| BUSINESSWEEK ONLINE : JANUARY 10, 2000 ISSUE | ||||||||
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| INDUSTRY OUTLOOK 2000 -- SERVICES
Travel America's airlines, hotels, and car rental companies all seem to share the same New Year's resolution: Rein in capacity growth and cut back on the discounting. If their willpower holds, and the global economy improves, the travel industry could gain some altitude this year. Because of soaring fuel prices, labor unrest, rapid capacity growth, and economic woes in Asia and Latin America, U.S. airlines in 1999 couldn't match a record 1998. Earnings for the major U.S. carriers fell 15%, to about $4.3 billion, estimates analyst Candace Browning of Merrill Lynch & Co. But slowing capacity growth and stronger economies abroad should boost earnings this year. Browning figures global airline capacity will grow about 4%, while demand climbs 5%. As a result, profits for the top U.S. airlines could climb 13%, to $4.8 billion. One risk to the upbeat forecast is fuel costs. As OPEC held down production last year, oil prices rose last November to almost $28 a barrel. This year, many analysts figure oil will settle closer to $20. If the year's average is as high as $25, industry operating profits could fall 15%, warns analyst Samuel C. Buttrick of PaineWebber Inc. Rising labor costs and slower productivity growth will be squeezing margins, too. ''We've got an enormous focus on controlling our costs,'' says Southwest Airlines Co. (LUV) Chief Financial Officer Gary C. Kelly, who is keeping administrative head count down and reconsidering some technology projects. UAL Corp. (UAL), parent of United Airlines Inc., faces a particularly tough challenge when its employee stock-ownership plan ends, triggering a snapback in wages. All major contracts except those for flight attendants are up for negotiation this year. Offsetting some of the cost pressures are lower distribution expenses. The industry's cut in travel-agency commissions last October could save the airlines about $800 million in 2000--even as it hastens a decline in the number of travel agencies, which are already down about 13% since 1995. And while lower-cost online bookings represent less than 5% of the travel market, that business is exploding. With online distribution, ''you can absolutely pinpoint the inventory [airline seats] you get rid of,'' says Continental Airlines (CAL) President Gregory D. Brenneman. That should help boost revenues. Like the airlines, hotel companies should be buoyed this year by a slowdown in capacity growth and an increase in tourists from overseas. That may halt a two-year decline in occupancy levels, figures Robert M. Mandelbaum, research director at PKF Consulting Inc. in San Francisco. But don't expect the industry to return to the 6% annual increases in room rates that fueled double-digit profit growth in recent years. Rates grew only 2% last year and should climb about 2.8% this year, says Mandelbaum. Still, ''Profitability is going to remain strong across the entire industry,'' says Thomas J. Corcoran Jr., CEO of hotel real estate investment trust FelCor Lodging Trust Inc. (FCH) Travel mania will also be a boon to car rental companies, which hope to build on two consecutive years of record profits. In recent years, most of the major rental companies have been spun off from the auto makers. That has forced them to focus more on profitability, says R. Scott Anderson, chief operating officer of Thrifty Rent-A-Car System Inc. in Tulsa, which was part of Chrysler Corp. (DCX) until late '97. Anderson sees room to raise prices ''more than just a little bit'' this year. Price wars, in short, are passe, and moderation is the watchword for travel companies. Consumers can only hope that they're wrong. By Wendy Zellner in Dallas _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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 POSITIVES Stronger economies in Asia and Latin America should bolster airline profits. Growth in hotel room supply will slow, stabilizing occupancy levels and room rates. Airlines will also try to avoid price wars. NEGATIVES Higher fuel prices and labor costs will put pressure on airline profit margins. Attempts by hotels to control staffing and amenities in order to keep costs down could end up degrading the customer experience. INTERACT E-Mail to Business Week Online | |||
