Originally published in AAHOA Lodging Business, August 2008

Keeping a Keen Eye on the Sky

Do the airline industy’s cutbacks spell disaster for the lodging sector?
By Dan Marcec

A significant cutback in airline flights is on the horizon this fall, and the hospitality sector will feel the effects. According to market research, some sectors of the hotel industry have seen dips in occupancy. As fuel costs continue to rise, the airline industry will continue down what could be a historic decline.

Though the results of these airline cutbacks only can be speculated at this point, AAHOA Lodging Business gathered industry data and spoke with experts on both the airline and hospitality sides of the equation to compile a snapshot of what is occurring right now and what significant airline cutbacks could spell for the hotel industry in the near future.

How Far Will the Airline Industry Fall?

According to two recent studies by AirlineForecasts and the Business Travel Coalition (BTC), airlines across the board are going to take a significant hit due to rising fuel costs. The study “Oil Prices and the Looming U.S. Aviation Industry Catastrophe: A Hole in the Transport Grid” breaks down numerous elements of just what rising fuel prices mean for an airline. According to the survey, every $10 increase in the price of oil translates to $4 billion in additional costs for passenger-only airlines.

This statistic is particularly significant to the hotel industry. Major airlines are announcing cutbacks that begin this fall, and the effect on the amount of rooms occupied certainly will take a hit. PKF Hospitality Research notes that there is a direct correlation between number of airline seats available and lodging demand. (please see sidebar and corresponding chart on p. 52 for more information)

The cutbacks won’t occur for several months, but as “Oil Prices and the Looming U.S. Aviation Catastrophe” notes, the top 10 U.S. airlines will spend nearly $25 billion more this year than last year only in fuel costs. Airline industry fares would need to catapult by at least 20 percent on average to cover those costs.

“To state the obvious, the airline is the economic fulcrum over the travel industry; at $130 a barrel [where oil prices were at the time of BTC and AirlineForecasts’ study], the industry shrinks by 22 percent, and might go to 40 percent if oil reaches $200 a barrel,” says Kevin Mitchell, chairman of the BTC. “Prices will have to go up, and as United Airlines reported in late June, they could rise $90 each way. Of course the first implications of this will be fewer travelers in the system — fewer people in restaurants, renting cars, and staying in hotels.”

BTC and AirlineForecasts’ follow-up study, “Beyond the Airlines’ $2 Can of Coke: Catastrophic Impact on the U.S. Economy from Oil-price Trauma in the Airline Industry,” addresses tourism directly, explaining that a possible failure in the airline transportation grid due to liquidation and bankruptcy of even the most well-traveled carriers would lead to widespread damage to the hospitality industry across the nation. Just more than half of passengers on U.S. airlines go for leisure, while the remainder goes for business purposes. Areas heavily dependent on air travel tourism — such as cruise launch points, and Alaska and Hawaii — will be hurt significantly. Cutbacks to United Airlines’ hub in Denver, and Delta and US Airways’ connection points in the Southeast could amount to many less travelers stopping over. With manufacturing and industrial jobs declining, many areas have turned to tourism for relief, but the trends in airline decline might prove otherwise.

The two studies jointly conclude that the airline industry is at the edge of an abyss. People are up in arms about the little things (e.g. paying for in-flight beverages or being charged for luggage), but those pale in comparison to the greater issues at stake. 

But, the news is not necessarily all bad for the lodging industry. Despite an historic decline in airline capacity, people will need to find a way to make trips — especially for business.

Every market will not falter, explains Doug Shifflet, chief executive officer of DK Shifflet & Associates (DKSA), which measures travel across the United States in terms of where people go, how they get there, and where they stay. Shifflet projects that major markets might even gain because there will be less hassle to find flights. In addition, he says that people find a way to travel, and they’ll make trade-offs to do so.

“Clearly a major adjustment is going to be price increases, and that puts people in cars or on trains to stay closer to home. We’ve even seen spillover into the bus system,” Shifflet notes. “There will be fewer trips, but many will pay the airfare and go to stay with friends, or they will drive a car and stay in a hotel — there will just have to be more balance for the average traveler.”

So, higher fares will mean less air traffic demand because people substitute the plane for a train or an automobile, and that will help maintain some lodging demand. In addition, losing, say, a 7:00 flight will force businesspeople to stay an extra night, and that is a positive point for the hotels. But, at the same time, travelers already are fed up with the airport experience, and the squeeze to occupy fewer flights only will disenchant people further.

 “One side point is that we so often focus on the Fortune 500 in tracking business travel statistics, but only 25 percent of revenue comes from those players, and smaller companies are much more price sensitive,” says Mitchell. “It doesn’t mean that they’ll stop traveling, but they may make six trips a quarter as opposed to 10.”

What is the Airline Industry’s Impact on Hoteliers?

Though an official conclusion cannot be drawn because the airline cutbacks have not occurred in full yet, there will be a significantly negative impact on hotel occupancy in the next year. Smith Travel Research notes a dip in 2008 already, and when the cuts in the air travel industry settle in, and as fuel costs continue to rise, there will be further collateral damage to the lodging sector.

“The hotels will take some hit. The high end will stay up by international travel, coming into the U.S. from Canada and Europe but that helps the luxury and not the economy sectors,” says Shifflet. “The AAHOA folks will benefit from those who want to get in their cars, and the economy sectors might pick up as the market slows down. People that have to drop their travel plans give a hit to the economy, but after that, mid-level people trade down to that, and you might see an acceleration of that trend because of the cost to get there in the first place.”

PKF echoes from their research that properties on the high and low ends typically are hit the least by movements in airline capacity, and that mid-tier are hurt the most. Hotels in the upscale and midscale without food and beverage classes are popular with mid-level business and leisure guests that have to make trade-offs that often include a downgrade in room rate.

“I’m sure you’ll see some trade down on the leisure side, but many are trading out,” says Bobby Bowers, senior vice president of operations for Smith Travel Reserach. “If you look at it from that angle, 2008 won’t be very good any way you look at it, and 2009 and will be a challenge too based on what we’ve seen until now; economists are saying it might be until the second half of 2009 that the financial situation will right itself, and generally there’s a lag of what goes on in the economy and then the lodging industry.”

Shifflet continues, “If you think broadly about the hotel industry, national conferences require air travel and attendances might be down there, but regional conferences might step up in that regard, and compromises like that might be a positive for some of the mid-major markets that are being affected by decrease in air travel.”

Overall, there isn’t any mystery that the next year in the lodging industry is headed for a financial downturn due to major cutbacks in air travel. The effects will range widely depending on geographic location, property type and a host of other factors, but by observing trends and planning ahead there is a chance of weathering the oncoming storm. AAHOA Lodging Business will keep abreast of travel and tourism trends as they develop and provide updates whenever possible.