January 2009 -
Airlines
The U.S. airline industry suffered a miserable 2008 as jet fuel costs spiked and demand began to soften. Though fuel prices abated in the second half of the year, the damage was done--pushing (or keeping) several major airline companies deep in the red. The good news for many carriers is that strategies designed to survive crude oil priced above $140 per barrel may help them regain profitability in 2009. Those strategies included trimming workforces--more than 36,000 across the industry in 2008, according to the Air Transport Association (
1); raising airfares; adding new or higher fees for checking baggage, choosing seats, changing reservations and many other customer service items; and perhaps most significantly, pulling down capacity.
"The industry could withstand a bruising 11 percent decline in revenue and still manage to break even on an operating basis," according to a November research note by J.P. Morgan analysts, assuming crude oil at $50 per barrel. Such a revenue decline, they wrote, "would actually eclipse 2002's whopping 7.5 percent decline," which stemmed from "post-9/11 travel fear" and a pricing battle between competitors. "The potential for modest-to-record 2009 profits remains uniquely high." (
2)
The volatile oil market always deserves attention. Fuel hedging contracts worked against airlines as crude oil prices plummeted, leading to large one-time financial losses reported in the third quarter, but executives at press time were placing greater emphasis on deteriorating demand. Corporate travel particularly began slowing noticeably in the second half of 2008, and the trend is expected to continue well into 2009.
To minimize losses and attempt to rebalance supply and demand, U.S. carriers in the third quarter began cutting capacity by reducing flight frequencies and ending service to certain destinations. According to November airline data, the most recent available at press time, monthly system capacity was down by double digit percentages versus the prior-year period at American, Continental, Delta, Northwest and United airlines.
Meanwhile, meaningful airline consolidation came to the United States in 2008 after years of speculation. By late 2008, Delta acquired Northwest and began what is sure to be a lengthy integration process. Proponents cited the need for airlines to adapt to challenging market conditions; in this case, by ostensibly creating a stronger, financially stable and globally relevant competitor. Critics feared that fewer major airlines would lead to higher fares and worse customer service. Numerous predictions that one transaction combining major competitors would trigger more did not come to pass, at least not yet.
Europe, however, is buzzing with potential airline deals. Air France-KLM, British Airways (working on possible mergers with both Spain's Iberia and Australia's Qantas) and Lufthansa (owner of Swiss International Air Lines and now in the process of purchasing Austrian and Brussels airlines) are seen as likely buyers. Potential sellers include Alitalia and SAS.
Meanwhile, antitrust-immunized alliances seemingly will play an increasingly important role in the global aviation marketplace (in some cases, possibly as precursors to cross-border mergers). Even the traditionally unaligned "low-cost" airlines--JetBlue Airways, Southwest Airlines and WestJet in Canada--are striking alliance agreements (without antitrust immunity) or marketing deals as ways to extend their networks.
Hotel Companies
Unlike many airline companies, major hotel companies have maintained profitability. For the major publicly traded entities, third-quarter financial performance was comparable to a year earlier, in terms of operating income and total revenue. But there is reason for caution, and Starwood Hotels & Resorts, Marriott International and Wyndham Worldwide Corp. all discussed cost-cutting programs after announcing third-quarter results, including job cuts and hiring freezes. (
3)
The U.S. hotel industry posted a decline in average daily rate during October, marking the first year-over-year fall in more than five years, according to Smith Travel Research. Citing "extraordinary financial events currently playing out on Wall Street and in Washington," PKF Hospitality Research in December revised downward its 2009 U.S. hotel forecast. The firm's latest projections included year-over-year industry revenue per available room and operating income declines of 7.8 percent and 14 percent, respectively. PKF also predicted a reduction in occupancy of 5.3 percent, to 57.6 percent, for what would be "the lowest level of occupancy posted in the past 20 years." (
4)
Based on a November survey of more than 400 U.S.- and Europe-based corporate travel managers, Morgan Stanley Research found 81 percent of respondents expected their organizations' 2009 room night volume to be flat or down, with nearly one-third expecting at least a 7 percent decline. The average expected reduction was 3 percent. At the same time, more respondents said 2009 negotiated rates would be higher (37 percent) than those saying they would be lower (19 percent). Looking only at the U.S. market, travel managers noted "aggressive price negotiations" and expected "U.S. corporate rates to be flat to down."
With an expected decline in overall 2009 average daily rates (partly from corporations "trading down" to lower-price properties) and hotels including more ancillary services in corporate rates (such as in-room Internet and breakfast), Morgan Stanley analysts "expect lodging stocks to continue to trade sideways to down as revenue per available room continues to deteriorate." Yet, they also "view flat [corporate] rates as a slight positive for the industry, as much of the Street was expecting decreasing rates due to decreasing demand, pressure on travel budgets and increasing airfares." (
5)
Car Rental Companies
U.S. car rental firms also are facing a challenging operating environment. To survive deteriorating business travel demand and rising fleet costs, rental companies are laying off workers (including salespeople), shrinking fleets and hoping to raise prices. Industrywide rate increases began to appear during the fourth quarter of 2008.
"We are in the midst of one of the toughest conditions I have faced in my 30-plus years in business," said Avis Budget Group chairman and CEO Ronald Nelson during a November presentation. He cited the uncertain future for automobile manufacturers that "has complicated fleet management and financing," a "soft used-car market" hindering disposal of existing fleets and a tight credit environment.
The company in the third quarter of 2008 lost more than $1 billion, dragged down by a $1.3 billion impairment charge given "the significant decline in the company's equity market value over the last several months, as well as soft economic conditions and financial market disruptions that have increased the cost of capital for many corporations." Earnings before interest, taxes, depreciation and amortization was $130 million, down from $168 million a year earlier. Nelson explained that Avis Budget realigned sales teams partly "to better serve and penetrate" the midmarket.
At Hertz Global Holdings, third-quarter net income was down sharply from the prior year as "conditions continue to deteriorate," said chairman and CEO Mark Frissora in November. The company divulged that headcount has "been reduced by 7,100 full-time employees" since August 2006, including "programs we initiated in September to reduce headcount by almost 1,400 employees."
While competitors reported significantly worse financial performance in the third quarter, Dollar Thrifty Automotive Group showed improvement with an $18.9 million net profit, up from $11.3 million a year earlier. Executive director of sales Cathy Funderburk told
Management.travel in November that "corporate business year to date is up over 13 percent." (
6)
"The pattern is trading down," said Neil Abrams of Abrams Consulting, regarding corporate travel purchasers selecting lower-tier brands. "It is a behavioral issue more than a volume issue." (
7)
Meanwhile, privately held Enterprise Rent-A-Car--which owns National Car Rental and Alamo Rent A Car--planned to eliminate 1,000 positions, the first mass layoffs in its 51-year history. (
8)
