With gas prices on the rise, travel biz buckling down

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With thousands of leaf-peepers streaming to the New England countryside to take in the fall colors, tour operator Larry Niles has a slightly different perspective on the gas crunch than most.

We hear a lot of comments about people wanting to see the fall colors, but that they dont want to have to drive to do it. So we put them on a bicycle for five or six days, he said.

Would that life were that easy for the whole travel industry. Exacerbated by storm damage to Gulf Coast refineries, drilling platforms and pipelines, gas prices have nearly doubled since the fall travel season last year, and fuel costs for airlines and cruise lines -- already at record levels -- just keep heading higher.

Yet travel industry players said last week that they were seeing less of an impact on travel than might have been expected.

That probably hasnt kept them from losing a bit of sleep over what might lie ahead, but for the time being, Americans continue moving about the country.

Niles, president of Bike Vermont, headquartered in Woodstock, Vt., said his weeklong and weekend foliage tours are booming, and last-minute bookings are up.

Foliage tours are a major revenue source for tour companies in the Northeast. So President Bushs request that Americans cut back on driving after Hurricanes Katrina and Rita forced refinery and oil rig shutdowns in the Gulf region has many foliage operators worried that business will suffer.

Vacation time trumps fuel costs

So far, indications from a number of sectors suggest that consumers still consider vacation time too precious to let higher fuel costs stop them from traveling.

A survey released last month by research firm Yesawich Pepperdine Brown and Russell (YPB&R) showed that a strong majority of adults who were planning vacations within six months said they were unlikely to cancel trips because of gas prices.

But their answers were premised on prices below $3.50 a gallon. Higher prices would cause 19% to cancel trips, and 53% said they would alter travel plans if prices pushed that high, said CEO Peter Yesawich.

It is noteworthy that the sample divided along age lines. Among older Americans, who make up a sizeable portion of those traveling by car and motor homes to destinations such as Las Vegas and western resort areas, nearly half appeared to be considering altering their vacation travel plans.

A survey in mid-September by AARP found that 47% of those over 50 intended to limit travel and vacations as a result of high gas prices.

Cathy OKeefe, a public affairs coordinator for the Travel Industry Association in Washington, said the group did not conduct a survey this year related to fuel costs and travel because they did not anticipate much change relative to last year.

Fall travel is going to be flat this year, OKeefe predicted. But last fall was a record season. So if we keep pace with last year, were still doing pretty well.

OKeefe, who said she is among those who believe gas prices will decline, said increases in total costs of a vacation trip in the U.S. are actually less than most people assume when they see soaring gas prices.

Overall, when you look at how much more people are spending per trip because of higher gas prices, it is not a major increase in the cost of their trip overall, she said. And driving is still attractive for family vacations because even at $200 each for an airline ticket, families spend about $1,000 to fly. You can cover a lot of miles for $1,000 in gas.

On the other hand, the price of heating fuel is also expected to soar. This will produce unbudgeted costs for the hotel industry that will have to be passed on to customers, thus increasing other travel costs.

Airlines taking a huge hit

Car travelers arent the only ones feeling the pinch. While it remains to be seen if sustained high gas prices will cause tourism to fall in some states, there is plenty of evidence of their impact in other sectors.

Most notably, U.S. airlines are taking a severe hit, recently attributing everything from route cancellations to bankruptcies, in part, on the cost of jet fuel. The price hikes have also prompted schedule changes and flight cancellations, and they even seemed to be encouraging cancellation of light flights to improve load ratios.

Delta said last week that it would cancel flights with too few passengers in cases where it could quickly accommodate disrupted travelers on another flight with a minimum delay, although that practice was set to end this past weekend. 

As the industry heads into the winter season, international routes are also under scrutiny. American said it would suspend service between Chicago and Nagoya, Japan, at the end of October, primarily because of fuel costs. Northwest suspended daily service indefinitely between New York and Tokyo on Oct. 2.

American also pointed the finger at fuel prices in suspending 15 roundtrip flights in markets the airline serves from its Chicago-OHare and Dallas/Fort Worth hubs. However, these changes reduced frequencies without eliminating routes, and American said it anticipated restoring those flights as early as Oct. 30 if fuel prices drop.

For now, prices are still rising. New York Harbor jet fuel closed at $2.43 per gallon Oct. 3, and Gulf Coast Jet reached a record $3.01, according to JP Morgan analysts.

That pressure comes not only from oil prices, but because the cost of refining jet fuel, already historically high, is still rising. Merrill Lynch aviation analysts said theyre forecasting the difference, known as the crack spread, to increase from $16 to $40 per barrel for the fourth quarter. Merrill Lynch forecast jet fuel at $2 per gallon in the fourth quarter, but the change could force it to $2.50 per gallon, analysts said.

Higher revenue and lower nonfuel costs will partially offset increased fuel expenses, analysts said, but they are now predicting a fourth quarter pre-tax loss for the seven largest airlines at $3.5 billion, up from earlier estimates of $2 billion.

Business as usual for cruise lines

Cruise lines, meanwhile, have not changed operations as a result of higher fuel prices, but as costs increase, so does the pressure to recover those expenses.

At Carnival Corp., fuel costs rose $50 million during the third quarter, CFO Gerry Cahill told analysts in September. In mid-September, Cahill said fuel costs were projected at $308 per ton for the fourth quarter, up from $214 per ton a year ago.

Cruise lines typically use bunker fuel, a heavier distillate than diesel, to power their ships, although several new vessels also have gas turbines that burn marine gas oil, a lightweight fuel similar to jet fuel.

Bunker trades at about a 34% discount to crude oil, said A.G. analyst Tim Conder. In late September bunker fuel traded for $44 per barrel, compared with $67 per barrel for crude. But bunker fuel prices, according to Conders research, are still up more than 100% from February 2004.

Its too early to see tangible effects of higher fuel costs on the cruise lines, but smaller companies, such as Radisson Seven Seas and Crystal, have levied fuel surcharges to offset higher prices.

Last month, Carnival CEO Micky Arison waived off the concept of a surcharge, saying the company has been successful in mitigating a significant amount of fuel increases through yield increases.

Yesawich said he understood that some people are concerned about cutbacks in travel, but that he wasnt among them.

I think many people will heed that request, he said of President Bushs appeal to conserve gasoline. But how that plays out is to be seen. Some may take shorter trips, others may just spend less on some part of their vacation. I think the two ideas can co-habit here without a real problem.

To contact reporter Dan Luzadder, send e-mail to [email protected].

Rebecca Tobin and Andrew Compart contributed to this report.

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