Judging from the near-hysterical tone of media coverage of the looming “fiscal cliff,” one would think the economy is threatened with imminent collapse into a vortex that will swallow travel along with most other commerce.
Within the industry, however, the typical mood last week was less high-anxiety than moderate concern about the combination of tax increases and spending cuts that will be triggered automatically if President Obama and Congress fail to reach a compromise.
Interviews with travel retailers revealed that despite all the political sparring and intense media coverage, a large chunk of the industry is relatively sanguine about the looming fiscal cliff.
Bob Joselyn, president and CEO of Travel Agency Management Solutions (TAMS), said that discussions among TAMS’s 172 members agencies, which range in size from $2 million leisure agencies to $500 million-plus corporate travel management companies, have barely touched the subject.
“Most people think it will be fixed, if not by Jan. 1, then shortly after,” said Joselyn.
He added that he saw the looming deadline as not really a cliff at all but more of a gradual easing into the end of a variety of tax cuts and tax breaks and the beginning of automatic government spending cuts — certainly not the best way to balance a budget, but not the end of life as we know it, either.
Most others in the industry appeared to share the expectation that Congress and the president will reach a compromise in time to avert the draconian spending cuts and tax increases.
Should they fail, the economic impact would be largely domestic. Yet, the fiscal cliff was commanding the attention of speakers and attendees at the International Luxury Travel Market (ILTM) conference in France last week, where keynote speaker John Andrews, consulting editor at The Economist, said it would amount to “collective suicide” for the executive and legislative branches to fail to reach a compromise.
“President Obama got a lucky break [just prior to last month’s election] with Hurricane Sandy, and he could be lucky in the next few weeks, as well,” Andrews told an audience of about 2,700 ILTM attendees. “I can’t really believe that even a gridlocked Congress will allow such collective suicide. They’ll either kick something down the road or come up with some sort of grand bargain.”
On the other hand, rampant speculation in the media about a looming economic doomsday has already triggered a great degree of consumer and business angst.
“There has been enough media coverage,” Joselyn said. “And because of the implication that it is armageddon, I think a lot of people are holding back on spending because of a chance taxes might go up.”
Libbie Rice, co-president of the Ensemble Travel Group, said that media coverage of the fiscal cliff has fueled a great deal of uncertainty.
“When you have uncertainty, people buckle down and you don’t have that much discretionary spending,” Rice said.
She added that the timing is unfortunate because Ensemble members are currently seeing a surge in bookings.
What’s more, the surge she described seems to be taking place across retail travel.
Roger Block, president of Travel Leaders Franchise Group, said members are seeing double-digit booking increases ranging from 15% to 25%. Travel Leaders is seeing those increases across the board, be it in sun-and-fun destinations, luxury cruises or escorted tours.
Even so, Block said Travel Leaders agencies on the corporate side have expressed concern about the fiscal cliff, even though they, too, are seeing strong demand.
As an example, he cited an agency in northern Virginia that could be affected by massive government spending cuts. While the agency’s clients are not themselves government employees, some of them supply government agencies, meaning that automatic spending cuts would have an immediate impact.
There are also growing concerns about reduced corporate travel. A report from the Global Business Travel Association Foundation estimated that plunging over the fiscal cliff would cause a $20 billion drop in business travel spending over the next nine quarters, a 2.5% decline that would equal the loss of 32 million business trips.
However, according to the GBTA report, eliminating tax cuts and reducing federal spending would also result in reduced deficits and lower interest rates over the long run, which the group predicts would ultimately spur an increase in business travel spending.
The report said that the economy overall would grow more quickly after absorbing the initial shock of the fiscal cliff. Short term, however, the increased taxes that would result if Washington can’t negotiate its way back from the cliff would mean more competition for fewer discretionary dollars, Block said.
“If taxes go up across the board, it’s going to remove disposable income out of the economy,” he said. Travel will be competing with every other industry for greatly reduced supply of discretionary dollars.
John Lovell, president of Vacation.com, said his group was seeing a lot of pent-up demand, particularly in the premium and luxury categories.
“Those products are really back,” he said, adding that the part of the market where he is seeing some hesitation is the contemporary, midmarket buyer.
“That buyer is sill waiting for some things to be settled,” he said. “It really comes down to tax policies, how some of those things are going to play out.”
Joselyn said that for the moment, the agencies he is working with are buoyed by the fact that 2012 was the best year or one of the best years most have experienced in the 11 years TAMS has been in business. Nor is that an anomaly, he said, pointing to widespread reports of many businesses having a highly profitable year.
He credited that to the fact that travel agencies, like other companies, have tightened their operations, squeezing many costs out.
He, too, felt that, in the unlikely event the country actually goes over the fiscal cliff, it would hit the mid and low-end sun-and-fun market.
And, even if the worst does happen, there are countervailing forces that could soften the impact, said Gary Langer, president of Langer Research Associates in New York, which compiles the weekly Bloomberg Consumer Comfort Index.
“Chief among those is the simple fact that lots of people are feeling better about the economy, or at least less bad about it, than they have for a long while,” Langer said.
(Editor’s note: Gary Langer is the husband of Kate Rice, the Travel Weekly reporter who wrote this article.)
The Bloomberg Consumer Comfort Index has been improving; while still much weaker than its long-term average, consumer sentiment is on track for its best year since 2007, before the Great Recession began. It indicates that economic optimists now outnumber pessimists; 37% now say the economy is improving, the most in more than a decade.
Langer said that these views coincide with improvements across a range of other indicators: employment numbers, the housing market, gross domestic product, the S&P 500 index and the Dow Jones Industrial Average, among others.
“That doesn’t mean there won’t be damage if the country drops off the cliff, just that there’s a little more resilience there than there’s been recently,” Langer said. “What ultimately will matter to travel and the rest of the economy is what direct impacts are felt from the fall, how fast and how hard, because consumers are going to respond to real-life conditions, not ‘what-if’ prognostications.”
The only good thing about the fiscal cliff is that the uncertainty will end soon, said Jan Freitag, senior vice president of global development at STR, the hospitality consulting and research company.
“Hotel owners, like the general business community, are craving certainty,” Freitag said.
Danny King contributed to this article.
Fiscal cliff photo courtesy of Stephen VanHorn/Shutterstock.com.