Economic Woes Test Travel Industry
One of the time-tested truths about economic slowdowns is that a shaky economy brings a sharp reduction or elimination of non-essential spending.
As the economy continues to freefall, Americans are eliminating non-critical expenses, saving cash and cutting back on discretionary spending. That means less lattes, fewer fashion items and a cutting back number of family vacation expenses.
So what will be the exact effect on travel?
IG Travel Guard recently surveyed 300 people for Travel Beat, and nearly 70% said they had no plans to decrease the number of leisure trips they will take in 2008, while just over half said they had no plans cut back on the quality.
Just over 20% said they would eat in less expensive restaurants, and a slightly lower number said they would stick closer to home; another 16% said they would choose less expensive hotels than in the past.
Non-Travel Economy
Across the board, though the service sector, which makes for about 65% of domestic economic activity, is taking the hardest hit.
Discover Financial Services recently released the results of a regular survey of 15,000 consumers that showed that half of them had plans to reduce or eliminate non-essential spending in February, and to devote less money to home improvements, major purchases and savings.
And the pinch is being felt beyond the lowest rungs of the economic ladder. Even folks earning over $75,000 a year are getting pinched. The survey, which was taken in January, showed that less than 10% of those earning more than $75,000 a year plan to increase spending on non-essential items such as entertainment and travel, a decrease of nearly 15% from the month before.
As the downturn sharpened through fall and into winter the number of consumers moderating their spending has grown sharply, as has the number who plan to spend less in an effort to offset personal economic pressures.
From retail to entertainment to tourism and related services, the entire service sector is bracing for a sharp downturn in demand and volume.
A study of more than 40 major retailers by the International Council of Shopping Centers shows that chain stores open more than one year, called same-store sales, have shown the most sluggish January growth numbers since the figures were first collected in 1970.
Companies such as Ross, T.J. Maxx, Nordstrom and Macy’s suffered declines in same-store sales in January. Macy’s has announced plans to cut nearly 2,500 management jobs.
Meantime, the financial services sector is on the verge of shedding some 200,000 jobs.
Even once unstoppable companies like Starbucks are planning to close nearly 100 under-performing stores across the country in 2008. That is in addition to curtailing their new store growth for 2008 by nearly 25%, from a projected target of 1,600 stores to under 1,200 stores.
Even Wal-Mart, which saw a small increase in same-store sales for January, noted that consumers spending patterns are changing.
Noting evidence of falling room rates at Disney resorts and a fewer reservations, several prominent analysts have recently downgraded Disney stock from ‘hold’ to ‘sell.’
WalMart has seen a bigger than expected drop in gift-card redemptions, while customers seem to be hanging on to gift cards longer and using them more often to buy food and consumer items instead of making discretionary purchases.
Airlines
After enduring a nearly ten-year slump, one of the most pressing problems for the airline industry, beyond the decline in domestic economic activity, is how to deal with the sharp rise in fuel prices.
In the last year alone, the price of oil has climbed nearly 75%, while the U.S. sub-prime mortgage crisis has ballooned into a general international credit crisis, which has curtailed commercial and private borrowing, which has in turn led to a sharp fall off in consumer spending.
The rise in oil prices has meant that airlines like Continental Airlines Inc. expect to shell out well over $1 billion more for fuel in 2008, compared to 1007.
No less a figure than Warren Buffet recently announced that the U.S. was in the throes of a recession, and the Federal reserve has been forced to take actions that have been necessary for the first time since the Great Depression.
In fact, whether one embraces the term ‘recession’ or not, most economists feel that we are in the midst of a strong economic downturn. The question has now shifted to just how severe the crisis will be and how long it will last, in addition to what steps are likely to ameliorate the situation.
Glenn Tilton, chairman and chief executive of UAL, the parent company of United Airlines, recently warned workers that the airline industry faces ‘serious challenges’ going forward.
However things turn out for the country at large, the airline industry does indeed face ‘serious challenges.’
Merrill Lynch recently predicted that earlier projections of an industry-wide profit of about $1.7 billion will are now being replaced by projections of a combined loss of nearly $1.5 billion among the eight largest U.S. carriers.
Those revised projections, along with projections for a wider industry loss of ranging from $5 billion and $19 billion for 2008, along with a major slump in travel beginning in the second quarter, mean that all eyes will be on the industry for signs of weakness or insolvency.
Also, before the current slump, a wave of consolidations was expected to sweep the industry and help the companies to better compete with their well-capitalized European allies.
The merger between industry giants Delta and Northwest was supposed to kick-off the deal making initially ran into some difficulty when the airline pilots’ union was unable to agree on a suitable way to address seniority between the two airlines’ pilots.
The Silver Travel Lining
Now, there is some good news in all of this madness. That’s provided that you are not one of the hundreds of thousands of people losing your home to foreclosure, or losing your job to the slumping economy. If you still have a home and a job, and you’re not working too hard to make up for the other poor saps that lost their jobs, then you may actually get something like a vacation and you may actually have a few dollars to spend.
Now, with the Euro at nearly 1.5 to 1 against the dollar, even those who simply must travel abroad to enjoy themselves, most major European countries are probably out of bounds. However there are a number of smaller countries and non-EU countries like Switzerland (the Swiss Franc is at about 1.4 to the dollar) that may yield some bargains.
In the United States, consumer spending grew just 0.2% in December and was basically flat with inflation factored in.
In January, for the first time in since 2003, the American service sector shrank, with employers cutting 17,000 jobs, the first decline in over four years.
Those signs could mean more stores closing and fewer expanding. Which could mean more layoffs and fewer available jobs.