Airline & Hotel Bankruptcies Coming

Growing worries about financial markets and the global economy are starting to weigh on the travel industry. Airlines, which had appeared to dodge a bullet when oil prices declined, are losing some of their best customers -- the ones who can mean the difference between a flight being profitable and producing a loss.

"When the Wall Street meltdown started two weeks ago, the heat turned up in an already uncomfortable world," says Simon Talling-Smith, British Airways' executive vice president for the Americas. The airline, which has a lot of exposure to the banking sector on its London-New York route and its flights to other finance centers, including Hong Kong and Tokyo, says its first- and business-class traffic fell nearly 9% in September from a year earlier.

"If you start to lose one-half of 1% of those high-yield, front-of-the-plane travelers, that can change the economics of a flight in a snap," says Kevin Mitchell, chairman of the Business Travel Coalition.

The slowdown isn't limited to trans-Atlantic routes. "Even in Asia, passenger demand is softening as a result of weakness in both the European and U.S. economies, while consumer confidence is being undermined by further turmoil in the financial markets," the Association of Asia Pacific Airlines said in a statement Tuesday. The trade group, based in Kuala Lumpur, Malaysia, represents 17 airlines that carry 20% of global passenger traffic.

"The premium passenger is the name of the game for [airlines] going over the water," says John Snyder, global president and chief operating officer of BCD Travel, the world's third-largest corporate travel-management company by airline billings. "A slip in premium traffic is the last thing they need."

Even airlines that don't cater to the investment-banking crowd rely on a small number of peripatetic business travelers for a large portion of their revenue. Northwest Airlines Corp., for instance, says its elite frequent-flier members account for 5% of its total passengers but 25% of its revenue.

"Any reduction of the elite [fliers] has a magnified hit," adds Kevin Mitchell, chairman of the Business Travel Coalition, an advocacy group for corporate travel buyers. "If you start to lose one-half of 1% of those high-yield, front-of-the-plane travelers, that can change the economics of a flight in a snap."

Until earlier this year, Stephen Terrell, a 45-year-old executive with an Atlanta insurance-settlement company, regularly flew business class for work-related travel to New York, California, Florida and the Midwest. But as the financial sector began to unravel in recent months, his employer, which this week laid off nearly half its 50 employees, began booking only economy-class seats. "We're only traveling when it's absolutely necessary," Mr. Terrell says.

Most U.S. airlines decline to discuss demand trends before they report third-quarter financial results later this month. After the first half, though, some airlines were already beginning to anticipate a drop in demand from their best customers. In mid-July, carriers including Continental Airlines Inc. and Delta Air Lines Inc. said corporate customers were starting to book earlier than usual to get lower fares.

The International Air Transport Association, a global trade group, says that demand from premium airline passengers began to wane early in the summer. After modest growth during the first five months of the year, premium traffic dropped slightly in June and then fell 1% in July, compared with demand levels a year ago. That decline "most likely reflects a fall in business travel, driven by the increasing weakness of major economies," the association says.

A Deutsche Lufthansa AG spokeswoman says the big German carrier "is not immune to the current crisis, and our corporate business overall is certainly down compared with last year." But she says the carrier isn't seeing significant reductions in its first- and business-class bookings on New York-to-Germany routes. "We have a diverse customer base out of New York," the spokeswoman says, "so losses among the investment banks equal gains among other industries, in particular lawyers and consultants, who are constantly flying right now."

Airlines aren't sitting idly by as they lose some of their best customers. Some carriers, including BA and Singapore Airlines, are offering promotional fares to attract new business in their premium cabins. Others are trying to charge business customers more. Some of the U.S. airlines have brought back minimum-stay or Saturday-night-stay fare rules to stymie business travelers seeking to grab the cheapest fares. And corporate travel managers say there is increased pressure by airlines to renegotiate or drop corporate accounts that don't deliver travel volume in return for a discount.

The lodging business hasn't escaped unscathed. Marriott International Inc., which reported a 28% decline in third-quarter profit, says it is seeing a major slump in its time-share business and a drop in corporate group meetings. The company, which owns the high-end Ritz-Carlton brand, says its Ritz-Carlton Central Park property in New York, which is "normally filled with investment bankers and their clients," is now filling up with diplomats and people in the entertainment industry.

"Other hotels are opening inventory to airline crews, government travelers" and members of the American Automobile Association and the AARP, an advocacy group for people age 50 and older, Marriott's chief financial officer, Arne Sorenson, said on a conference call last week. "This business is typically at lower than corporate rates, but it fills a portion of our hotels."

At InterContinental Hotels Group PLC, owner of the luxury InterContinental Hotels & Resorts brand, bookings are holding up even though more than half the guests are corporate travelers, says Janis Cannon, vice president and brand manager for the Americas. While there is "definitely compression in some segments," she says, there could be hidden opportunity. "Somebody's got to do work on the bailout."

Hervé Sedky, vice president of advisory services for American Express Co. Business Travel, says corporate clients are sending fewer travelers, avoiding internal meetings that involve travel and demanding stricter employee compliance with corporate travel policies. When Wall Street's woes heated up, Amex Business Travel postponed the release of its 2009 travel forecast to later this month to try to get a better handle on macroeconomic conditions, he says.

The scariest thing for the industry is lack of clarity. "People don't understand what's going on this time," says Susan Gurley, executive director of the Association of Corporate Travel Executives trade group. "Even banks and economists were caught unaware, so there is added nervousness about spending."

Source - Wall Street Journal