Preview 2009: It's not too early to prepare for the 2010 rebound

Though industry economists foresee a recessionary year ahead for travel, characterized by declining hotel occupancy, airline capacity cuts and cruise discounting, several analysts believe that the downturn will be followed by a recovery in 2010 that could prove to be surprisingly robust.

The consensus foresees a particularly difficult first half. Some analysts believe that the second half will remain weak, while others see the beginnings of relief by then. If 2009 has a silver lining, it may be as a setup for strong growth in 2010, powered by pent-up demand and the unprecedented flood of government stimulus being pumped into the global economy.

But a major caveat clouds even the next few months. Though the reliability of economic outlooks is always suspect to some degree, the severity of the crisis that unfolded in the fall has heightened concerns among analysts that their forecasts might be particularly shaky this time around.

"You want to put a stake in the ground and put a forecast out there," said Ken McGill, managing director at the economic and financial analysis firm Global Insight. "But the macro picture has really changed dramatically, and we're all reacting to it."

Several forecasts have already seen downward revisions, and more would seem likely as data hint at a deepening economic slide. Several prognosticators warned that even their most recent forecasts could become dated quickly.

Such concerns aside, some analysts believe that 2010 could come back so strongly that suppliers should begin positioning themselves for it now.

For example, Chris Klauda, a vice president at D.K. Shifflet & Associates, suggested that hotels with the financial wherewithal begin investing promptly to prepare for 2010.

McGill said the magnitude of the economic stimulus is so great that policymakers might be over-correcting, in turn sowing the seeds of the next unsustainable bubble somewhere in the economy. 

But before any such outcome is possible, it is clear that the industry must endure a difficult near term, with weakness nearly across the board.

An era of discounting

In this environment, rates could come under intense pressure. Discounting, for example, is likely to translate into flat rate growth for hotels, at best. When combined with reduced occupancy, that is likely to result in a big drop in revenue per available room (RevPAR).

Similarly, a combination of weak demand and plummeting oil prices is expected to push airfares lower, perhaps sharply.

The outlook for cruise might differ only in the details, with cruise lines scrambling to keep sailings filled by continuing the aggressive discounting that began during the fall.

As beleaguered as travel fortunes might be for much of 2009, most forecasters see the industry holding up somewhat better than the economy at large. Total domestic person-trips are projected to decline by 1.9% next year (to about 1.93 billion), according to the U.S. Travel Association (formerly the Travel Industry Association), whose forecast incorporates information from Tourism Economics and other sources.

The USTA forecast calls for the leisure segment, with person-trips contracting by 1.4%, to remain more resilient in 2009 than business travel, which is forecasted to decline by 3.5%.

Suzanne Cook, USTA's senior vice president for research, pointed to an October USTA/Ypartnership survey that found travel intentions virtually unchanged from the same month in 2007. This suggested that consumers' underlying desire to travel should put a floor beneath leisure travel, she said, adding, "The core desire and interest in travel are there."

The situation for corporate travel could be nearly the opposite.

"Every business now is looking to cut some portion of its travel," said Adam Weissenberg, vice chairman, U.S. tourism, hospitality and leisure leader at Deloitte. Those cutbacks "will hurt across airlines, they'll hurt across hotels, and they'll hurt across auto rentals."

Kevin Maguire, president and CEO of the National Business Travel Association and manager of travel for intercollegiate athletes at the University of Texas, said he sensed that the culture of business travel has changed as a result of this year's economic disruptions.

Maguire called the current downturn "much deeper and broader" than post-9/11, adding that while the recovery could begin in the second half, "I don't think you'll see a dramatic recovery" for business travel. 

The industry-wide forecast issued jointly by Global Insight and D.K. Shifflet also indicates a difference between leisure and business, though both are seen declining slightly less than is expected by the USTA.

Global Insight/D.K. Shifflet forecasts a 0.6% decline in domestic person-trips next year, with leisure dropping 0.5% and business contracting 1%. Most of the downside, McGill said, will come in the first half.

"Historically, particularly in recent history, travel grows faster than GDP," McGill said. Similarly, "travel will not go down as much as GDP" in a recession.

Cook and McGill agree that the travel retrenchment would be temporary. Cook, for example, expects a bottoming sometime in the second half of 2009, and "a fairly strong recovery" in 2010.

McGill is particularly optimistic about the prospects for a rebound in leisure. "Get ready for the recovery," he said. "It's going to happen pretty quickly."

The problem, in McGill's view, lies in the forces underlying the expected rebound.

"We have dumped so much stimulus" into the economy, he said, that "we're concerned we're planting seeds on the other side" that could cause a return of inflation and create "the next asset bubble."

Can anyone see bottom?

Weissenberg warned that though a recovery would come, its arrival remained "a slow-moving target."

"We're probably looking at the end of '09" for a rebound in leisure travel, he said.

The prospects for a faster upturn, he said, were dimmed by a sense that the bottom has yet to be reached.

Business cutbacks and layoffs indicate that "the stone is gaining momentum," he said. "Until people feel we've really hit bottom, it's going to be difficult."

Duane Vinson, a vice president at Smith Travel Research, agreed.

"We don't think we've hit bottom yet," he said. "We don't expect that to happen until the first half" of 2009, with improvement expected to begin in the second half.

Smith Travel Research's 2009 hotel outlook traces a theme that is common to several forecasts: Declines in occupancy and little or no increase in average daily rates for the first time since lodging rebounded after the post-9/11 downturn.

And since RevPAR is a function of both occupancy and rates, it is expected to drop significantly next year, with declines ranging from 2.5%, as projected by Smith Travel Research, to 5.8% forecasted by PricewaterhouseCoopers and even 7.8% in the view of PKF Hospitality Research.

Though RevPAR forecasts vary, they all anticipate a hit to both occupancy and rates.

Of those two factors, rates may prove more difficult to predict.

While PKF and PwC lean toward something of a capitulation on the part of hoteliers by forecasting ADR declines of 2.7% and 2.4%, respectively, Smith Travel Research projects a 1.0% increase in ADR based in part on a sense that hoteliers remain wary of allowing discounting to get out of control, as happened in 2001 and 2002. 

PwC's rationale for predicting a decline in rates is straightforward: "Hotels are expected to continue to lose pricing power, due to decreasing demand."

PwC expects 2009 RevPAR to register its largest decline since 2001 and occupancy to skid to 58.6%, the lowest level since 1971.

Warren Marr, a director in the hospitality and leisure consulting practice at PwC, cautioned that leisure likely will face more of an uphill battle in the current slowdown than it did in the post-9/11 period, which was characterized by fear.

"People were able to fight that fear with price," he said. But because the current downturn is purely economic, "regardless of price, some people aren't going to travel."

Even so, Marr and other analysts say that the downturn will not affect all lodging tiers equally. A "flight from price" among corporate travel managers will put disproportionate pressure on luxury properties, whose RevPAR is expected to decline by 8.7%, said Marr.

On the other hand, trading down from luxury and upper upscale will help support upscale, Marr said.

PwC's forecast calls for both upscale and midscale without food and beverage to actually enjoy slight demand growth in 2009.

Midscale without food and beverage, Marr added, will benefit from "the newer, quality product in that bucket," as well as refurbishments.

Robert Mandelbaum, director of research information services at PKF Hospitality Research, agreed that both the upscale and midscale without food and beverage segments stand to weather the downturn better than other lodging sectors.

He also pointed out that while the outlook for luxury hotels might seem harsh, "historically, the luxury segment shows some of the sharpest percentage declines."

"But they're starting at a very high occupancy level," he said, "and, obviously, a very high average room rate," which can provide some cushion.

In looking beyond 2009, Mandelbaum described a positive scenario for hotels.

In 2010 and 2011, he said, "You'll see a dearth of new hotel rooms" because the lending crunch has curtailed development. "If you do see travel pick up," he said, "we'll have the opposite of this year, with occupancy picking up rather rapidly."

D.K. Shifflet's Klauda added pent-up demand to the equation.  "What we're telling our clients is to be braced for 2010," she said, not because business will stay weak but because leisure demand could rebound strongly.

Klauda predicted that whereas "right now we see a lot of trading down, the reverse will happen in 2010, maybe 2011." 

Even so, timing of the recovery will be a key variable, because "every month, things are changing."

Airlines face further fare cuts

Rapid change also applies to the airlines. Having started cutting capacity a few months ago, when oil was at $147 a barrel, carriers now find themselves cutting capacity further as a result of weakening demand, even though oil has fallen precipitously.

But the scale and scope of the difficulties 2008 brought for air carriers are not likely to be repeated in 2009, said John Heimlich, chief economist at the Air Transport Association.

In recent months, Heimlich said, "the drop in fuel prices has overwhelmed the reduction in demand," resulting in a net benefit for the airlines vs. the period preceding the oil bust.

Oil's collapse, Heimlich said, should give airlines some breathing room to continue to bring supply more in line with demand, streamline fleets and permanently close costly facilities.

Even so, Heimlich said, "We need meaningful profits for several years. We're hoping we're really transforming here and not just recovering."

Brian Pearce, Heimlich's counterpart at the International Air Transport Association, seemed to agree, particularly with regard to U.S. carriers.

Though Pearce's outlook for airlines globally is grim ("the worst revenue environment we've ever faced"), he credited U.S. carriers with being more proactive with capacity cuts in 2008 than airlines elsewhere, which he contended would pay off in 2009.

"We're expecting the U.S. industry to be profitable next year, after substantial losses this year," he said, adding that such an outcome would be "remarkable, as we're entering a really big recession."

Lower fares stand to benefit the rest of the travel industry, and Vaughn Cordle, chief analyst with AirlineForecasts, predicted that carriers would see much of 2008's fare gains undone in 2009. 

Earlier this fall, at a time when airline executives were still hoping to raise fares further, Cordle correctly foresaw fare erosion. He now predicts that weakening demand will force fares to drop by about 7% in 2009.

What's more, he thinks leisure fares will come under particular pressure in the first quarter as the full impact of the recession sets in, with declines in the double digits if oil prices remain low. He expects capacity for the 10 largest U.S. carriers to continue shrinking perhaps by as much as 7% to 9% in 2009.

Pearce concurred. "I'd be very surprised if we don't see fares fall," he said.

Cruise will fill cabins for less

Unable to quickly rotate assets out of service or to accept empty cabins, cruise lines can be expected to pull out the stops in 2009 to prop up demand.

Peter Wild, managing director at the cruise consultancy G.P. Wild, said the challenges for cruise lines could be especially difficult.

"It might, perhaps, be thought that 2009 would see nil growth in passenger numbers as a result of the global financial crisis and resulting effects on consumer demand," Wild said in a written analysis.

"However, the cruise industry is generally supply led, and with significant net increases in capacity over the next two to three years, the leading operators are likely to do all in their power to ensure that this capacity is taken up, if necessary, through wider discounting than has been seen over the last four to five years."

Demand stimulation, in combination with incoming supply, is likely to result in global passenger growth of 4.8% next year, to 16.77 million, Wild said.

A key implication for cruise lines is suggested by his conclusion that "the effects of the economic situation are, therefore, more likely to be measured in lower revenue yields than in reduced passenger numbers."

Despite challenges for cruise in the near term, Wild noted that "historical precedents would suggest that more normal patterns of growth may return later in the decade, especially as the market tends to respond to the debut of exciting new ships, such as the [Royal Caribbean] Project Genesis vessels, the new Celebrity and Disney megaships and others due to debut in the next few years." 

Given the downbeat travel outlook for 2009, a return to "normal patterns of growth" would indeed be welcomed by the entire industry, whether late in the year or even, as appears more likely, in 2010.