On my second day in
India, back in the early 1980s, a taxi driver refused to take my 10
rupee note. When I asked why, he pointed to a tiny tear in the
corner of the bill.
I soon discovered at
that time in India that only a bank or a fool would knowingly
accept a bill with a tear in it.
A teller, inspecting
my bill, told me there was actually no legal problem with torn
notes, but the citizenry could not be convinced of that.
So for the next three
months, I joined a game the entire country seemed caught up in:
inspecting a bill for even the slightest tear before accepting it
or, upon discovering that I had carelessly acquired a torn bill,
trying to pawn it off on someone else. The alternative was to stand
in long bank lines.
It was then that I
fully came to appreciate that economics is as deeply rooted in
psychology as it is in math.
I think about that
when I look at the reaction to the subprime lending fiasco and
notice that although the vast majority of people in the U.S. are
not threatened with home loss or other direct fallout from the
crisis, general consumer confidence has plunged.
If your home value
dropped from $1 million earlier this year to $750,000, you'll
suffer from what economists call "negative wealth effect." It
doesn't matter that you have no intention of selling your home or
that you make a respectable salary and have a secure job. When you
lived in a million-dollar home, a vacation in Europe felt like a
birthright. Now, it feels like an extravagance. The stability of
your cash flow and disposable income have become
In this week's Travel
Weekly cover story by Lester Craft, industry analysts comfort
themselves with the belief that hotel capacity and demand are well
balanced and that airlines can tighten capacity should there be a
But airlines really
only became smart about capacity recently, in an expanding market.
In that environment, keeping capacity tight invariably leads to
greater profitability because incremental price increases drop to
the bottom line as long as overhead costs remain stable.
overhead costs can lead to reduced profitability and margins if
top-line numbers go down because significantly fewer people are
traveling. And the carriers have been so good at cutting costs over
the years that it will be challenging to find meaningful new ways
to reduce spending proportionate to any significant top-line
situation is currently quite good for hotels, and they can
withstand a certain amount of reduction in demand without much
pain. Nonetheless, there are far many more rooms today than there
were during the last downturn, which was painful indeed.
Both the hotel and
airline cushions rely on any downturn being only slight. But if oil
prices, tight credit and a weak dollar contribute to further
erosion of consumer confidence, the number of people who cut back
on travel spending may overwhelm these mitigating
There are a few
silver linings worth noting that may buoy the industry even in the
face of weakening consumer confidence.
The first is the
ongoing transfer of trillions of dollars in wealth to baby boomers
as their parents pass on. When people receive an inheritance,
travel is the second-most-likely thing they will purchase with
their windfall (real estate is first).
The second is that
airlines, and especially hotels, are playing in a global
marketplace. The major U.S. hospitality companies are developing
new markets around the world. Should Americans suddenly reduce
their travel spending, there are increasing numbers of Chinese,
Russians, Arabs and Europeans to help fill the vacuum.
travel companies don't really care who's spending what and where,
as long as someone's spending something, somewhere.
Still, one can't help
being nervous. Your clients' lives may not have changed materially,
and their ability to spend may actually remain unimpaired. But
increasing numbers of them nevertheless believe that our economy
has a tear in it. And they're wary.