Fears about the world economy failed to dent the Easter holiday period, but can travel really escape the effects of a downturn? Ian Taylor reports
Despite the projected economic downturn, two million UK holidaymakers headed overseas during this year’s long Easter weekend.
That’s fewer than last year, but no cause for concern since Easter was early and many school holidays have been put back to early April.
There are few signs so far that the turmoil in the money markets, the credit crunch and apparent decline in spending on the high street are hurting the trade.
TUI Travel chief executive Peter Long expressed confidence in the resilience of the industry when reporting healthy first-quarter figures last week.
UK mainstream bookings for this summer were up 9% year on year against a capacity cut of 13% following the merger with First Choice, so Long had reason to be pleased.
He reported 47% of capacity for this summer already sold and said there was no sign of weakness in demand or of customers choosing cheaper holidays. “We are confident about the outlook,” he said.
However, Long did warn the high oil price would lead to rising holiday prices. “We are going to have to live with much higher oil prices,” he said.
TUI Travel should suffer less from the price of oil than the low-cost carriers, of course. Long pointed out fuel makes up 7%-8% of the cost of a package holiday – whereas it can be 30% of the cost of an air fare.
The signs elsewhere are equally encouraging. Travel Trust Association managing director Simon Hargreaves reports: “Bookings are on the up. Travel appears to be immune to the current talk of a downturn.”
Industry accountant Jonathan Wall, managing director of Elmann Wall, says: “Millions of people are going on holiday. Many travel businesses are having a good time.”
Industry consultant Alan Bowen agrees: “There is not much sign of a downturn. There may be a question later in the year if late bookings are down. Companies dependent on last-minute bookings may find it difficult to get a decent price. But there is no sign of people stopping booking.”
No escape?
However, it is hard to believe a downturn in the world economy will have no impact on travel, given the sheer weight of bad news.
It is seven months since the onset of the credit crunch that led to the collapse of Northern Rock and there is no end in sight.
The recent collapse of the fifth-largest bank in the US saw the world’s biggest economy cut interest rates below the rate of inflation – meaning that, in theory, lenders will be giving away money.
Yet the credit crunch risks becoming a credit collapse. The oil price is at a record high – it was reported last week that supplies at the current price are being snapped up as far ahead as 2016 – and inflation is rising.
The Financial Times noted the conundrum last week: “The future appears bleak, but the present still looks relatively rosy.”
Rising fuel costs hit airlines
Look beyond the trade to the airlines and the signs of trouble are unmistakable. EasyJet warned last week that the cost of fuel would cut its profits, following a warning from British Airways early in the month.
The no-frills carrier noted jet fuel prices have risen 19% since early February. In fact, oil prices have risen 30% in two months.
The practice of hedging – contracting to buy fuel in advance at a lower price – continues to mitigate some of the impact of the oil price. But this will progressively unravel as carriers find it more expensive to lock in future supplies at the current price.
EasyJet has hedged 40% of its fuel at 75% of the current price until September. Thereafter, only 10% of its supplies are hedged so fares will rise unless the oil price falls.
In the US, carriers are already cutting back. Delta Air Lines cut US domestic services by 10% last week and offered early retirement to 30,000 staff.
In an echo of the aftermath of the September 11 attacks when US airlines mothballed aircraft, Delta will pull 45 aircraft out of service. Northwest Airlines will withdraw up to 20 from service and United Airlines will ground 15-20.
United managing director for Europe Marcel Fuchs conceded: “We face unprecedented challenges.”
All the cuts so far are in US domestic services, where passenger numbers fell 2% year on year in January, and all three carriers will launch new services to the US from Heathrow at the end of this month – contributing to the sense that all is well in the industry.
But the added competition may push down fares at a time when airlines least need it. All trade commentators sound a note of caution. “The credit crunch has not really hit consumers yet,” says Bowen.
UK ‘has reason to be afraid’
Wall warns: “We are not in a recession yet, but the economy is tighter. Clients in other sectors are affected. Holidays are one of the biggest household expenditures and people will probably be more selective, so businesses need to be on the button.”
Corporate travel may be one of the first sectors to see an impact. Institute of Travel Management executive director Paul Tilstone reports one US-based corporation has begun insisting all non-essential trips be cancelled.
“There is probably more fear in the US than here,” he says. “But there is reason to be afraid here, too. Companies do not want to admit the outlook is downbeat or that they are struggling. But I would be surprised if [the downturn] does not begin to bite.”
Hargreaves agrees, having joined the TTA last year from a financial company. He points out: “The trade can escape a downturn for a time. People can choose not to spend on big items such as cars in order to go on holiday. But a long-term downturn would inevitably affect travel.”
