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Industry Outlook 2001 -- Services

Travel

After years of buoyant demand and modest capacity growth, the travel industry can count on only one side of that equation this year. Airlines, hotels, and car rental companies are still expected to expand cautiously, but it's questionable whether demand will keep up in a slowing economy.

Amid the economic uncertainty, the airlines face another source of potential turbulence: a wave of contentious consolidation. The Justice Dept. could soon decide whether to challenge the $11.6 billion merger of UAL Corp (UAL) and US Airways Group Inc. (U) If the deal goes through without any big asset divestitures--a prospect that most observers consider unlikely--then other major carriers are expected to follow suit with their own costly and disruptive deals. That could spur Congress to enact a "passenger bill of rights," new competition guidelines, and other efforts that industry adamantly opposes.

Barring such dramatic changes, the airlines are expected to post growing profits this year. For one thing, they should get some relief if oil prices start to fall. Operating profits for U.S. carriers could rise about 25%, to $7.5 billion, predicts David A. Swierenga, chief economist at the Air Transport Assn., the industry trade group. That's after two years of falling operating profits in the face of climbing fuel prices. Analyst Michael J. Linenberg of Merrill Lynch & Co. sees a 29% gain for the nine biggest carriers. But if oil averages $30 a barrel this year instead of the $26 that Linenberg assumes, industry profits will be flat.LABOR WOES. Modest expansion plans should help the airlines. Analysts are estimating capacity gains of only 3.5% to 4.5%. If the economy is even slower than expected, "history suggests that the industry will behave sensibly with respect to supply," says American Airlines Chief Financial Officer Thomas W. Horton.

The bad news: Labor costs are surging just as a softening economy may make it more difficult for airlines to pass the added expense on to passengers. Analyst Samuel C. Buttrick of UBS Warburg predicts airline labor costs will increase at least 10% this year, with lots of potential for the kind of labor strife that forced United to cancel thousands of flights last summer. Unions at other airlines are now trying to match or beat the rich deal that United signed with its pilots.

In the hotel business, growth in rooms is likely to slow a bit this year, but so is demand. Occupancy rates could slip slightly, to 63.6%, in 2001, estimates Bjorn Hanson, a partner in the hospitality and leisure industry practice at PricewaterhouseCoopers. But higher room rates should still propel the industry to record profits. Hanson figures profits will rise 6.7%, to about $25.6 billion, after an 8.6% gain last year. Some increases will come from "getting charged for things you didn't used to be charged for," he says, such as flat daily fees for using a room's modem line.

CEO Fred J. Kleisner of Wyndham International Inc. (WYN) denies he's planning to tack on such fees. He won't have to, he says: Upscale hotels will benefit as more execs hit the road this year in efforts to drum up business in a slowing economy. Marriott International Inc. (MAR) CFO Arne M. Sorenson predicts his strong brand will flourish in a tougher environment. He expects profit margins to rise as new computer systems improve staff scheduling and the Internet lowers the costs of distribution.

Car rental companies may have less room to flex their pricing muscle. Pricing has been weak since last summer, when United's labor woes and the record air-traffic delays hurt business. Analyst David Riedel of Salomon Smith Barney expects revenue per day to be flat this year, after a 3.7% gain last year. Still, Budget Group Inc. (BD) CEO Sandy Miller says rental companies are setting prices at a level that should ensure profitability. "It has never been more rational," he says of his industry.

Hotel and airline executives have sung the same tune in recent years. But 2001 could prove the toughest test yet of that newfound rationality.By Wendy Zellner in DallasReturn to top


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