One Industry Sure to Bear the Brunt of a Downturn

In an economic downturn, airlines and hotels are invariably among the industries that get hit the hardest. Not only do consumers postpone or cut back on vacations and other non-essential trips, businesses also pressure employees to spend less time on the road, or if they must travel, to cut corners wherever and whenever they can. Given the many signs that point to recession in the U.S., the following report from the Associated Press, "Companies Curtailing Travel Budgets," is not unexpected.

As the economy cools, companies are starting to shrink their travel budgets — a move likely to put further strain on struggling airlines.

Hotels, car-rental agencies and restaurants, which along with airlines employ roughly 4 percent of U.S. workers, will also feel the pinch.

So far, travel bookings are holding up. But corporate travel managers are taking a more active role in keeping on-the-road spending in check:

• Employees are increasingly being asked to provide an economic rationale for their trips.
• Rules that require employees to book the lowest fare, stay in pre-approved hotels or double-up in cars and rooms are being enforced more strictly.
• Executives are pushing alternatives to face-to-face meetings, including phone- and Web-conferencing.

"They expect you to be smart," said John Flynn, a sales representative for a San Diego health care software company. But while maintaining a tight budget is a priority, so is knowing when it's important to pay clients a personal visit. "There's no replacement for that," Flynn said.

Chicago-based accounting firm Grant Thornton International, for example, has spent the past two years trying to more aggressively reduce travel costs, especially on the administrative side. That has meant shunning expensive regional flights in favor of driving or taking a train, and relying more heavily on online employee-training sessions and video conferences. Still, travel costs remain Grant Thornton's third-biggest expense after personnel and facilities, said Cheryl Geib, national director of travel and meetings.

Companies are fighting an uphill battle.

Faced with rising fuel costs, airlines increased business- and first-class fares by 12.4 percent during the first half of February compared with last year, according to Sabre Travel Networks. Economy fares climbed 6.2 percent.

Airport rental-car rates have jumped at least 20 percent each week this month compared with a year ago, according to Abrams Consulting Group. And hotel room rates jumped 5.9 percent in 2007, according to Smith Travel Research.

For companies striving to tamp down their travel spending, deciding how far to go and how quickly to act is not easy.

Executives want to keep sales staffs on the road to drum up new business rather than pull back preemptively and give competitors a potential opening. That's why airline bookings don't typically fall until economic conditions have slowed noticeably.

Any reduced spending by corporate travelers — who typically pay more per ticket than leisure travelers — is bad news for airlines. Leisure travelers tend to be more sensitive to worsening economic conditions than business travelers, but leisure bookings also remain steady, industry officials said.

The last economic downturn, exacerbated by the Sept. 11 attacks, hit airlines hard.

Travel dropped off sharply, and four of the nation's six legacy carriers eventually turned to bankruptcy protection to retool their operations. The last two to emerge, Delta Air Lines Inc. and Northwest Airlines Corp., are now mulling a combination that officials hope will boost their financial health.

The hotel industry never fully recovered from that recession, said Bjorn Hanson, a hotel consultant with PriceWaterhouseCoopers LLC. In part that is because of permanent changes in the way some companies manage their travel budgets.

"In the late '90s, (you'd) stay where you want, spend as much money as you want, didn't matter," technology consultant Perry Sellers said recently while waiting for a colleague's flight to arrive at Newark International airport so they could share a rental car. "But today, uh-uh. Just be very conservative at all times."

Because corporate America has permanently done away with some of the travel excesses of the 1990s, there may be less fat to cut this time around. For instance, growth in hotel room demand this year will be weaker than the average rate of 2.1 percent but will still grow by 1.2 percent, Hanson said.

Restaurant industry profits are falling, but it's hard to determine how much of that is due to business travel versus local families cutting back, said Standard & Poor's chief economist David Wyss. Wyss said the travel and leisure sectors, which employ roughly 1 in 25 Americans, are "by no means trivial" to the broader economy.

In the airline industry, a new recession could lead to further industry restructuring, including new partnerships, consolidation or even a return to bankruptcy for the weakest carriers, said John Heimlich, chief economist for the Air Transport Association.

The trade group expects the industry will post a profit this year — its third since 2000 — in part because of aggressive capacity cuts that have slashed the supply of seats. But optimism is tempered.

"If we have a continued slowdown, combined with fuel prices staying stubbornly high, that's where we get into a problem," Heimlich said.

In their most recent earnings announcements, the nation's biggest airlines provided a mixed picture on the forecast for business travel.

Southwest Airlines Co. Chief Financial Officer Laura Wright said the low-cost carrier, an increasingly popular option for business travelers, began "seeing domestic weakness about a year ago" and has cut its 2008 capacity growth target to 4 percent or 5 percent, about half its original plan. On the other hand, American Airlines, a unit of AMR Corp. and the largest domestic airline, said advanced bookings are up 0.8 percent for the first quarter compared with last year, a typical rate of increase for this time of year.

Companies in industries that have been hit hard by the mortgage crisis, such as construction, building supplies and finance, are starting to consider cutting back on travel, said Jack Riepe, a spokesman for the Association of Corporate Travel Managers.

"Your view of the impact of a potential recession depends on how close you are to it," Riepe said.

Airline executives said generalizing on business travel is tricky.

"You have some corporates who are looking to reduce their travel spend. You've got other companies who see what's going on as an opportunity," said Robin Hayes, executive vice president for the Americas at British Airways, which generates much of its profit ferrying business travelers across the Atlantic.

Sabre said it issued 5.3 percent more tickets for travel during the first half of February than it did last year. Business- and first-class ticket issues rose 4.1 percent.

"Businesses like to hang in there as long as possible," said John Armbrust, founder and chairman of Armbrust Aviation Group, a Florida airline consultant and trade publisher.

Also, many companies have to send support staffers to clients to meet contractual obligations — or just to keep customers happy.

"Our clients require accounting services and tax services even more during a recession," said Grant Thornton's Geib. "Sometimes a recession for us can be an opportunity."

Comments

[Susan]

"point to recession"? I love this soft-pedal talk, we have been in a "recession" (arbitrary definition) for at least a year. And what we are headed towards . . . . it starts not with an "R" but a "D". And we Americans, we need to try hard to no slaughter each other in desperation over what is coming next, because its going to require actual hard WORK and downscaling of lifestyles for most of us.

[Contrarian Investors' Journal]

Can't resist a new twist to the main idea of this article- how about looking at which industries that will profit inversely from a downturn? See "Which industry’s profitability grew as the Great Depression progressed?" at http://cij.inspiriting.com/?p=371.

Note: The industries that profited from the Great Depression may not necessarily be the same ones that will profit from the coming financial crisis. We just include this here for information and interest only.

[Deborah]

I did see one article that "popular" cities are actually benefiting with travel due to the weaker dollar, New York, for example, is getting far more visitors from Europe now that the cost as gone down due to currency declines.