For decades, the American traveling public has received a generous subsidy for their vacations. Unbeknownst to most, consumers had a patron who provided discounted holidays to Paris, sale-price tickets to China and low-cost jaunts to the Caribbean.
Who was this warm-hearted sugar daddy?
I'm talking about airlines.
Since the first flight of the Wright brothers, the sum aggregate profit of commercial aviation is zero. And their billions of dollars in losses were the flying public's gain.
Initially, the airlines' problems resulted from a surplus of airlines and general unwillingness on the part of any of them to reduce capacity.
Until recently, seemingly healthy airlines were often at the mercy of their weakest competitor. As predictable as a drunk's sway, a floundering airline would announce a fare sale, and carriers on competitive routes would immediately match its prices, hoping to deprive the weak of cash flow but also weakening themselves in the process.
Over time, bankruptcies and consolidation thinned out the airlines' ranks, and the remaining carriers have summoned the courage and discipline to reduce capacity, lowering supply to truly match demand.
And making cheap seats scarcer.
Oil prices and a milquetoast dollar have exacerbated the situation, and the combination of high fuel costs and the newfound ability to raise fares has resulted in the highest fares we've seen in decades. Consider ARC's May numbers: For the previous 12 months, ticket sales were down 1.6%, but despite the reduction in volume, revenue rose 8%, reflecting a fairly steep rise in fares.
Regardless of how you might feel about the airlines, you can hardly expect them to loosen capacity voluntarily. Higher airfares are here to stay, even if the price of oil drops and the dollar strengthens.
On the other hand, travelers have found a new benefactor: hotels.
As a result of the recession and subsequent economic uncertainty, hotel rates are, for the most part, well below the reasonable value of rooms. And the most disciplined hoteliers cannot reduce capacity. If they have a 300-room, tourist-class hotel, they are stuck with a 300-room, tourist-class hotel.
Tour operators have exploited this weakness in hotel demand to counterbalance increases in the air portion of a package or escorted tour. In many cases, they have successfully pressed hotels to give them substantial discounts that compensate to some extent for higher airfares.
As a result, the average traveler has yet to face the full cost of a vacation. The air subsidy has, for the time being, been replaced by the hotel subsidy.
This might last as long as the global economic picture is fuzzy, but it won't last forever. The situation for hotels will, in time, tip to their favor again. Economists predict that over the next 16 years, more than a billion people in China will rise to the middle class and will travel. That's not to mention the hundreds of millions more upwardly mobile citizens in India, Brazil and Russia.
Ultimately, the vacation subsidy will end. We might even return to the time when taking a vacation abroad is something a family saves for years to do.
Although a potential reduction in the number of trips taken by U.S. citizens is, long term, bad news for many in the travel industry, there do appear to be a few silver linings for travel agents.
For now, agents are the primary outlet for high-value tours and cruises. And long term, the need to stimulate demand will be strong. Hotels finished a record-breaking expansion just before the recession, and cruise lines had ordered several muscular ships, many of which came on line during a time of economic uncertainty. Cruise lines and hoteliers will, for some time, desperately need heads on beds.
And, despite their newfound ability to raise fares, airlines need more butts on seats. To grow, they cannot simply continue to raise fares indefinitely. Eventually, they'll need to add more flights while maintaining high fares, and demand for flights must be stimulated. Travelers who book through agents spend more than other travelers, and I believe that's why 50 airlines agreed to join Vacation.com's recently announced AirPro program, which returns airline commissions to travel agents along certain routes and in certain classes.
The industry has survived wars, epidemics, natural disasters and excessive taxation. But the question remains how it will handle the withdrawal of vacation subsidies.
Email Arnie Weissmann at [email protected] and follow him on Twitter.