2009 - Banner Year for Air Travel?

Much like the recent turmoil in the stock market, the health of America’s airlines industry is changing on a daily basis. Just five months ago, second quarter travel statistics were extremely gloomy as carriers slashed capacity to counter falling demand. But a combination of factors has leveled the playing field in such drastic ways as to make some industry analysts bullish on travel in 2009.

Q2 & Q3 2008 - DOWNWARD SPIRAL
With job losses escalating and job security increasingly uncertain, gas prices breached the $4 per gallon mark all over the country. More people were holding back their travel spending, leaving airlines, hotels and resorts with fewer customers and facing the prospect of another financial crisis.

Airlines found many creative ways to raise fees and fuel surcharges this year as they tried to offset high costs for fuel, which peaked at record levels in the first week of July -- just after the second quarter ended. Average airfares soared to record heights, rising close to 12% nationally, while oil prices reached an all-time high of close to $140 per barrel. The average round-trip flight cost $352, the highest amount on record in the 13 years that the Bureau of Transportation Statistics has tracked ticket prices. Even with the fare and fee increases, most major U.S. airlines still lost money in the quarter.

The financial meltdown of Wall Street and the impending failure of the Big 3 in Detroit were threatening to send further shockwaves throughout an industry that had been walking on shaky ground for more than seven years.

Oddly enough, amid Wall Street's tumble in September, domestic airline revenues rose 14% while capacity fell close to 10%, according to recent data from the Air Transport Association. In the third quarter most all carriers reacted by grounding planes at unprecedented levels in efforts to keep costs under control and ticket prices at levels where they might turn a profit. That is an enormous departure (pardon the pun) from previous economic slowdowns, when airlines slashed prices to attract consumers in an attempt to keep planes full.

Delta, who recently completed its $2.8 billion acquisition of Northwest, recently announced they will be reducing 2009 domestic capacity by 8-10% year over year while international capacity will shrink 3-5%. Airline industry analysts held an equally gloomy view of the industry’s ability to stabilize in 2009, projecting travel statistics to fall in unprecedented numbers as a result of the recession and high price of oil. Even Southwest, which posted profits in 69 straight quarters and gained huge advantages with their fuel hedging strategy, succumbed to market pressures by reporting a quarterly loss.

Las Vegas, once considered immune to recession, was hit particularly hard by the economic & travel downturn. The LVCVA just reported their October data which saw the number of visitors decline more than 10% from October 2007 (still 3 million visitors). Hotel occupancy slid 8.5%, while the average room rate was $115, off 14% from last October. The most striking figure was a decline in Strip gaming revenues of nearly 26%.

Indeed the entire industry was pulling in the sidewalks and bunkering down for the long, long winter ahead.

Q4 & 2009 – FRESH OUTLOOK
Moving into 2009, sunnier days appear closer for most of the major carriers. Even Southwest, once the red-headed stepchild of the industry was optimistic, as it took the title of largest domestic airline. The price of oil, $140 per barrel in early July, has since plummeted to $45 on December 8, which is a huge break for the airlines. All the reorganization and capacity reductions are just starting to take hold, allowing the airlines to operate more effectively while their largest expense has been reduced by more than 50%. Picture yourself getting a raise while cutting back your hours and then having your mortgage cut by half! Sign me up.

What factors contributed to that drop, you ask? Who cares! While the election of Barack Obama (and impending departure of George Bush) most certainly had something to do with the drop in the price of oil, the cost savings not only allow the airlines to operate more efficiently, but also puts a lot of money directly into consumers’ pockets. Instead of emptying their wallets at the gas pump, many people will have a little extra money to spend on vacation getaway deals.

United Airlines made dramatic improvement in on-time performance in October as their reduced schedule allowed more time to turn around its aircraft. United moved from 17th to 10th in on-time performance rankings, according to DOT. Overall industry on-time performance improved 1% in October, while United's score improved to 86.3% from 79.8% in September. With fewer flights, airports are less crowded, more planes are getting to their destinations on time, resulting in fewer delays. Even baggage handling improved significantly!

There may be no cheaper time to travel than this winter, as the sharp drop in demand in Q2 & Q3 forces airlines, hotels and cruise companies to slash fares and lower rates. In what may be a silver lining during a season of economic angst, travelers are finding some of the best deals in recent memory, from half-priced resorts to rock-bottom airfares.

Even Hawaii has become cheaper, where multiday trips are available for less than $1,000 including airfare. The Four Seasons Resort Hawaii, Hualalai is offering a fourth night free, bringing the average rate from $725 to $544 for an ocean view room. Upgrading your room will net guests two rounds of golf and two spa treatments. An off-peak, round-trip ticket from LAX to Honolulu on Delta was selling for $244 last week, a fare which hovered near $900 over the summer. Since August, prices for Caribbean and Mexican cruises have fallen 10% on average. On some ships, travelers have been able to sail for less than $50 per person per day.

While the Las Vegas data mentioned above is not exactly encouraging, many Las Vegas hotels are offering some unbelievable deals to attract leisure travelers. One hotel is offering rooms for $1 a night in hope to lure gamblers to their casino for more lucrative gaming and F&B revenue. The internet is also being blanketed with cheap deals to Vegas offers. You can't go online without seeing at least a few.

So it seems to me that the airlines’ reorganization and consolidation as a result of the recession might just be a good thing for everyone. The airlines will be operating more efficiently while reducing their largest expense by over 50%. Consumers and businesses will be able to reap the benefits of the ensuing reduced fares, which ultimately have a great effect on destinations, transportation, hotels and entertainment.

I guess what I’m trying to say is this: If you want to help the country get out of this recession, go on vacation!