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Society Of Government Travel Professionals
6935 Wisconsin Ave. #200
Bethesda, MD 20815, 301/654-8595
FAX: 301/654-6663, govtvlmkt@aol.com


News Release: Travel Industry Indicators

By: James V. Cammisa, Jr
E-mail: tvlind@cs.com

Planning for 2005 is now a priority, and there is optimism that recovery and momentum seen in travel this year will carry forward to the year ahead.

Economic projections for 2005, while reflecting slower growth than was seen this year, still are positive. Consensus estimates are for a U.S. Gross Domestic Product increase of 3.5 percent, down from the 4.3 percent expected this year.

Travel industry growth, based on GDP relationships, are a starting point in most forecasts. This year there was a close to 1 to 1 relationship between domestic travel trip volume and real GDP. Over the decade of the 1990s, the relationship was 0.90 to 1. Using this latter historic norm, a 2005 travel projection based on GDP growth would be at +3.2 percent.

Consumer economic indicators for the year ahead are positive, and this will bode well for leisure travel.

Business economic indicators show the same pattern of slowdown versus 2004, but acceptable performance that will sustain the recovery we're now seeing in business travel. Corporate profits won't be at the double-digit rates we saw this year, but at more normal historic levels. While T&E budgets will continue to be tightly controlled, the cutbacks we saw during the downturn years of 2001-2003 are now history.

Business travel strengths are clearly boosting performance in the hotel sector. Marriott, Starwood and Hilton all reported strong third quarter profits, driven by the increases in business travel that are boosting weekday occupancies and average room rates. Hotel sector forecasts are now for a 6 to 10 percent increase in RevPAR this year, followed by another 5 to 7 percent gain next year. In terms of the bottom line, PFK Consulting projects that the average U.S. hotel property this year will show a 17.9 percent increase in operating profits.

Car rental operators have had little success in restoring pricing power.

Major domestic leisure destinations all will show impressive recovery figures when year-end performance tallies are made.

Inbound foreign arrivals from other world regions also are on the upswing, but there is still further to go in matching the peaks of the year 2000. The 2000-03 fall-off was a whopping 30 percent. It may therefore take another year or two to make up this deficit. Encouraging factors that will contribute to further recovery are the projected strengths of the worldâ?Ts economies and the purchasing power of foreign currencies. The International Monetary Fund (IMF) estimates worldwide economic growth in 2005 at a robust 4.3 percent.

Outbound international travel weaknesses also now appear behind us. But, as with inbound foreign travel, there's still further to go. The cost of European travel is of course an inhibiting recovery factor, with the euro expected to continue its strength versus the dollar.

Airlines continue to be the laggard in an otherwise bright picture for the travel industry as a whole. While worldwide airline traffic has rebounded, carrier financial results have been horrendous. For U.S. carriers in total, the quarterly loss will reach $1.0-$1.5 billion, with the annual losses expected to approach $5 billion. Losses of this magnitude rapidly deplete airline operating cash, and are therefore unsustainable.

Possible bankruptcies still unclear at this writing, would mean half of the nationâ?Ts air capability in bankruptcy and under court control. Though there is now some progress being made in industry labor cost concessions, what is not going away is their abnormally high jet fuel expense tied to $50/barrel oil. Most futures contracts, 18 months out, are still for $40/barrel oil, well above the $20-$30 level the airlines had been used to.


Airline liquidations may therefore be on the horizon.


Loss of airline services would be one of the fallouts of a liquidation. Service disruptions, inconveniences and other negatives, could make a liquidation a disturbing development.


Trend Watch Pricing Power Recovery an Important Goal in 2005


It is now clear that 2004 will be a year in which there was a travel demand recovery, with our industry matching the levels of trip volume reached in the benchmark year 2000. The key challenge now in the year ahead is for long overdue supplier pricing recovery.


Most all travel providers will be faced with increased operating costs in 2005, particularly rising labor expense. A third of car rental facility expenses are payroll related, almost 40 percent for the airlines and 45 percent for the average hotel property. As a labor-intensive industry, the rising costs of employee benefits hit our industry hard. For all U.S. industry, while wage and salary costs have risen only 12.7 percent since 2000, employee benefit costs have jumped by 25.3 percent. As most know, the latter has resulted from the sharp rise in health care costs.


Industry pricing increases will therefore be necessary both to cover these higher operating costs and make up for the long overdue absence of travel price increases. Some of the pricing recovery will come automatically as demand strengthens and one's customer mix improves with the rebound in higher yield business travel. But organizations will have to take other steps. These include better managing their inventories to deliver maximum yields. Efforts to lower transaction costs, through lower middleman commissions, also improves yields. A higher proportion of Web and direct bookings should therefore be a goal in 2005.


Another opportunity area that has been given less attention by our industry is in trading up customers to higher-priced/higher-yield travel services.


While pricing power recovery is clearly an industry necessity in the year ahead, it won't be achieved simply by raising base prices for one's travel product. Consumers resist paying more for the same. Much more imagination will therefore be required, using a variety of different pricing skills. These pricing strategies should be an important part of everyone's 2005 marketing plan.