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Weekly UpdatesToday's economy proves that our airlines, car rental companies, hotels, and travel agencies--the "players" in the Passenger Travel Industry--are totally interdependent. Efforts to cut costs or shift focus by one impacts all others. More than ever before, they need to join forces to remain in the game and provide the kind of service that government travelers have come to expect. By leveraging their strengths and resources, the airlines, car rental companies, hotels, and travel agencies will be able to withstand the downturn that currently dictates the passenger travel industry.
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Passenger Travel is considered by many economists to be a key barometer of our economic health. Travel trends--not just at home in the USA, but around the globe--register the direction that the recovery will take. The outcome is unknown. But, one thing is certain ... we have entered a new world.
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I always like to have a positive outlook, and like the old cliche, I prefer to see the glass half full rather than half empty. At the recent NDTA board meeting, I began my briefing by asking the other board members what they wanted to hear first--the good news or the bad news ... The good news is that in the Passenger Travel Industry (PTI), the government and the defense contractors are still traveling strong. The bad news is that the government and the defense contractors are the only segments still traveling--demand is strong.
Euromonitor International, an international provider of business intelligence and strategic market analysis, forecasted that the global economic downturn will lead to the travel and tourism industry shrinking in 2009, with Middle Eastern, African, and Eastern European markets faring slightly better. The forecast also indicates a correlation between Gross Domestic Products (GDP) and the travel and tourism industry. According to UNWTO-World Business barometer, when global growth exceeds four percent, tourism arrivals growth tends to be higher; however, when the GDP falls below two percent, tourism growth tends to be lower. With the global economy contracting in 2009, the impact on the travel and tourism industry is severe. That is why the International Monetary Fund has revised its 2009 global GDP forecast from 3.9 percent to -1.3 percent. (Nina Varghese, Business 24/7 June 7, 2009).
The PTI is challenged with the worldwide recession and reduced demand. In response, all segments of PTI report year over year declines in passenger traffic. "Revenue flat" seems to be the new "revenue up" these days, and if Passenger Traffic is any indicator of the economic health, then the economy is still struggling to improve. While depending on the price of gasoline and demand, airlines are reducing capacity to make ends meet, hotel occupancy is down, travel agencies are focusing on opportunities in leisure travel, and the car rental industry, plagued with low rates prior to the recession, is now lowering rates even further to stimulate travel and keep cars from sitting idle. To survive, the PTI has gone through major restructuring, cost cutting, layoffs, and temporary and permanent salary cuts, as well as other money saving initiatives.
The price of oil, which has dropped substantially since the last edition of the DTJ Passenger Travel Issue (lingering in the $140s/barrel), is creeping up again. The drop in gasoline price significantly helped the airlines because the airlines fuel hedges at higher prices were being replaced at lower cost. The advantage airlines have over other segments of PTI is the ability to flex capacity with the changing economic environment, grounding planes when demand is weak and then reinstating capacity when travel picks up again. Considering all of this, the challenge is being able to time the supply and demand curve. Reducing capacity could take up to six months to adjust in the system. Forecasting fuel prices is also a difficult task, and saving fuel costs through hedging is impacted heavily by the accuracy of these forecasts. Knowing this from the airlines gives the rest of the travel industry an indication that matching capacity with lower demand is the key to reduce variable costs and to make fixed costs more manageable under reduced revenue streams.
The agility, innovation, and flexibility of the PTI are keys to surviving the tough times. For instance, the car rental industry has been devastated by the economy. The problems experienced with the decline in leisure and corporate travel are compounded by the fact that car rental companies rely heavily on borrowing large amounts of capital to finance their fleets, and finding banks willing to lend this money has been very difficult. Additionally, the problems experienced by the big three auto makers has increased overall pressure on how and from whom vehicles may be purchased. The car rental industry is looking forward to the stabilization of the banking and auto industry along with the resurgence in leisure and commercial travel; however, no innovative revenue generating ideas are ruled out. In fact, for years the car rental industry missed out on utilizing fees similar to those with airlines and hotel industry. Subsequently, the most important questions remain as follows:
* How do we get people to travel again?
* How can we increase profitability in this extremely competitive market?
* To what extent will the fleets be right sized to meet demand?
* What services will be abandoned, and what locations need to be closed?
* How can quality service be preserved with aging fleets?
* Can lost revenue be generated during peak periods?
* What other service costs can be passed to the customers?
Similar to the car rental industry, the lodging industry is also suffering a major downturn due to this worldwide recession. Builders have begun to suspend or cancel projects as their banking resources have dried up. Hotels are seeing declines in occupancy across the globe as corporations rein in their travel spending and airlines cut capacity. This has resulted in hotels competing for limited business. Both the transient and group sides of lodging are declining, resulting in layoffs, closings, and restructuring in most of the major lodging chains. European hotels are expecting closings and chain bankruptcies if the trend continues. The good news for the government travelers is that just about every hotel chain has discovered government business and is welcoming government travelers. Many hotels that never offered per diem rates are now welcoming them, as well as discounts for leisure travelers.
While the travel and hospitality industry in general reflects the current economic condition globally, the US government travel has not decreased significantly year over year. While we may see a downward shift, we do not expect to see the significant fall off which is currently being experienced on the corporate America side. The majority of the travel agencies, or CTOs, providing travel service to the Department of Defense also rely on corporate and leisure travel as a major source of revenue. As corporate and leisure travel continues to decline, greater pressure will continue against the financial bottom line of these companies and challenge them in continuing to be competitive in the US Government market place.
All of the players in the PTI chain are interdependent. The travel agency, airline, car rental, and hotels, along with other PTI entities impact the entire travel experience. Lower traffic for the airlines could mean fewer car rentals and lower hotel occupancy. The economic downturn means cost cutting measures for organizations of all sizes, translating to lower travel across the spectrum. This domino effect that we are experiencing now validates that there is a direct correlation between travel and the health of the economy.
The good news for the government remains to be low rates in every segment of travel. However, the airlines, hotels, car rental companies, and travel agencies all have concerns that need to be addressed, and we continue to work with DOD and GSA in order to enhance programs that are beneficial for all stakeholders. There are many ways government and industry can collaborate to meet the needs of all parties. If the Government desires to continue benefiting from lucrative programs, the needs of industry must be addressed, or the government and its travelers stand the chance of seeing less attractive programs and increased costs.
By Dr. G.R. "Rocky" Mobaraki, MBA, PhD
Passenger Travel Services Committee (PTSC) Chair Director, Global Government & Strategic Programs, The Hertz Corporation
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