• by Eric Butterman , July 15, 2010

Will leisure travel bounce back or stay grounded?

Not long ago, leisure travel looked anything but relaxing. Oil rose to more than $140 a barrel, airline prices were sharply escalating, and customers were wondering if they'd ever go on vacation again. Well, they don't wonder as much anymore. Oil sits at $72 at press time, some believe the possible consolidationb of United Airlines and Continental could actually lead to better price competition, and the economy is still looking brighter in the last year, despite a schizophrenic stock market. In other words, leisure travel might still be headed for bright blue skies - provided you don't mind paying for carry-on bags.

Douglas Quinby, senior director of research for travel research firm PhoCusWright, says the recovery is real, though it's a restrained version. "We're definitely on a comeback in 2010, but the consumer is still recession-weary," he says. "Remember, we're only forecasting a fairly modest single-digit growth for the travel market overall this year because of macroeconomic issues that are bearing down on the U.S. economy. Also, part of the reason the data can appear better than the reality is because 2009 was so much worse by comparison." 

An Even Exchange
And good news may even come from bad. Brian Hoyt, vice president of communications and government affairs for Orbitz, says that although European economic unrest has affected U.S. financial markets negatively, it may lead to a favorable increase in travel abroad. "We used to see Europeans coming here for Christmas shopping because the dollar was so weak," Hoyt says. "Now problems with the euro set up Americans to do the same thing in their countries. Global occupancy is still down, which means they could save on the hotel room, if not the airline ticket."

Henry Harteveldt, travel analyst for Forrester Research, agrees with that sentiment, believing that leisure travelers will start to see overseas travel as a package as opposed to a plane seat. "It doesn't matter if an airline ticket costs $1,000 or more," he says. "What did it used to cost you to head overseas for a week after hotel, entertainment and restaurants? Some travelers are starting to add it up and say, 'Hey, maybe this isn't the worst time to travel.' "

But an area many feel is the worst is the extra airline fees. "Ancillary fees are here to stay" Quinby asserts. "That means everything from baggage fees, higher interchange fees, cancellation fees, seat selection, blankets and pillows. Airlines are looking for any way to squeeze out revenue, and consumers may be annoyed with it but it's not stopping them from flying." Hoyt agrees that clearly the airlines have won out here, but says leisure travelers are seeing lower costs overall as a result. "Spirit Airlines was selling dramatically reduced tickets for consumers who didn't check bags," he says. "But that story somehow didn't get out."

Nevertheless, says Hoyt, some airlines are going too far. "When Ryanair was charging you to go to the bathroom, that got ridiculous," he says. "Or when they're charging you for water. There are limits!"

Quinby says the real breakthrough may come from selling new offerings. Extras passengers haven't seen before are presenting opportunities for more revenue and are less likely to anger the customer, he says. "Things like prepaying for certain types of meals or recent movies are offerings they like," Quinby says. "Wi-Fi also seems to be doing well. Respond to customer spending habits and you have a win-win."

Up in the Air
Speaking of Wi-Fi, travel Web sites aren't exactly hurting in the leisure market either. Says Quinby: "We've seen online travel dramatically outperform the total travel market in 2009 with a countercyclical lift because they gave strong positioning as discounters. In a market where demand falls off dramatically, you see suppliers going to big distributors and we also see hotels and airlines giving better rates and more content to the Expedias and Pricelines. We will continue to see them outperform through 2010 because of the nature of the current economic environment."

Still, Harteveldt says it's an uphill battle to gain the most conservative of spenders. "Many of them are holding their ground," he says. "In fact, 46 percent of travelers allow their budgets to dictate where they vacation. If they can't make the numbers work, they just won't go. We have seen a decline from the fourth quarter of last year to the first quarter in terms of how people feel about financial conditions. People don't feel entirely confident until they see a sustained improvement in wage rate in comparison to inflation."

The International Air Transport Association, a trade body representing more than 200 airlines, agreed, releasing a report assessing that although indicators such as the amount of economy-class passengers is up 7.4 percent in the first quarter from a year ago, leisure is by no means the leading driver of the overall improvement in air travel's financial health. "Consumer confidence has not recovered in the same way as business confidence," the report says. "Higher levels of unemployment and consumer debt have led to little improvement since the mid-2009 rebound. This is likely to slow the recovery in leisure travel."

Travelers seem to get nervous any time two airlines want to get together, but Harteveldt thinks it's the other airlines who might have to be concerned about the possible merger of United Airlines and Continental Airlines. "I think the merger will be positive because they don't overlap in hubs but also in destinations," Harteveldt says. "United has little presence in the Caribbean and Florida and Continental has light presence on the West Coast. By bringing them together it could lead to greater competition and force the other airlines to reduce their prices. Airlines will have to fight for customers more." Quinby believes in the long run the merger will actually have little effect.

"The old argument against consolidation is that prices will rise, but we've seen time and time again that competitors can move into a market and create competition," he says. "We've seen this with Southwest in aggressive expansion over the past three decades and with JetBlue and start-ups like Spirit. There could be near-term negative effects on pricing and availability for certain routes, but in the long term I think that it's not that big of a deal. Unfortunately, though, it won't have that much of a positive effect either."