At TravelCom, upheaval predicted

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ATLANTA -- The state of the economy and its impact on the travel industry dominated discussions at the U.S. Travel Association's TravelCom conference here this week, with several speakers saying further consolidation may be in the offing.

In particular, Brad Gerstner, the founder of Altimeter Capital Management, an asset-management firm in Boston, said during a presentation that American and United were the two "most imperiled" U.S. airlines and that by 2010 they might find themselves in Chapter 7 bankruptcy proceedings, liquidating their assets.

That's a more pessimistic outlook than most airline analysts are offering, but Gerstner said American and United were more imperiled than other carriers because of their massive unfunded pension liabilities.

Gerstner, a former co-CEO of NLG, a travel and cruise retailer, also cited Harrah's, Norwegian Cruise Line, Sabre, Travelocity, Orbitz Worldwide, Avis and Hertz as "great companies with too much debt."

He argued against bailing out airlines, saying the government could run out of cash to do so.

Gerstner added that there was about 20% overcapacity in the U.S. airline industry and that airlines would languish unless that capacity was removed.

Southwest Airlines founder Herb Kelleher, who received TravelCom's second annual Steve Fossett Innovation Award, echoed some of Gerstner's sentiments in a separate conference session.

Without naming specific airlines, Kelleher said if the economy gets any worse, then at least two carriers could file for Chapter 11 reorganization by the end of 2009 or in 2010, although an economic turnaround might help them escape.

Offering a sector-by-sector analysis, Gerstner said it was likely that the four major U.S. online travel agencies -- Expedia, Orbitz, Priceline and Travelocity -- would consolidate into three before the end of the year. Gerstner said Priceline and Expedia have minimal debt, while Orbitz and Travelocity have loads of debt "and limited equity value." He said likely combinations include Expedia buying Orbitz, or Travelocity and Orbitz merging.

TravelCom co-chair Henry Harteveldt, principal travel analyst for Forrester Research, asked the Orbitz and Travelocity CEOs to comment in a subsequent session about how their companies might reduce their debt.

Barney Harford, president and CEO of Orbitz Worldwide, said "We feel good about the position we're in." He noted that Orbitz recently made $40 million in cost reductions and has "flexibility."

On following Expedia's move eliminating consumer booking fees for flights, Harford said, "We're actively evaluating. Stay tuned."

And on the debt issue, Hugh Jones, president and CEO of Travelocity, said the company certainly was concerned about the economy but "feels good" about Travelocity's ability to service its debt, its EBITDA position and cash flow.

Gerstner said Chapter 7 filings would not be the norm as the economic shakeout continues, because businesses that are cash-flow positive rarely liquidate. He said the industry would more likely see lots of renegotiations and restructuring, adding that the hotel industry, despite plummeting average daily rates, would likely see the fewest bankruptcies.

The cruise industry, too, is under pressure, Gerstner said, with net revenue down 15% to 20% despite 100% occupancy rates. He said Royal Caribbean Cruises Ltd. and Norwegian Cruise Line were among the companies over-burdened with debt.

For example, Gerstner said, Royal Caribbean "still hasn't figured out" how to finance the 5,400-passenger Oasis of the Seas and another ship due next year.

Gerstner, cited Jeffrey Immelt, CEO of GE, in describing this recession as a "reset" and not just another boom-and-bust cycle. Gerstner said consumer spending as a percentage of discretionary income in Q4 2008 was lower than in Q4 2001.

"We are not going back to the way things were five years ago," he said.

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