Travel Weekly Editor in Chief Arnie Weissmann spoke with executives in every segment of the industry and explored what they expect in 2010. He found pessimism, optimism, bold thinking and cautious conjecture -- sometimes all within the course of one conversation.
Gary Kelly
Chairman and CEO, Southwest Airlines
Our outlook is very cautious. I'm with the consensus that believes current economic activity is pretty lackluster. There are mixed signals: some good things, some alarms going off. It's an overused expression, but bumping along the bottom is an apt description, and my best guess for 2010 is that that's going to continue.
The impact the economy will have on the travel industry is significant. Consumer demand is reasonably healthy, and it felt like it was not very healthy in the first half of 2009. I'm not bold enough to predict an uptick, but I don't think it will weaken significantly, and we're well positioned to take advantage of consumer demand.
But on the business travel side, there's plenty of evidence it's very weak. And history says the business travel market will recover very slowly.
If you look at our largest city-pair markets as a basket, the revenue growth is nonexistent year over year. In fact, we're seeing a revenue decline for that set of markets. Yet, overall, our unit revenue is up 12%, so we've found ways to overcome weakness in our core markets. I think that's a testament to low-fare brands, diversity of destinations and even to "Bags fly free."
People will want to travel but will be more focused on value. Arguably, there are still too many seats domestically, though that's less a problem elsewhere around the world. It will be a very competitive environment here, where lots of good deals will be available.
The legacy airline traffic has shrunk 40% -- the equivalent of two legacy carriers -- while our piece of the domestic traffic has expanded. But you will see more and more capacity come out of the U.S. market.
We hope not to cut capacity [in 2010]. We've been pretty aggressive in a lot of ways, but we have the same number of planes. We're just flying less per day per airplane. We've trimmed our flights in early morning and late evening. That's how we're trimming capacity. We're not growing the fleet, and we're modestly reducing our overall level of employment. I think it will be the same next year.
We did add one new city for our May schedule, Panama City Beach, Fla. Odds are low we'll be adding any more; if we do, it'll be some time after August. Something would have to happen to change our minds.
We're very strong financially, outperforming the industry in terms of revenue. We have over $8.2 billion in cash, well above our target. We have modest debt, and we're ready to act if an opportunity arises, and this is an environment where opportunities can come. We've demonstrated by our bid for Frontier that we're open to an acquisition, and there's still every incentive for carriers to look for consolidation as a solution. But it doesn't seem like there's any looming bankruptcies or pending disaster for any carrier. We'll see what unfolds.
The industry as a whole is not making money. It has survived this year, survived this crisis, in large part because the industry was already reacting to high energy prices very well. I've been encouraged by the relative stability in oil prices; the range is in the $60- to $70-a-barrel range. We're a lot better off at $50, but talking to producers, they're more comfortable with prices in the $70-to-$80 range in terms of committing to new [exploration] projects. If $50 seems too low for them, well, it will be better to have $70 and stability.
I don't think we'll necessarily see recovery even in 2011. I'm very concerned about overhang with the federal deficit. Lower taxes, that would be the right thing to do to help stimulate jobs and business investment and position for growth in 2011. But it could be a very long period of weakness. I think it's a very serious problem.
Stein Kruse
CEO, Holland America Line
2009 was an unprecedented year for all of us. We hadn't seen that type of contraction in spending and confidence, not even after 9/11. It was a very, very difficult year for the cruise industry, and the consumer benefited from it. The value proposition for cruising was more recognized than ever before because there were so many good deals.
Yes, there will continue to be deals and discounting in 2010, but if that's suggesting we'll have a tough year, I don't think they're related. The cruise industry is one of the few businesses that I know of, and certainly the only one in leisure travel, that operates at 100% capacity utilization. We're full 365 days a year on all our products. We're such a high-cost, capital-intensive business that we need to operate at that level 24/7 in order to be profitable.
Hotels don't operate like that. Airlines would like to, but they don't. Discounting and deals are part of the way we yield-manage to that 100% capacity utilization. We took the steps needed to get to 100%, and we filled our ships, which I think is a credit to our industry.
The deals and discounting will continue, but the cruise industry has gotten so big and widely distributed that there are certain areas that are doing better than others, while some areas will have challenges. But I think the tone of business has changed. In the last couple of months, you're starting to see a more positive outlook. We see it in call volumes and in conversations with business partners and travel agents.
Generally, the world is pulling out of a significant downturn. There are signs all over that things have improved. When the history books are written, [the downturn] will be viewed as a sharp contraction, and nothing more.
The trajectory the world is on is very positive. The underlying factors are very solid, the demographics, the emergence of giant nations like India, China and Brazil -- their potential for consumption and productivity cannot be stopped. An aging baby boomer population is coming into a time of their lives when they have more money, and we have an industry that really caters to them in so many ways.
We are clearly facing issues, but this will be seen more as a bump than a prolonged crisis. The U.S. appears to be gaining momentum. The economy is picking up in almost all regions. And although we have large problems, housing and unemployment especially, we've apparently moved beyond the crisis and into recovery. The country is no longer in a recession.
We took delivery of, and even ordered, new ships. Ideally, do you want to take delivery when an economy is down? Ideally, no. But when we make these decisions, we don't know what's around the corner. We don't order ships for two or three years, we order for 20 or 30 years, so we don't get caught up in when the delivery takes place. So even when we're having a year like 2009, the new ships are helping extend the broad appeal that cruising has. As bad a year as it was, our business did well. Carnival Corp. and Royal Caribbean Cruises Ltd. are publicly traded, and those were impressive numbers for the type of year we had.
Going forward, consumer confidence is a very important issue, and we know that it sank to some of its lowest levels in the past few months. But it has been inching up, and I think we will see it gaining. There's a correlation between consumer confidence and companies like ours which are discretionary purchase decisions.
I don't want to just sound like a cheerleader. Yes, there are challenges. But our trajectory is one that is very encouraging. Our partnership with travel agents is very solid, and the relationship is fundamental to our business success. I understand the frustration on the [noncommissionable fees]. That's a challenge when there are highly discounted deals. It becomes more noticeable.
But we haven't changed them in the past years -- well, perhaps $5 -- but our commissions and willingness to work proactively on co-ops and advertising and promotional opportunities show the viability of the distribution system. We're connected at the hip and wallet with travel agents and will be for a very long time.
Dean Smith
President, Flight Centre USA
In Australia [where Flight Centre is based], they didn't refer to the economic downturn as the Great Recession, but as a mild economic downturn. Our business there immediately came out and is growing. We'd like to see the U.S. follow that trend, but it will likely be slower to achieve that goal. But we do see 2010 as an improvement over 2009.
At our FCm Travel Solutions, we're seeing corporations holding very tight to their purse strings, applying travel policies rigorously and opting for savings wherever they can, especially corporations spending more than $2 million. Where they stay, what class they travel in, they're watching it very carefully.
At Gogo Worldwide Vacations, we'll see year-over-year growth in Mexico, which was hurt by H1N1 in 2009. We'll see improvement in the Caribbean, though in some destinations more than others. Some of the smaller ones are struggling to gain voice, but the traditional markets, like Punta Cana, Jamaica and Aruba, will be stronger. Europe will be up after a poor year, given the euro.
In 2010, Gogo's focus will be to work even closer with travel agents. Not just sales and service, but marketing and sales support. If an agency isn't a member of a consortium, we can use our skills and marketing opportunities to help them grow their business. We'll have a full new tech suite available, an improved online experience for agents. We'll continue to expand the product range. Watch for a big new announcement in the middle of the year about South America. We expect to see at least a 10% improvement on the year; we'll be disappointed in anything less.
As for Liberty Travel, we're seeing a continuation of a positive trend in cruise sales. Cruises have been performing particularly well for the last two months, and we expect them to continue to do so. We think escorted tours and traditional vacation destinations will be strong in 2010, with Liberty's results in traditional markets -- Mexico, Europe, Hawaii, Florida, Las Vegas and the Caribbean -- mirroring those of Gogo.
The exciting news for Liberty is our growth strategy, which will commence in 2010. We just signed our first new lease [since acquiring Liberty in November 2007], in [New York's] East Village on Eighth Street. There will be more coming in our traditional footprint in the Northeast.
We currently have 165 agencies, but we'll be opening another six in 2010, moving toward a goal of 350 by 2020. We believe that the brick-and-mortar travel agency has a strong future as long as it markets itself properly and as long as it makes itself a vibrant retail space. I think the invisibility of the travel agent is a major threat to our industry, and we don't intend to become invisible.
Robert Joselyn
CEO, Joselyn Tepper & Associates
If I had to label what we're seeing now, I'd say it is a partial portfolio recovery. In every aspect, there's good news, and then the rest of the story, which in many cases is not so great. The stock market is certainly up, but it's still down 30% from a year ago, and a lot of wealth was lost. We've seen a slight uptick in the housing market, but a lot of that is foreclosure bargains, not new sheetrock being put up. We still have a record number of upside-down loans, with the average value down being 30%.
The rate of increasing unemployment is declining. (Don't you love the parsing of those words?) But what's worrisome there is that we have the lowest average workweek in a quarter-century: 33 1/2 hours. People took involuntary reductions in hours, and as we begin to have an uptick, businesses will certainly try to re-employ those who had their hours cut, and that will have to play out before taking people off the unemployment rolls.
There were 108 bank failures, but the FDIC still calls 900 banks "worrisome." There are still a lot of banks in trouble.
One poll on people's intentions said that 8% would increase spending in 2010. Consumers didn't spend a lot in 2009, and 33% say they will spend less.
There's some worry about inflation. We could be facing, given the debt being built up, an inflation tsunami in 2012. If we print money like the Japanese did, then we risk inflation or hyperinflation. The alternative is raising taxes. That's an iceberg sitting out there in 2012.
Currently, we don't have inflation, but deflation, especially in the travel industry. Everything's on sale. On Black Friday this year, there were more consumer purchases, but less money spent. Prices are lower, we're seeing it everywhere in the travel industry. It's an insidious problem.
Take all of this together, and I think we're still in a slight upticking. We're past the middle of a U-shaped recession. Some think it will be a double-U, but I think it would take another terrorist attack to cause something like that. I think we're at the bottom and improving slightly, and that's what I see for the next three quarters.
That said, if you want to improve your bottom line, you can do it, but you're going to have to do it yourself. Don't expect help from outside.
It may take two or three years to come out of the recession, and things will have changed. Baby boomers, who went through life thinking things would always be better, have been shaken to their core. All of sudden, they're nearer retirement and have lost value in their home and in their stocks. As consumers, they will come out buying differently.
Younger people will be more likely to spend more money on travel. The older a person is, the less likely they are to spend in the near future. Young people didn't have money in the stock market or houses, and retirement isn't a concern. They're voyeurs on what is happening on the economy. Those under 30 were least touched.
It's critical for this industry to understand what the young want and how to communicate with them. We knew they were important, but now they're even more important.
But first, agencies need to have an increased focus on their existing client base. Don't lose touch with clients. Communicate with those folks more often and in a more personal way. Demonstrate how you value them. Do everything you can to make them feel special, then leverage those relationships to meet other people like them.
On the revenue side, don't wait for the economy to get better. Don't stop marketing, but be smart. Don't throw things against the wall to see what will stick, but get into alliances with other businesses going after the same customers you are.
On cost side, if you haven't looked at everything by now, you're in trouble.
Over the next 12 months, I don't think there's going to be a massive reduction in the number of travel agents; perhaps another 10% to 15% will go out, close or merge. There are a number who have good businesses but got into cash-flow issues, and couldn't get ahead of it. If credit markets opened, it would be less severe.
The corporate travel market will be tough. Generally speaking, corporate agencies waited a little longer to cut expenses. The business is way down, and I think it will come back slowly. There are some who took large, up-front GDS payments and are desperate for new business because they already spent their GDS money and have the contingent liability to produce segments, even though business overall is declining. That means a lot of bidding for business is being done at break-even levels, just so they can get the business, to avoid a shortfall in segment bookings. That's squeezing margins for everyone.
Shirley Tafoya
President, North America, Travelzoo
We are very pleased with 2009. We had a great growth rate in the U.S. For next year, with so many deals in the market, the challenge will be: How do you evaluate all these deals? How do you make sure they're quality deals, that if you showcase them, they can be found, that they can be found in the date range you want?
Next year, we have an incredible opportunity to help hotels with their occupancies and airlines with loads, to help get yields up and increase average daily rates. We have a model for that, so we're expecting a really good year in 2010.
I absolutely think there's going to be a major adjustment in the dollar. It will devalue severely, at least by 30%. It will happen in 2010, and it will make domestic travel more attractive. Oil prices are going to shoot right back up, and that will put a lot of pressure on the airlines, and we're going to see a lot more partnerships, with codesharing, with consolidation of routes. A major merger might pop up. There's a serious possibility of United merging.
Look at consumer spending. People are definitely saving more. The decrease in travel spending is causing angst among suppliers, causing more deals to come into the market. There could be consolidation in the package market, particularly in Europe, which will help U.S. packagers. In fact, if they can get prices to a good place despite the dollar's decline, [U.S. packagers] can become a more important channel for European hoteliers. It could lead to better deals being packaged, which might make Europe more attractive. And places where the dollar won't be as weak as in Europe, like Central and South America, will strengthen. However, those focusing on Mexico will have a very tough time in 2010 and will have to diversify.
Hotels will adopt tools like dynamic packaging to implement on their own websites -- dynamic packaging and direct rates in an effort to keep rates up. They may make deals directly with the airlines, who are also interested in dynamic packaging. The companies that come up with tools to create those partnerships will do very well, because rate integrity is falling through the floor at this point. They're relying on online travel agencies to push volume, but they're losing rate integrity with the OTAs, so the direct channel will become more important to them.
I'm wondering if we're going to see backlash against strong-arming by the online travel agencies. When hotels turn to us, they want to turn rooms very quickly and want massive volume to come in. For a Vegas property, we have moved 15,000 room nights in four days. When the OTAs see that, they'll drop that property for a week or two or put them on the last page. So there's a real fight going on between a hotel's ability to do what they have to do to for their business and fighting the OTAs. They get punished by the OTAs, and the consumer loses. This is becoming a real issue, and I wonder if all this won't come back to bite the OTAs.
David Jones
CEO, Amadeus
I think 2010, compared to 2009, will be a bit better. Further improvement won't be nil, but it will be limited. We're likely to see a gentle improvement, a slight upward movement. It should continue to improve in 2011, and everyone has taken such determined action on the cost front that in 2012 and 2013, we should be looking at reasonably good times, in financial terms.
There's been something of a reset in business travel. There will be a slow recovery in volume, and the effect on yield from travelers downgrading [airline] classes, particularly in short haul, is going to stay with us for many years. But nevertheless, given that travel is a critical component in conducting commerce, it's not going away.
On the leisure side, people like to travel, and it will continue to grow. It has been growing in mid-single digits for decades, and I don't see anything fundamental to say that will change.
What will change is the weight of the geographies of the world. In 2009, North America GDP was down 6%, Europe down 2%, but China up around 7.6%. India is up 5%. With that disparity in growth rates, there's simply bound to be a shift in that direction, and it's going to have a lot of impact on many of us in the travel industry. We're putting a lot of effort into taking advantage of that. It's a fundamental shift that has big implications: Where do you put the focus of your efforts? How are customer expectations different? How do you present your offerings to a world that is significantly different? Everyone needs to think about how this shift will impact them.
But on a day-to-day basis, what keeps me awake at night is not this stuff, but rather, how's the latest airline migration going? We cut over some [Brazilian airline] TAM functions from Sabre to Amadeus last weekend, and it had to happen without any break in service. It took six months of work at breakneck speed to make it happen. And in 2010, this is going to continue. We have 13 migrations booked so far for the next year, and there will be more.
As regards ancillary airline fees, this is a big sum of money in aggregate. There are also a number of challenges here for a GDS. Downstream, for travel agents there is the need to access and book these fees, and upstream, we have to have connectivity and interaction with the airlines. On the upstream side, there are those interested in standards, and we've been working with them, but some airlines have been charging ahead and doing their own things differently. So what we have done is develop a capability that reflects standards but is not limited to them, and starting in the first quarter we'll be making this platform available to travel agents.
It's very complex. From the point of view of travel agencies, they want to be able to compare like with like, even when every airline is doing something different. It takes massive amounts of information to develop a fare quote search and comparison tool that will compare like to like, irrespective of if certain fees are bundled or unbundled.
George Morgan-Grenville
Group managing director, Abercrombie & Kent
The business started to decline almost immediately after Lehman Brothers went down, but the effect on the first two quarters [of 2009] was masked to some degree because we had such strong forward bookings before Lehman collapsed. The test was Q3 and Q4. The booking window dropped from 168 days to about 95. It's now extended back out to 120, but it's still hard to get a good and accurate window into your bookings.
As a travel company, your assets are mainly people. We cut the number of employees by 10% to 15%. You can't stand on ceremony when the economy goes down. We've learned from bitter experience during the first Gulf War and the run-up to the second Gulf War that when the market goes against you, you cut fast. If you think it'll get better next week, you go under.
In 2010, I think there will definitely be more bankruptcies. More tour companies go bankrupt coming out of a recession than going in. You lose talent, and then when the market goes up, that same talent is not available. I think the longer it lasts, the more casualties you will see. The smaller, specialty cruise lines have already been hit hard. We know because we own Akorn Destination Management, a B-to-B business, so we handle hundreds of different operators globally. We have a good understanding of source markets and can tell you there have been casualties in small to medium-sized companies.
The full effect of the downturn will be determined by its longevity. I'd be surprised if there's a double dip. Our challenge going forward will be taking on more staff when things get better. We're not about to go into a massive up-cycle; it'll be just the market balancing itself.
Last year, in the U.K. market, everyone stayed home. But everyone who took a "staycation" -- what an awful term! -- has vowed never to do it again. 2010 is not going to be a massive year, but it will be a solid year, and we'll start to see the booking window lengthen. I don't know that we're going to see the return of the wait list, but we're looking for a 5% to 7% lift year over year. A little bit will be an inflationary price lift.
There are three aspects of travel next year that we're taking very seriously. First is looking at value for price. You'll see more escorted tours under the $6,000 level than we've had in the past. Products with entry-level prices will be expanded.
Second, we expect there will be an explosion in the number of people wanting villa holidays. We have about 135 properties, mainly in Spain, France and Italy, and they offer real value for the money, and as much or as little adventure as you want. And you can add components like a cook or concierge or host, if that's what you want.
The third is that we've chartered a ship in the Antarctic. Under new rules regarding what types of fuel can be used by ships in the Antarctic, we anticipate traffic will be cut by 50%. We expect to have high demand.
Gordon 'Butch' Stewart
Chairman, Sandals and Beaches Resorts
If you go back to the middle of 2008, we could feel that something was wrong. One day you'd have a good day, then a bad day. So we got everyone together and said, "Look, something's happening, so let's start thinking about doing some smart things now. And let's start with the idea that whatever we do, our service and satisfaction levels will have to improve." So we started a degree of restructuring.
Then the horror struck, which frightened the life out of all of us. November last year, none of us had any idea where this whole world economic scenario would end up. We were lucky because the Sandals brand had significant business on the books. So did Beaches, though not as much.
When the downturn really took place, we said, "OK, people wanted better pricing, so we have to buy better. The food. The china. The linen." I didn't want to lay off a lot of people. I didn't want service to slip, so the restructuring was small.
Last winter, people started arriving with significantly bigger expectations. They basically were saying to themselves that they could have spent their money anywhere, but they spent it with you, and you darn better do it well. Then last summer, the expectations seemed to leap again. And I believe it's going to happen again this winter.
Really what's happening is that people might want to buy a BMW or a Mercedes, but they're not going to buy it unless they get an incredible deal.
Now, we're at the end of 2009, and the market has stabilized but at a lesser level than in previous years. But an interesting thing has happened. At the end of 2009, we have a better organization. It has been a year I have relished because we got to understand our own business better. As much as we thought we were in charge, we went back to school, and that goes for all of us: operations, marketing, whatever.
We initially held back on projects at the beginning of the year but then took the time to train the maintenance department better, then took the time to pay attention to simple things like decorating. We had more focus groups for guests, travel agents and staff than we've ever had in any one year before.
It forced us to focus where the weaknesses of the product were. And as a result, our guest satisfaction scores have rocketed at the same time our costs are down. We learned to do business on the basis of less is more. This happened quickly, and a year later it's still going on.
I think 2010 will be much the same as it is right now. I don't think economic indicators that everyone looks at will be that much different. I think the stock market will improve because companies have found out how to do better business cheaper. And we've got more business on the books than ever before.
Frits van Paasschen
CEO, Starwood Hotels and Resorts
We have to remember just how grim things looked at the beginning of 2009. I remember in January when incoming Treasury Secretary [Timothy] Geithner was saying things like, "We're on the verge of collapse."
Most of us were in shock and awe, and we focused on reducing costs. I think more than 90% of CEOs said they did reduce costs in 2009, and more than 70% said they reduced travel specifically. So it had a real impact on our business.
We're in a different place now. As we begin 2010, we see things pushing us forward: pent-up demand, zero interest rates, growing confidence, growth in economies around the world. You need to send people to meetings to close the sale, to nurture the relationship -- not things easily done in a video conference.
In July and August, we saw the return of the leisure traveler. Occupancies in November and December lead me to believe we're starting to see a return of the business traveler. And luxury is so far down it will bounce back strongly when the economy picks up.
This is not a V-shaped recovery, where we'll see a straight-line, robust recovery in 2010, but we have a lot of reasons to feel confident. Throughout the crisis we've been able to open hotels; 60% of our properties are newly opened or renovated in the last three years. We've emerged from the recovery with the strongest portfolio of hotels in the history of our company, and many are mouth-watering. We opened 90 hotels in 2009, and we'll open around 90 more in 2010. Sometime in January, our 1,000th hotel will open, and in 2010 we're looking forward to opening in our 100th country. We're not sure which it'll be. It's a race among Mongolia, Slovakia and Libya. So we feel good about where we are in this recovery.
As regards RevPAR, this is an interesting thing. You have two different effects at play here. You have rates, which have been weak and will take awhile to return, and growing occupancy at the same time. It's hard to predict these things. Maybe we'll see a step-change in rate in 2010, maybe in 2011. It depends upon the trajectory of recovery. But if we learned anything in 2008, it's that we should throw away our crystal balls.
We look at it day by day, but also we look at it around the world. What is clear is that unlike recoveries in previous recessions, this one will not be driven by the U.S. consumer pulling out credit cards, but by continued and sustained growth in economies around the world. It's time to stop calling countries like China "emerging economies" and start calling them "rapidly growing economies."
More than half of our business is outside the U.S., so this will play to our strength. For us, the foreign exchange situation will be a positive instead of a negative. We have more than 50 hotels in China, more than 50 in the Middle East and Africa, and we'll be increasing our footprint in India by 40%, going from 25 to 40 properties.
In the past, most travel was from U.S. and Europe outbound, and then from emerging countries to the U.S. and Europe. Now, we're seeing traffic between China and Africa blooming, and this is important. People from emerging nations are visiting each other.
And they're traveling in their own countries. I remember being in China in the mid-1980s, and the only hotel we had there was the Sheraton Great Wall, and it was for Westerners. Today, almost 80% of the business in China is by Chinese. And we'll become the natural, desired place to go as the Chinese travel into new markets.
As these economies grow faster, what it means for us and our competitors is that we have to be more global in our way of relating to guests and the interests and language needs of people from so many different places.
We're also very excited about the emergence of the Gen X and Gen Y travelers. They relate to the world in a different way from baby boomers such as myself, and it's one reason we're excited about the global expansion in W and Aloft, which cater to the way emerging travelers relate to the travel experience.
There's one more important factor at play: Over the last 40 years, demand and capacity in hotels have grown in tandem, except since 9/11. And you can imagine that capacity won't grow quickly through 2012 because of the financial crisis. This should help rates.
To read the entire "Preview 2010" issue, click here.