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U.S. travel companies, bruised last year by a recession that drained demand and destroyed their ability to raise prices, are taking tentative steps toward recovery, but a full rebound may be a long way off.
The greatest concern for hotels, airlines, travel agencies and entertainment companies is that the financial crisis has led to a permanent reduction in spending on business travel, that corporations will tell their road warriors they always have to fly coach and shop online for cheaper hotel rates.
"Companies are realizing that travel has always been a big component of their budgets, but it’s a component you can control," said Deutsche Bank analyst Chris Woronka. "You travel differently now. Maybe you fly coach instead of business class, maybe you stay in a four-star hotel, not a five-star one," Woronka said.
Travel management agencies and consultants said companies are likely to institute permanent changes in the way employees travel, effectively creating a "new normal" for business travel.
Some companies may prohibit premium-class travel altogether or use video conferencing to replace some trips, according to a business travel outlook provided by Carlson Wagonlit Travel.
The issue will be among those addressed by executives from travel companies like InterContinental Hotels (IHG.L), Las Vegas Sands (LVS.N), UAL Corp’s (UAUA.O) United Airlines and Expedia Inc (EXPE.O) next week as they speak at the annual Reuters Travel and Leisure Summit in New York.
Hotels
As the recession sapped demand for travel, hotel operators got creative. They shut down restaurants, closed floors and even cut back on newspaper delivery to ride out the downturn. Hotel heavyweights Marriott International (MAR.N) and Starwood Hotels & Resorts (HOT.N) have since noted signs of a nascent recovery in travel demand. Companies are sending employees on business trips again, even if they are openly pinching on travel budgets, and hotels are fuller. The central issue now for hotel operators is room rates. Hotels cut prices for their U.S. rooms an average of nearly 9 percent in 2009 and are expected to cut them another 2.1 percent this year, according to PricewaterhouseCoopers LLC. Will hotels be able to command the rates they once enjoyed in the heady days of 2007 or has there been a paradigm shift in the way people spend on travel? "That’s the $1 million question," said Choice Hotels International (CHH.N) Chief Financial Officer David White in an interview.
White says the severity of recession has recalibrated how companies and vacationers think about travel spending. They’re likely to gravitate toward good deals. "The great recession has scarred many people and it may take a while for them to come out of their shells and decide they’re willing to go more upscale with their purchases for hotels, for TVs, anything," White said. "That pursuit of value by consumers is not going to go away easily or soon," he added.
Airlines
The airline industry has been clobbered in recent years by low-fare competition, overcapacity, terror concerns, high oil prices, and then the recession. For now, the industry looks poised for recovery, and carriers have reported signs of returning business travel demand. So far, however, they have had limited luck raising air fares despite increased passenger traffic. "It’s a continuing marginal overcapacity situation, which is an acute overcapacity situation in certain periods and markets," said airline consultant Robert Mann at RW Mann and Co. "It’s been difficult to maintain a compensatory pricing structure," he said.
Casinos
U.S. casino operators are also banking on an economic recovery to boost business, especially in Las Vegas which was hit hard when consumers cut back on gambling trips. Sin City also saw its convention and group business sag last year after government officials, including President Barack Obama, chided banks and other financial firms for frivolous spending. Operators have responded by sacrificing profit and aggressively discounting rooms and other resort offerings. "The convention business in general in the U.S. is the last to suffer and the last to come back," MGM Mirage (MGM.N) Chief Executive Jim Murren told Reuters in an interview. "We see a recovery occurring right now – certainly the second half of this year being better than the first half." He said MGM’s group room rates for 2010 are at levels seen in 2004 and 2005, with bookings for next year at levels close to those seen in 2008. Still, the addition of thousands of new hotel rooms in Vegas, including 6,000 at MGM’s new CityCenter project, is also hurting room rates in the city.
The company, which relies on the Las Vegas Strip for more than 80 percent of its business, also plans an equity offering this year for its 50-50 joint venture in China’s Macau, where gambling demand has been booming. Las Vegas Sands Corp (LVS.N), which also operates in Macau, is counting on a continued boom in Asian demand at its new resort in Singapore this year and additional Macau properties starting in 2011. The big concern will be whether China’s booming economy suddenly hits the skids, particularly if there is a bursting of what some see as a bubble in the Chinese property market.
Travel Agencies
Meanwhile, online travel agencies are working hard to bolster bookings using promotions and fee cuts. Priceline.com (PCLN.O) said last week that the value of its bookings increased by 52.9 percent in the fourth quarter. Priceline’s chief rival, Expedia Inc (EXPE.O), said the values of its bookings jumped 26 percent in the quarter. "The travel economy has recovered a little bit here in the second half of 2009," Priceline Chief Executive Jeffery Boyd told Reuters in an interview. The company predicted continued bookings growth in the first quarter of 2010.
Theodore is the Co-Founder and Managing Editor of TravelDailyNews Media Network; his responsibilities include business development and planning for TravelDailyNews long-term opportunities.
