Destinations brace for market jolts from airlift cuts

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Sweeping capacity cuts by major U.S. air carriers likely will force rapid adaptations by destinations and other suppliers as they seek to limit the impact of reduced airlift and higher fares.

After months of half-measures, U.S. network carriers -- first American, followed last week by United and Continental -- finally are capitulating to stubbornly high oil prices by announcing major service cuts. The planned reductions will result in the retirement of about 210 planes in total from the three carriers' mainline fleets by the end of next year.

The actual net loss in aircraft will be somewhat less than that, since some of those planes will be replaced by newer, more fuel-efficient models. The shutdown of United's Ted brand, also announced last week, won't contribute to seat cuts because its aircraft will be redeployed.

The capacity cuts announced so far -- and more are likely to come -- will mean reduced service for many destinations as routes are dropped or frequency is reduced. In addition, the availability of fewer seats will help drive airfares higher, especially given the persistence of high oil prices.

The greatest concern among executives and analysts in the broader travel industry is that shrunken U.S. airlines might deal a double blow to travel and tourism in the form of reduced demand for travel as fares rise and a diminished capability to provide desired destinations to those passengers who still want to fly despite the price.

But for now at least, that kind of dire scenario seems more a fear than a reality.

Most segments of the travel industry appear capable of countering the blow of capacity cuts by engineering a wide range of adjustments and adaptations. For example, some destinations can increase their appeal to short-haul travelers, while others can be expected to work more closely with air providers (both scheduled carriers and charter services) to ensure adequate airlift. Destinations especially dependent on air seats, such as Hawaii and the Caribbean, may need to devise more creative solutions, such as subsidizing specialty carriers.

Bulk of reductions in Q4

The travel industry actually will have some time to prepare before most of the reductions take hold.

"Most of the cuts are going to happen starting in the fourth quarter," said Adam Sachs, managing director at travel consultancy Tourism Economics. The airlines, he added, "are going to keep the planes in the sky for summer."

Tourism Economics is forecasting a decline of about 3.5% in domestic air travel this year, with the full effects of capacity cuts not being felt until 2009.

Sachs noted that airlines likely would concentrate much of their cutting domestically on low-yield, leisure-oriented routes, such as Hawaii, Las Vegas and South Florida. Furthermore, he said, "Short leisure routes are going to fare better than longer leisure routes," given that the impact of jet-fuel costs increases in proportion to the distance flown. At the same time, major carriers have been shifting domestic capacity to international routes, which are more lucrative despite the longer distances because they generate higher fares.

Gabor Kovacs, vice president at aviation consulting firm Morten Beyer & Agnew, said that although the airlines have yet to announce many of the specifics about where they will cut, the general outlines are clear.

"They will protect their home turf by pulling back to core markets, their hubs, where they have the strongest positions," he said.

Routes that a given airline would consider marginal to its network will tend to be eliminated or face frequency reductions, while trunk routes and significant feeder routes will be less affected, he said.

Kovacs believes that the travel industry cannot escape the impact of airline cutbacks completely, especially given the slowing economy. Most likely to be vulnerable, he said, is "discretionary travel to leisure destinations," with the presumption being that some consumers will defer travel to foreign destinations and distant resorts and instead drive to someplace closer.

Potential impacts on business travel, he said, are not yet clear. A key question is whether businesses will respond by "putting off sales calls or business trips and relying more on technological solutions such as teleconferencing and e-mail."

Even as traveler behavior could be subject to change, adaptations on the part of the travel industry itself could be an important key to weathering problems rippling from airline cutbacks.

"There is always adaptation" when key fundamentals threaten to undermine tourism demand, said Ken McGill, executive vice president and executive managing director at economics and analysis firm Global Insight. In the Caribbean, for example, he said destinations might develop alternative methods for maintaining seats as major air carriers cut back. Charters and third-tier niche airlines could come into play.

"We may see more of that in an effort to subsidize, if you will, the number of air seats going into a destination," McGill said.

He noted that for some airlift-reliant destinations in the Caribbean, "85% to 95% of their gross domestic product is tourism. They won't take this lying down."

Indeed, a sense of urgency is palpable among Caribbean tourism leaders. Allen Chastanet, chairman of the Caribbean Tourism Organization and minister of tourism and civil aviation for St. Lucia, threatened last month to resign his tourism minister's post if the CTO failed to fund a $30 million regional branding campaign. Chastanet also was critical of governments in the region for levying departure taxes and raising landing fees. He instead urged officials to reduce airlines' costs in order to help preserve airlift.

"In this region, without aviation we are dead," he said.

Chastanet's expressions of concern proved prescient: Within days of his remarks, American announced significant reductions in Caribbean service, including slashing daily flights at its San Juan hub from 38 to 18.

Targeting regional markets

While destinations that are almost completely reliant on airlift might have to take extreme measures to keep air passengers coming, other destinations can adjust more easily. For example, Sachs said that some U.S. destinations that normally market themselves nationally would need to seek more local and regional business.

"I think we're going to see some winners" among regional destinations that attract visitors who decide to drive more and fly less, he said. "This happened in 2002 for Orlando. Orlando turned its sights to Florida markets, and it really helped a lot. "

Tour operators, too, can be expected to adapt as the new airline realities set in. Ken Pomerantz, president and chief marketing officer for MLT Vacations, said that increased charter air service could be a response in some cases. Currently, though, MLT's main adjustment is "focusing on the high-end leisure market," he said. "Even in a tough environment, I think those are the people that not only are going to be traveling but will be willing to pay the going fares."

Richard Launder, president of TravCorp USA, noted that some tour gateway locations might shift. Over the years, the airlines have added many attractive secondary cities in addition to traditional tour gateways such as Rome or Paris. But as the airlines cut back, he said, tour operators' ability to start and end from certain cities "may well come into question."

"People absolutely will travel," he said. "Where people travel to may vary."

Tim Conder, managing director and leisure analyst at Wachovia, agreed that consumers were particularly loath to give up vacations. Wachovia research into consumer sentiment covering a span of 30 years, he said, confirms the notion that consumers tend to take vacations "no matter what."

Cruise, like other travel segments, has several tools for offsetting the challenges posed by airline cutbacks and fare hikes, Conder said. Among those options is leveraging the long history of collaboration between cruise lines and airlines.

"If the cruise lines say, 'We're going to have demand,' the airlines will make the capacity available where at all possible," he said, adding that buying blocks of seats and reselling them at cost, and even chartered air service, can help.

Keeping in mind that fuel surcharges imposed by the cruise lines also weigh on consumers, Conder acknowledged that "at some point there is a tipping point" at which demand could plummet.

"We're not there yet," he said.   

 

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