The end of subsidized travel
For decades, the American traveling public has received a gener- ous subsidy for their vacations. Unbeknownst to most, consum- ers had a patron who provided discounted holidays to Paris, sale-price tickets to China and low-cost jaunts to the Caribbean. Who was this warm-hearted sugar daddy?
I’m talking about airlines.
Since the first flight of the Wright brothers, the sum aggregate profit of commercial
aviation is zero. And their billions of dollars
in losses were the flying public’s gain.
Initially, the airlines’ problems resulted
from a surplus of airlines and
general unwillingness on the part
of any of them to reduce capacity.
Until recently, seemingly
healthy airlines were often at the
mercy of their weakest competitor. As predictable as a drunk’s
sway, a floundering airline would
announce a fare sale, and carriers
on competitive routes would immediately match its prices, hoping to deprive the weak of cash
flow but also weakening themselves in the process.
Over time, bankruptcies and consolidation thinned out the airlines’ ranks, and
the remaining carriers have summoned the
courage and discipline to reduce capacity,
lowering supply to truly match demand.
And making cheap seats scarcer.
Oil prices and a milquetoast dollar have
Editor in Chief
exacerbated the situation, and the combination of high fuel costs and the newfound
ability to raise fares has resulted in the
highest fares we’ve seen in decades. Consider ARC’s May numbers: For the previous
12 months, ticket sales were down 1.6%,
but despite the reduction in volume, revenue rose 8%, reflecting
a fairly steep rise in fares.
Regardless of how you might
feel about the airlines, you can
hardly expect them to loosen
capacity voluntarily. Higher airfares are here to stay, even if the
price of oil drops and the dollar
On the other hand, travelers
have found a new benefactor:
As a result of the recession and subsequent economic uncertainty, hotel rates are,
for the most part, well below the reasonable
value of rooms. And the most disciplined
hoteliers cannot reduce capacity. If they
have a 300-room, tourist-class hotel, they
are stuck with a 300-room, tourist-class
Tour operators have exploited this weakness in hotel demand to counterbalance
increases in the air portion of a package
or escorted tour. In many cases, they have
successfully pressed hotels to give them substantial discounts that compensate to some
extent for higher airfares.
As a result, the average traveler has yet
to face the full cost of a
vacation. The air subsidy
has, for the time being,
been replaced by the hotel subsidy.
term, the need to stimulate demand will be
strong. Hotels finished a record-breaking
expansion just before the recession, and
cruise lines had ordered several muscular
ships, many of which came on line during a
time of economic uncertainty. Cruise lines
and hoteliers will, for some time, desperately need heads on beds.
FROM THE WINDOW SEAT
This might last as long as the global
economic picture is fuzzy, but it won’t last
forever. The situation for hotels will, in
time, tip to their favor again. Economists
predict that over the next 16 years, more
than a billion people in China will rise to
the middle class and will travel. That’s not
to mention the hundreds of millions more
upwardly mobile citizens in India, Brazil
Ultimately, the vacation subsidy will end.
We might even return to the time when taking a vacation abroad is something a family
saves for years to do.
And, despite their newfound ability to
raise fares, airlines need more butts on
seats. To grow, they cannot simply continue
to raise fares indefinitely. Eventually, they’ll
need to add more flights while maintaining high fares, and demand for flights must
be stimulated. Travelers who book through
agents spend more than other travelers, and
I believe that’s why 50 airlines agreed to join
Vacation.com’s recently announced AirPro
program, which returns airline commissions to travel agents along certain routes
and in certain classes.
Although a potential reduction in the
number of trips taken by U.S. citizens is,
long term, bad news for many in the travel
industry, there do appear to be a few silver
linings for travel agents.
The industry has survived wars, epidemics, natural disasters and excessive taxation.
But the question remains how it will handle
the withdrawal of vacation subsidies.
For now, agents are the primary outlet
for high-value tours and cruises. And long
Email Arnie Weissmann at aweissmann@
travelweekly.com and follow him on Twitter
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