Bruised & battered travel industry

Will it ever recover?

Bruised & battered travel industry It’s no secret the travel industry is suffering. The question is – when, and if, it will ever recover, and what that will mean to you.

The events of the last year have led some people to believe the industry is on life support. According to a report on the airline industry in the Wall Street Journal, “If passengers don’t return to the skies and fares don’t rise, some airlines could run low on cash, raising the specter of additional bankruptcies. Like the auto,consumer-goods, packaged-food and retail industries, airlines are suffering huge revenue declines.”

Take off eh.comFor airlines, the dramatic drop in high yield business passengers has resulted in the loss of irreplaceable revenue. In need of quick cash transfusions, the airlines are focussing on the leisure traveller to fill the void — stimulating the price conscious leisure market to book with a series of seat sales. Although this tactic is proven to move seats, the danger with chronic seat sales is they become institutionalized. When the sale ends, people stop booking.

For travellers, the result is a pricing bonanza the likes of which we haven’t seen in ten years. And unless the airlines find a way to wean the public off these deals and back to realistic pricing, we will soon see more service cuts and less choice. In removing capacity and reducing routes, airlines achieve some cost savings. Unfortunately, this also leaves legacy carriers vulnerable to low cost competitors who can step in and fill the void.

Long term, we will almost certainly see more mergers and bankruptcies. And if oil spikes back up to $150, it will drive the entire airline industry into a tailspin.

Cruise lines are not faring any better than the airlines and in some ways their destinies are tied. Over the past few years, the major cruise companies have embarked on a massive expansion by launching mega ships that hold twice as many passengers as traditional ships. This expansion could not have come at a worse time as demand has severely dropped off and the airlines have taken out some capacity. Even when the cruise lines try to stimulate demand they are at the mercy of the lift provided by the beleaguered airlines.

Like the airlines, the cruise lines have created unintended consequences by dropping prices. The “can’t afford to stay home” deals are attracting a different client base and these customers tend to spend less on board and alter the overall character of the cruise. The CAA’s Alison Hermansen says her biggest fears are for the cruise industry: “It may be the last to recover,” she said. “How are they ever going to get the price back up with the massive discounting they’re doing?”

Lowering costs through capacity reductions is much more difficult for cruise lines than airlines. One option for revenue recovery is to redeploy ships to emerging countries in Asia and South America.

Canadian sun destination tour operators are also struggling with lower demand and increased capacity. On top of this, consumer habits have changed. Consumers no longer tend to book their winter vacation months in advance. Most consumers hope for a deal and wait for the last minute before deciding to buy. This makes it hard for the operator to plan and often triggers sales because of the nagging worry that the package may in fact not be sold. With this kind of pressure on the margins, year after year, the operators find themselves in very lean positions.

Thomas Cook’s CEO, Manny Fontenla-Novoa, blames chronic overcapacity in the Canadian packaged holiday market on a “totally unregulated, fragmented” business where some operators are selling at a loss. “It’s just unbelievable,” he says. “I can’t see the rationale and something’s got to give.”

Hoteliers, car rental companies, etc. are all facing their own crises in one form or another and all will need different solutions to survive. They know demand will not come back overnight and so they will have to be innovative and realistic about their expectations.

Added to this grim scenario, the entire industry is holding its breath for the possible impact of the swine flu this winter. Even the fear of an outbreak could put the brakes on travel plans for many Canadians.

The reality is, travel will likely never return to 2008 levels. It will adapt and evolve to a leaner, more commoditized product. In the meantime, the great deals will be around for some time to come. Enjoy it while it lasts, because ultimately the industry will re-invent itself. It always does!