Mounting economic turmoil and the loss of tens of thousands of Wall Street jobs will erode travel demand and bring new hotel development to a virtual halt, travel experts and analysts predicted last week.
"This is a fairly severe change from a week ago," Bjorn Hanson, a former PricewaterhouseCoopers analyst who is now a professor at New York University's hospitality school, said of the outlook for travel demand following last week's collapse of Lehman Brothers and the government's bailout of AIG.
One of the biggest hits could come in luxury travel, which until now has been the one market segment that seemed somewhat insulated from the economic downturn.
"Since about 10% of luxury travel is directly or indirectly tied to the financial industry, we'll now see an effect on luxury travel greater than we otherwise would have," Hanson said. "Everyone in the financial sector will be saying, 'What's next?' It will affect bonuses, layoffs and just the mood of folks."
Kevin Maguire, president and CEO of the National Business Travel Association, said he was already seeing a drop in overall travel in 2008 of some 10% and that a projected decline of up to 20% could occur if the economic slowdown persists.
Lalia Rach, divisional dean of New York University's hospitality school, said, "There are great economists who say we have not seen the worst yet, and that is daunting. ... The U.S. consumer has really dealt with a lot in the last 18 months, and it remains to be seen if that resilience is wearing out -- not wearing thin, wearing out."
'Transactions are paralyzed'
The collapse of investment banks and the resulting turmoil in financial markets will also make it harder to get financing for new developments or acquisitions.
"Basically, transactions are paralyzed. The financing world is frozen at the moment," said Phil Gordon, a partner in the hotel and leisure group at Perkins Coie in Chicago.
Rick Swig, president of the hospitality consulting firm RSBA & Associates, based in San Francisco, predicted that new hotel construction, which has been difficult to finance since the credit crunch began last year, will come to a virtual stop.
"Debt's not going to be available for new hotels, and the stringency in evaluating hotel finance is going to be elevated significantly," Swig said.
"You're not going to see a lot of new hotels in major cities. ... The only ones that are getting done now -- and they may stop, too -- are the limited-service hotels in secondary and tertiary cities."
Airlines got some good news last week as oil prices continued to slide. Analysts and hedge fund managers said lower fuel prices should relieve pressure on the carriers to bolster their cash reserves, reducing the strain on their relationships with credit card companies and processors.
Kevin Crissey, an airlines analyst at UBS Securities, upgraded his ratings on most major airlines on Sept. 17, saying they were now positioned to be profitable despite facing much higher costs than ever before.
Steps such as charging for checked bags, cutting capacity, slashing capital expenditures, selling food and beverages and other previously taboo practices "were probably long overdue, but would likely not have been taken had it not been for higher fuel prices and the resulting survival concerns," Crissey wrote in his report. "Add in the overall benefit to the industry of the failures of marginal carriers, such as Eos, MaxJet, SkyBus and others, and it can be argued that high fuel prices are one of the best things to happen to the industry."
Others, however, said that widespread concerns about the health of global economies would negatively affect air travel.
"Crude oil prices have fallen recently due to significant concern about economic weakness in the U.S. and around the world," said Steve Lott of IATA. "A weak global economy and low consumer confidence means falling demand for air travel."
Worse, the spikes and valleys in prices suggest global instability.
"It's not the absolute price of fuel," said Michael Garrett, director of airplane configuration, integration and performance for Boeing Commercial Airplanes. "It's the volatility of those prices."
Still, noting that fuel prices remain significantly higher than last year, IATA said the airlines' financial crisis would not be erased easily.
"There's no doubt that the crisis continues as we see airlines go bust around the world," Lott said. "Just in the past 30 days, we've seen at least three [airline] bankruptcies in Europe and North America, and these are just the latest in a long list this year.
"While the price of crude has dropped, jet fuel prices in certain regions remain high due to the growing crack spread [the difference in price per gallon between crude oil and refined jet fuel].
"IATA expects the average price of crude to be $113 per barrel for full-year 2008, which is still 55% higher than last year. That difference means an extra $50 billion in costs to the airlines."
Hanson said holiday hotel bookings were down 10% to 12%, although he attributed some of that to people delaying making plans because they know demand is down. At the end of the day, he said, he expected holiday bookings to be down 3% to 5%.
Swig said the upheaval in markets globally would also result in a slowdown of inbound international travelers.
"Major markets, destination markets had a really great summer, and that honeymoon is over as of very soon, or maybe it's already passed," he said. "We are going to see some softening of the European invasion."
Outside of the firms that deal directly with Wall Street, many travel agents and tour operators said they were seeing no immediate impact from the market turmoil.
"In fact, we are seeing very little impact in the luxury market," said Alexandre Chemla, president of Altour in New York. "Bookings remain very strong and up from last year, although we are seeing an increase in the advance booking time frame as luxury travelers make their plans further out into 2009."
Bob Watson, president of Watson & Watson in Scarsdale, N.Y., said it was too early to determine what would happen.
"There are some tycoons who will be affected even if employed. It looks as if the year's bonuses will be severely impacted, too. This has a sobering effect, [but] it is too early to panic or really assess," he said. "There are so many maybes and ifs."
Christina Stubbs of Absolute Travel said her company had not seen any signs of panic so far.
"We had one client who worked for Lehman Brothers and was wondering if he could cancel his trip and get his money back," she said. "But he leaves very soon, and his trip is to some deluxe spots with strict cancellation penalties. We encouraged him to go and enjoy, and I think that is what he and his wife finally decided to do."
Rach said that one bellwether would be the affluent traveler, as opposed to the wealthy traveler.
"We've already begun to see bifurcation in the marketplace," Rach said. "I think we are going to see that within the luxury area. We are already seeing reports that the affluent customer is cutting back. But we are also seeing reports that the very top end will never cut back."
Michelle Baran, Michael Fabey, Nadine Godwin and Jeanie Stokes contributed reporting for this article.