Posts Tagged ‘restore our confidence’

Examining Current Industry Trends

Wednesday, September 15th, 2010


Dear Travel Colleague:

The summer ended much as it began, with the economy slowing and the travel industry on the cusp of an incipient recovery. Recent economic news does little to restore our confidence, but bright spots in industry performance suggest better days ahead.

Sharp Spike in Imports Drags Down Economic Growth

The U.S. Department of Commerce slashed its estimate for Q2 ’10 U.S. GDP growth from a 2.4 percent annual rate to 1.6 percent, confirming fears that economic growth has slowed significantly. In Q1, real GDP increased 3.7 percent, following a 5.7 percent growth rate in the final quarter of 2009. This deceleration in economic growth was caused primarily by a sharp acceleration in imports. Further, economic entrenchment that began in the second quarter spilled over into the summer, reflecting ongoing troubles in the nation’s housing sector (sales of existing and new homes in July hit record lows), continuing high levels of unemployment (stuck at 9.6%) and first-time unemployment claims, a continuing losing streak in the stock market and a rapidly rising trade deficit (which spiked 16 percent in June). Bright spots included corporate investment in such big-ticket items such as new machinery and computers, corporate profits from current production (they surged 4.6% on the quarter and were up 39.2% year-on-year), gains in U.S. home prices and an improvement in real personal consumption (+2.0%).

Some consumer attitudinal measures have also improved modestly in recent days. The Conference Board’s Consumer Confidence Index (CCI) showed a slight gain of 2.5 points in August to 53.5, reflecting an improvement in consumers’ short-term outlook. Nevertheless, consumers’ assessment of current conditions was less favorable as employment concerns continue to weigh heavily. Consumers remain apprehensive about the future and, overall, are about as confident today as they were a year ago (August 2009 CCI = 54.5). The Reuters/University of Michigan Consumer Sentiment Index also posted a slight uptick in August, but this too remained well below levels seen during the prior six months. The data indicate a slowdown in the pace of growth that will last into 2011 but that outright declines in consumer spending are unlikely. Nonetheless, consumer finances remain weak, and any additional erosion could quickly reduce consumer spending even more.

Further, Gallup’s most recent discretionary spending data (for the week ending August 29) show essentially no improvement from a year ago. Even the well-to-do aren’t immune. “A lot of people who are in the lower-income affluent & from $100,000 to $250,000 & – have dropped out of the luxury market,” says Pam Danziger, whose firm Unity Marketing regularly surveys the top fifth of income earners in America. “They’re back to the middle class.” Most economists expect economic recovery to continue at a similarly weak pace through the rest of the year and some have even upped the prospects of a double-dip recession to 30-40 percent.

Airlines Turn a Profit in Second Quarter

According to the International Air Transport Association (IATA), passenger traffic worldwide grew 9.2 percent in July, reflecting a slowing of growth seen earlier (June +11.6%), but still reaching a level 3 percent higher than pre-crisis levels of early 2008. A July capacity increase of less than half the demand growth (5.1%) pushed load factors higher. IATA says it is clear that the recovery has entered a slower phase but has been faster than anticipated. But, the pace of recovery is expected to slow towards the end of the year.

Reflecting increasing demand, 47 major airlines worldwide reported a cumulative $3.9 billion net profit for the second quarter, reversing the $900 million net loss in the prior-year period. North American airlines earned $1.74 billion in the quarter to lead the world’s regions, turning around from a $514 million deficit in the three months ended June 30, 2009. A $2.5 billion profit is anticipated for global airlines in 2010.

Capacity is starting to return as aircraft have been ordered or taken out of storage. Some say there is even a threat of excess capacity but published schedules suggest capacity growth will remain in line with demand. IATA reports that passenger fares have not rebounded in line with volume. Economy fares on average are 5 percent below early 2008 peaks and premium fares remain some 20 percent below.

In the U.S., airline revenues grew for the seventh consecutive month in July (+20%), passenger demand fell slightly (-1%) and there was a 17 percent increase in the average price to fly one mile, according to the Air Transport Association (ATA). Recently, the ATA released its 2010 Economic Report – When America Flies, It Works, reporting that the air sector remains fragile and its outlook for profits uncertain.

On top of these ongoing financial pressures, airlines are being hit with increasing landing fees, facility rentals and passenger taxes from airports struggling to survive as well as facing depressed passenger demand. Further, Americans’ general displeasure with the airline industry continues to haunt airlines for a fourth straight year, with 41 percent viewing this sector negatively and 30 percent viewing it positively, according to Gallup. Asked to rate 25 business and industry sectors, Americans gave the airline industry a net rating of -11, putting it toward the bottom of the pack. One reason – all the new fees which have proven highly unpopular.

In the face of such uncertainty, airlines continue to introduce new sources of ancillary revenue, such as an Express Seats option (coach passengers can pay for the roomier bulkhead seats or those closest to the front and be among the first to board), as well as increases in bag check fees and fees to transport unaccompanied minors. They are also attempting to raise fares. According to American Express Business Travel’s North America Business Travel Monitor (BTM), overall airfares rose substantially during the first half of 2010 to the highest levels since the first half of 2008. Mid-year international and domestic airfares increased 8 percent and 9 percent, year-on-year, respectively. Carlson Wagonlit Travel North America forecasts that domestic and international coach airfares will increase 3-5 percent in 2011. Domestic first- and business-class pricing, however, is expected to decline 2-7 percent while international business and first classes increase 3.5 percent and 4-6 percent, respectively.

U.S. Travel Outlook Dashboard
U.S. Travel Outlook Dashboard
U.S. Travel Outlook Dashboard
U.S. Travel Outlook Dashboard

To view the monthly data for these and other current indicators click here.

Hospitality Industry Results Increasingly Positive

In July, hotel demand continued to be well above 2009 levels (+9.0%), and signs of room rate recovery had begun (average daily rate +1.3%), especially in the higher end of the market. Five top markets experienced increases in revenue per available room (RevPAR) of more than 15 percent: Oahu Island, New Orleans, Detroit, New York and Denver. This improvement continued in August. During the week ending August 21, the industry’s occupancy increased 8.2 percent, the average daily rate (ADR) rose 1.5 percent and RevPAR increased 9.8 percent. In the coming months, Smith Travel Research (STR) expects to see more balanced RevPAR growth as operators begin to accelerate room rate growth. STR also expects stronger performance in the extended-stay market. The main reason for this is that extended-stay room construction was the lowest in 15 years at the middle of 2010 and it is heading lower.

Hotels continue to look for creative new ways to spur weekend and leisure business, such as an offer by hotel companies such as Kimpton Hotels and chains run by InterContinental Hotels Group to reimburse guests for the checked-baggage fees charged by some U.S. airlines.

Hotels are also reporting resurgence in group and business guests. According to InterContinental Hotels Group, its group and corporate business rose 10 percent in the first half of this year. The Rubicon Perspective reports that committed business on the books for the current quarter through the first two quarters of 2011 is now up 4.6 percent versus the same time last year. Group commitments are up 5.2 percent, while the business segment (which Rubicon considers to be weekday guests booking retail or negotiated rates) is up 10.7 percent. ADR is improving as well, albeit far more slowly than desired.

STR has updated its forecast again to become even more positive, projecting the hotel industry to end 2010 with increases in most performance measurements: supply (+2.2%), demand (+6.6%), occupancy (+4.4%), ADR (-0.1%) and RevPAR (+4.3%). “Room rate growth trajectory will determine the magnitude of recovery,” said Mark Lomanno, president of STR. “We’re still a little bit worried about the ADR part of the equation. The industry is currently facing a lot of challenges, and there are all kinds of pressure on that ADR number: the OTAs, and still rebounding group business to name just two.” STR projects the following for the hotel industry in 2011:
supply (-1.1%), demand (+2.5%), occupancy (+1.4%), ADR (+3.9%), and RevPAR (+5.3%). PricewaterhouseCoopers has revised its forecasts in similar ways. Colliers PKF Hospitality Research forecasts that the average U.S. hotel will achieve a 2.3 percent increase in net operating income during 2010. This follows a 37.8 percent cumulative decline in profit experienced from 2007 through 2009 and is the first annual uptick in forecasted net operating income since 2007.

Just as the lodging industry has begun to recover, it is being hit with yet another challenge. Beginning October 1, per diem lodging rates in 310 of the 378 so-called nonstandard areas (higher-cost areas where federal employees most frequently travel) will decline, according to the General Services Administration (GSA). For federal government employees visiting places like New York City, where lodging per diems will shrink by as much as one-third, in Chicago and Las Vegas where they will decline 21 percent for part of 2011, and in Boston where per diems will fall 18 percent, it could be tough to find affordable hotel rooms. GSA calculated these per diems based on hotels’ ADRs from April 2009 to March 2010, which was the heart of the recession when rates were at their lowest. With rates now beginning to stabilize and projected to rise in 2011, these lower per diems will likely not be sustainable and will put additional pressure on both hotels and on government travelers. U.S. Travel is engaged in trying to correct this situation with the federal government.

Business Travel Continues to Fuel Industry Recovery

Airlines, hotels and car rental companies in the United States all reported good to excellent results as business travel hit a more sustainable stride in the second quarter of 2010. Data from the Airlines Reporting Corporation show an increase of nearly 22 percent in worldwide travel agency sales during the first half of 2010, reflecting 7.5 percent more domestic transactions and 11 percent more international transactions when compared to the same period last year.

The exhibition industry, however, continues to struggle. The Second Quarter 2010 CEIR Index marked the ninth consecutive quarter of underperforming the previous year, down 1.4 percent. Measures of net square feet and revenues continued to decline, but at a much slower rate. Net square feet of exhibit space sold showed a decline of 3.0 percent, with exhibitors declining 3.0 percent. While overall declines continue, the exhibition industry is not performing as badly as it did in 2009 when it had its worst year ever, declining 12.5 percent. Optimistic indicators included a 4.5 percent increase in attendance. It is anticipated that slow growth will continue through 2010 with the fourth quarter of 2010 and first quarter of 2011 likely to show the beginnings of a true recovery for the exhibition industry.

After a tumultuous 24 months, the meetings industry seems to be on the mend, according to travel buyers, 60 percent of whom said they feel the meetings market is stable, according to the latest poll by Maxvantage’s (an alliance between American Express Business Travel and Maritz Travel). Much greater shares of buyers are now reporting that it is more challenging to find available meeting space and harder to negotiate lower rates than did last year. Good news for travel suppliers but bad news for meeting planners and the companies they work for.

Virtual Could Overwhelm Future Meetings Market

Other new developments will also continue to challenge the meetings segment of our industry. A new study by Bernstein Research concludes that “telepresence” or virtual meetings could replace 70 percent of internal travel and 10 percent of external travel over the next 10 to 15 years, leading to an aggregate reduction of 21 percent in corporate travel spending. The U.S. telepresence or virtual meeting market could be worth $30 billion in 10 to 15 years. According to Forrester Research, 17 percent of U.S. business travelers have used either videoconferencing or virtual presence in the past year to reduce their business travel, and 48 percent expect their employers will have policies in place by the end of this year for the use of videoconferencing and virtual presence to reduce demand for business travel.

Leisure Travel Posting Mixed Results

According to the results of Ypartnership’s just-released 2010 Portrait Of American Travelers, the U.S. leisure travel market has finally stabilized. The average American leisure traveler took an average of four trips during the past year and spent more than $3,500 on travel services, and the research suggests that the industry can expect a modest increase in demand in the year ahead. But “value” will remain in vogue and consumers have developed a “new resourcefulness,” allowing them to accommodate many of the unexpected constraints on their travel spending and adopt new shopping/staying techniques so they can satisfy their desire to travel for leisure but in a more affordable manner. This new resourcefulness has altered travel behavior in several interesting ways. Fully eight out of 10 leisure travelers now identify “the ability to check the lowest fares/rates” (83%) and the “lowest price/rate guarantee” (82%) as the two most important attributes in a website that promotes travel services. And a remarkable one out of seven (14%) has purchased a travel service as a result of getting an unsolicited e-mail.

But this nascent recovery in leisure travel seems quite vulnerable. Rural arterial vehicle-miles (a measure of non-local highway travel) remain soft (up less than 1% through June), although Amtrak continues to show strong performance (see Dashboard). In addition to benefiting from increasing business travel, Amtrak reports that third-quarter sales of its vacation packages were up 51 percent from a year ago.

Travel agents report that those postponing vacations last year are making modest vacation plans this year. But with it has come a new level of austerity as vacationers seek frugal ways to get away by juggling their finances, taking shorter trips, visiting less expensive destinations and even staying with relatives. The National Park Service, for example, expects about 285 million visitors this year, and visitor numbers at parks like Yellowstone, Yosemite and Death Valley are running above levels a year ago. Special offers and incentives are continuing to be offered by hotels, resorts, cruise lines, etc., to attract the more reluctant leisure traveler of today.

AAA projected that Labor Day holiday travel would increase 9.9 percent this year over last, with 34.4 million people to travel at least 50 miles from home. But some were skeptical as to whether hotel performance would follow those traveler increases predicted. Reserved occupancy for the Labor Day weekend was up 3.6 percent, according to Rubicon. And, TripAdvisor®’s annual Labor Day travel survey found that 28 percent of Americans expected to travel over that holiday, down slightly from 30 percent one year ago. And Hurricane Earl didn’t help, causing leisure travelers along the Atlantic coast from North Carolina to Maine to cut short their end of the summer season vacations.

The TripAdvisor survey also looked outward to travel during the next few months, finding that 86 percent are planning leisure trips this coming fall, compared to 73 percent that said they took trips last fall. Nearly half (45%) plan to spend more on travel this fall, while 41 percent expect to spend the same amount. One-third intends to spend more than $3,000 on fall leisure trips. Traveling in the fall is getting more popular with married couples in the 55-plus demographic, according to a recent study by Ruf Strategic Solutions for Travel Guard North America.

Destination Performance Mixed As Well

Nevada industry reps are guardedly optimistic about this year, reporting clear signs of improvement – visitation is up and sales tax, one of Nevada’s main revenue sources, appears to have reversed a more than four-year slide. Convention bookings remain strong, with convention room nights for 2011 about 20 percent ahead of pace. But gaming revenue, Nevada’s other major revenue source, is less certain. For those looking to attract the gaming market, you might check out a new customer segmentation model developed by Market Metrix. The purpose of this model is to identify critical behaviors and trends of casino customers that will help casino management better understand and connect with their target customers.

In Orlando, Walt Disney World recently reported that its attendance has slipped as it cuts back on discounts. Attendance fell 2 percent during the three months that ended July 3 and occupancy at Disney World hotels dropped eight percentage points to 83 percent. But some of that lost attendance is being offset through higher average prices. Per-capita spending inside Disney World’s four theme parks climbed 3 percent during the quarter; per-room spending in its hotels rose 4 percent. Elsewhere in Orlando, the opening of Wizarding World of Harry Potter in mid-June – said to be the hottest opening in Orlando this year – has reportedly given many of the area’s hotels and resorts a much-needed summer business lift. The number of visitors expected in Orlando in 2011 is forecast to increase 3 percent compared with this year, according to Global Insight.

New Orleans seems to be heading in the right direction after having its tourism industry crippled by Hurricane Katrina five years ago. The number of visitors to New Orleans – a city in which 35 percent of jobs were reliant on tourism before the storm – dropped dramatically in the weeks and months that followed. Today, New Orleans isn’t quite back to what it once was, but tourism is said to be on the rebound. In 2004, the year before Katrina, slightly more than 10 million visitors came to the city and spent close to $5 billion dollars. In 2006, the year after the hurricane, the numbers dropped to 3.7 million visitors. Last year, despite a nationwide recession and cutbacks in corporate business travel, the number of visitors to the city edged back up to 7.5 million. These tourists, in turn, spent $4.2 billion – just below the pre-Katrina peak.

And, of course, many destinations along the Gulf of Mexico suffered tourism losses this summer because of the BP oil spill. For example, in Beaches of South Walton on Florida’s Gulf Coast, summer occupancy was down 30 percent, and in Alabama’s Dauphin Island, 90 percent fewer people booked summer rentals compared to last summer. June was particularly bad when, for example, lodging receipts tumbled nearly 40 perent and retail sales fell 22 percent in Gulf Shores, Alabama. Similar losses were expected in July. Other communities had deceptively high occupancy rates because BP and federal officials were stationed nearby. They may have filled the hotels but were not spending money in other attractions and retail establishments like tourists do. Further, although the BP well has now been capped, some destinations in the Gulf Coast region may still be suffering from misperceptions, fueled once again by yet another oil platform explosion that threatened further damage as well as re-igniting concerns among potential visitors about the area’s potential vulnerability.

Two surveys conducted by Ypartnership on behalf of VISIT FLORIDA clearly demonstrate these misperceptions, reinforcing VISIT FLORIDA’s argument that the state needs more money from the British oil company BP PLC to continuing promoting the fact that most of Florida’s coastline is untouched by oil. Interestingly, in the face of this crisis, Florida relied on social media, mounting a PR blitz to show beachgoers that Florida’s surf had been spared an oily disaster. On May 11, about three weeks after the spill, the state tourism agency launched a marketing campaign, using the same social media tools that the media used to spread information about the spill. VISIT FLORIDA created a website called Florida Live to provide real time information about how the spill was – or wasn’t – affecting the coast. It increased their website traffic by 46 percent compared to the same time last year, and bumped up its Facebook page traffic about tenfold – now the site has more than 8,000 fans. U.S. Travel synthesized the good online work of state tourism offices affected by the oil spill with creation of the portal site, giving travelers a one-stop source on news from this region.

Activity Trends

The Cruise Lines International Association (CLIA) is reporting some optimistic signs. A total of 13.4 million people cruised on CLIA lines in 2009, up 4.8 percent more than 2008. Two-thirds (8.9 million) embarked from U.S. ports. But to achieve these numbers, cruise lines offered attractive fares and other incentives, reducing cruise lines’ total gross revenue by 11.4 percent. The North American cruise industry continues to expand its presence throughout Europe, a source of new passengers. And cruise lines are reporting positive statistics for 2010 and beyond, citing improved revenue yields for the first time since 2008, strong booking volumes for the second half of the year and the effectiveness of cost-control measures.

Interestingly, as the cruise industry continues to shake out, some U.S. ports will benefit and others will lose. The hardest-hit U.S. cruise markets are on the West Coast, such as the ports of San Diego and Los Angeles, but also others like Norfolk, Virginia. Princess Cruises and Holland America Line, Alaska’s two largest cruise operators, have significantly reduced their Alaska capacity. Some ships are being redeployed to Australia and New Zealand to tap new markets and create new itineraries. Others will go to Europe. But several U.S homeports are doing well, such as Fort Lauderdale’s Port Everglades (homeport of the world’s largest cruise ship, the Oasis of the Seas), Miami, Baltimore and Galveston.

And, as travelers plan their trips, there seems to be a move back to traditional travel agents by some who are becoming increasingly frustrated by travel websites, according to Forrester Research. The number of travelers who would consider using a traditional offline agency increased 26 percent in 2009. Further, 15 percent fewer travelers enjoy using the web and the number of online travel hunters who believe websites do a good job of presenting travel choices has dropped to one in three as more travelers believe their business is taken for granted by websites.

As leisure travel continues its rocky recovery, it will remain challenged by our entrenched work ethic and reluctance to take off vacation time. As explained by John de Graff, Executive Director of Take Back Your Time, U.S. adults who receive only an average of 13 vacation days per year, typically leave three days unused. The U.S. Bureau of Labor Statistics says there are approximately 153 million employed Americans, meaning that each year an average of 459 million vacation days are going unused in the United States. A recent survey suggests that close to half (45%) of working Americans let hard-earned time away go to waste in 2009; furthermore, three-quarters (78%) anticipate leaving as many as 10 vacation days on the table in 2010. Why? Many say coordinating schedules with family and friends is too difficult (51%) or they are not able to afford a “real vacation” (40%). Others admit it is less about personal situations and more about work-life being too busy to enjoy time away (47%). While consumers express pessimism towards the possibility of a work escape, adults who choose to go on vacation feel reconnected with the family (53%), more productive and positive about their jobs (34%), as well as the health benefits of being rested and rejuvenated. You will find more Benefits of Travel data and resources on U.S. Travel’s website.

International Inbound Travel Continues to Contributes to Trade Surplus

International inbound travel is on the mend. According to the U.S. Department of Commerce, international visitors spent an estimated $11.1 billion on travel to and within the U.S. during the month of June – $1.4 billion more (15%) than was spent in June 2009 – marking the sixth consecutive month of growth. International visitors have spent an estimated $64.6 billion on U.S. travel and tourism-related goods and services year to date (January through June), an increase of 7 percent compared to the same period last year. During that same period, Americans have increased their spending on outbound international travel only slightly, spending nearly $50.6 billion abroad year to date (up 2%) – resulting in a $14.0 billion trade surplus for travel and tourism.

But problems remain in some of our key inbound markets. Mintel says the U.K. holiday market will take five years to recover. Value Added Tax (VAT) increases and higher fuel costs will make holidays from the United Kingdom more expensive, which could cause a further dip in the market. Overall spend on overseas holidays is forecast to rise by 17 percent over the next five years, which is significantly more than from 2005 to 2010, but the rise will be driven by higher holiday costs. In constant price terms, expenditures on holidays will decline by 1.6 percent between 2010 and 2015. Overseas city breaks and holiday homes are the two markets that would be most affected. While beach and family holidays will continue to dominate the market, more diversification will be seen in holiday types. Niche products/destinations will see the fastest growth, according to Mintel.

So, How Do We Reach ‘Em?

Social network advertising is getting renewed attention in 2010. Ad spending on social destinations in the U.S. will reach $1.7 billion this year and cross the $2 billion mark in 2011, according to eMarketer. The company driving most of the growth is Facebook, while MySpace is diminishing in importance. Twitter, which finally launched its ad business earlier this year, captured less than $50 million in ad spending in 2010 but its potential in 2011 and beyond could be substantial.

According to the PhoCusWright Consumer Technology Survey, users of social networks, micro-blogs and mobile early adopters are significantly more likely to use the Internet to select their leisure travel destination. But, despite advanced mobile devices like the iPhone making headlines almost daily, the majority of travelers are not using their phones to visit travel-related mobile websites or make travel reservations – not just yet. Further, travel reviews were found to have a significant impact on booking decisions, and, for now, are cited as influential more often than any other type of social media, but their location and content have an effect on how influential they ultimately are. The most popular methods for online travelers to share their leisure travel reviews, however, involve “technologies” that are rarely mentioned these days – in person, phone and email.

And mobile applications are proliferating rapidly. According to Ypartnership/Harrison Group, nearly a third of all cellphones in the U.S. now are so-called smartphones (Web-enabled devices that make surfing the Internet for information easy for people on the go). And nearly 20 percent of travelers have downloaded one or more travel-related applications to their smartphones: 47 percent of these have used GPS functionality to find their way to a destination, 46 percent have searched for flight updates, 29 percent compared airfares or hotel rates, 18 percent booked air travel or lodging, 15 percent viewed virtual visitor guides, and 11 percent downloaded and/or redeemed coupons. Watch for U.S. Travel’s new report Use of Mobile Travel Services by Destination Marketing Organizations, to be published soon. The report reveals significant use of mobile social networks by destination marketing organizations and high ratings for their effectiveness in meeting organizational goals. However, the survey on which the report is based also finds a need for better understanding of mobile travel services and how they can be used for marketing purposes and, most importantly, how best to measure the return on investment on such services.

Four Months and Counting

Now more than halfway through 2010, the economic picture is still a bit fuzzy and a nudge one way or the other may result in either a fairly robust or only “so so” 2010 for the travel and tourism industry. The remaining four months will help determine how we view 2010 from the perspective of 2011. But from whatever lens one is using, we should applaud ourselves for surviving 2009 and taking advantage of lessons learned in 2010 as we approach 2011.

Last Chance to Save Money When You Register for Marketing Outlook Forum!

Time marches on and we are now less than two months out from our 2010 Marketing Outlook Forum (MOF). This year’s dynamite program – an event that you won’t want to, and really can’t afford to miss – will be held in Las Vegas, October 26-27 and will be followed by the Travel Marketers Continuing Education Workshop, brought to Forum delegates once again free-of-charge by the Acxiom Corporation. The Early Bird deadline is Friday, September 10, so register today! In this very uncertain environment, the market intelligence, expert analyses and forecasts, marketing insights and networking opportunities with your peers and industry leaders make this the one must-attend event this fall. I look forward to seeing you there!

Dr. Suzanne Cook
Suzanne Cook, Ph.D.
Senior Advisor, U.S. Travel Association and
General Manager, Marketing Outlook Forum

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