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 irrelevant.

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 downturn.

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.

However, 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 deterioration.

The capacity/demand 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 factors.

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.

Today's multinational 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.


From Our Partners

2021 Family Expo
Family Travel Expo
Register Now
Air Astana 1366
Air Astana
Read More
2021 Caesars Webinar
Watch Now

JDS Travel News JDS Viewpoints JDS Africa/MI