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The attacks on the World Trade Center in New York might keep many executives rooted to terra firma, but not Gary Smith. The CEO of optical-equipment maker Ciena (CIEN
) returned to company headquarters in Linthicum, Md. on Sept. 16 after a European business trip What's more, Smith expects to keep flying. With customers in China, Europe, and Latin America, Ciena executives fly all the time to seal deals and take care of high-level negotiations.
The travel industry can only pray that more businesspeople think like Smith. But that's unlikely. In the next few months, car-rental companies, airlines, and hoteliers all expect a significant drop in corporate travel. While face-to-face contact and a firm handshake remain important in any major business deal, many corporations -- including BusinessWeek Online's parent, The McGraw-Hill Companies -- are cutting travel as a preventive safety measure.
The combined effects of the terrorist attacks and the economic slowdown could reduce corporate travel spending by 20% in the remaining portion of 2001 -- and even further in the first six months of 2002, according to Henry Harteveldt, a former travel-industry manager and senior analyst at tech consultancy Forrester Research. Since corporate spending accounts for 60% of travel-industry revenues, that would be a major blow.
The aftershocks from the Sept. 11 massacres are weakening the travel industry's already shaky foundation. Airlines, car-rental companies, and hotels had previously suffered cutbacks of 10% to 20% in corporate spending so far this year, as companies slashed travel budgets to pinch pennies. This second blow to travelers' confidence could push some of the more poorly capitalized airlines into bankruptcy, according to industry experts. Overall, the airlines have already cut capacity by 20% since the attacks. Now, business travel could drop by up to 50% in the next two months, predicts Glenn Engel, an analyst with Goldman Sachs & Co.
Engel predicts that after this big dip, air travel could recover within six months. Other experts are less optimistic, believing the process may require a full year. As for the industry's most pessimistic observers, they say air travel may never fully recover (see BW Online, 9/24/01, Fewer Spokes, Smaller Hubs").
RIDING THE RAILS. Some of the biggest effects of these broad shifts in corporate travel will be felt in the heavily populated Northeast corridor of the U.S. With airport security tightened, many passengers commuting relatively short distances -- between, say, New York and Washington, D.C. -- might opt for trains. After all, airline passengers now have to arrive at least two hours before departure, which means total travel time is about the same for train and plane passengers alike.
Amtrak has seen a huge surge in bookings. The railroad has increased its capacity by nearly 30% in the aftermath of the terrorist-orchestrated tragedies. In the longer term, "rail will play a bigger role than in the past," Harteveldt predicts. That's not a universal conclusion, however, as other analysts expect Amtrak to benefit only in the short haul.
Whether it's a short-term or long-term shift, the trend will take money away from Delta, United, U.S. Air, and the other carriers that made buckets of cash from the Northeast shuttle routes frequented by corporate road warriors. International and transcontinental routes will likely suffer less, as there remains no comparable alternative to air travel. Even there, however, analysts expect some lasting declines in bookings as corporations rethink travel plans.
DO NOT DISTURB. Car-rental companies also will feel the fallout. That's because most customers rent cars at airports, according to Forrester's Harteveldt. The decline could be as steep as 20% to 50% in the remaining months of 2001, and as much as 10% in the first half of next year. But it could be partially offset if travelers decide to rent cars for their journeys rather than fly to destinations.
Lodging looks the least vulnerable of the three industries, but it remains likely to suffer. So far this year, the lodging industry has cut rates by 7% to woo travelers reluctant to cough up big bucks for a bed during the current economic downturn. Room prices are likely to drop by an additional 15% through the end of the year, says Harry Curtis, analyst with investment bank Robertson Stephens. Upscale hotels will suffer the most: Their rates could slip 20% more before yearend and into the first quarter of next year, he says.
That means global hotel profits will drop from $23.5 billion last year to between $18 billion and $20 billion in 2001, according to consultancy PricewaterhouseCoopers. Still, in the first half of 2002, hotel revenue from corporate travelers should see a further decline of only a few percentage points, says Bryan Maher, senior lodging, gaming, and leisure analyst at Credit Lyonnais Securities. That's because the sharpest decline will happen in the first few months after the hijackings of Sept. 11.
FEAR'S SPECTER. Concerns over corporate travel have already triggered a big sell-off of travel-industry stocks. Shares of Cendant (CD
), which franchises hotel chains like Travelodge and offers car-rental services from Avis, have fallen from $18 to $14 since trading resumed on Sept. 17. Most airline stocks fell 50% after the tragedy, while hotel shares dived 15% to 20%. The lodging sell-off, in particular, has analysts somewhat mystified since hotel chains are generally on solid footing. "We are all surprised," says Maher. "Investors are throwing the baby out with the bathwater."
Indeed, Forrester's Harteveldt says, even when the shockwaves of the terror attacks are taken into account, U.S. companies will this year spend upward of $175 billion on travel, a figure that includes meals on the road and other related expenses. That's approximately as much as they spent two years ago, during the Internet boom. "We've come off an incredibly strong high," notes Harteveldt. That said, if the U.S. sees a further outbreak of terrorist activity, it could cause a protracted decline in corporate travel. In that case, the travel biz could find itself in a long-term holding pattern.
By Olga Kharif in Portland, Ore. Edited by Alex Salkever
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Copyright 2001 , by The McGraw-Hill Companies Inc. All rights reserved.
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