of the respondents were having financing problems. Sternlicht observed that since the financial problems stemming from 9/11 were so clearly not due to management errors, they had not tightened cup on credit. Kleisner remarked that since companies were not as leveraged as in 1990, they were better able to weather downturns. Sternlicht concluded by saying the problem was bank consolidation; as they merge the result is less banking capacity to finance a major deal.
