Virtuoso Travel Network sees travel market comeback

The latest study from the Virtuoso Travel Network sees international leisure and luxury travel on a pleasant trajectory, providing a glimmer of hope for the beleaguered travel market. Corporate travel, on the other hand, continues to lag, but that’s a function of the economy and companies that will err on the side of fiscal conservatism for a while.

The member survey by Virtuoso, which consists of travel retailers, reports that 39 percent of respondents se international leisure travel as most insulated from broader econmic pressures, and stays of three-to-five days have continued to go strong (according to 21 percent of respondents). Few see the long vacation and corporate segments as resilient – only 18 percent and 13 pecent, respectively. But, more than half see both the corporate and leisure markets bouncing back in the next six months.

“Many people are not aware that travel represents the world’s largest service industry; that it makes up 9.4 percent of the world’s GDP and 220 million jobs worldwide. Travelers benefit the world economy and deepen world understanding. We are happy to help people travel again while benefiting countries that rely on tourism revenue,” said Virtuoso CEO Matthew D. Upchurch, CTC.

Eighty-one percent of Virtuoso members have reported a year-over-year increase in future bookings, and 80 percent report that sales are up over the last three month.

Online agencies bright spot in Spanish travel market

The slump in the travel market has certainly affected Spain, which is among the top leisure destinations in Europe. Both foreign travel to Spain and domestic excursions within the country have suffered as a result of the global recession, with travel industry research firm PhoCusWright putting the decline at 12 percent for 2009. The traditional booking channels were hurt more than the online travel agencies, though, which only saw a 1 percent decline in the action. This is a bit of a shock, the research team reports, because the Spanish market has a lower rate of penetration for travel than other countries in Europe.

“While all travel segments contributed to the total market’s decline, each travel industry vertical has experienced varying levels of consumer pullback,” says Carroll Rheem, PhoCusWright director, research. “Car rental and hotel companies, particularly in Spanish cities like Madrid and Barcelona, have experienced some of the sharpest declines.”

The hotel industry in Spain had its worst drop in decades, losing 7 percent in 2008 and 9 percent more in 2009. International visitors, especially from the United Kingdom, plunged, and domestic tourism was squeezed, too. Excess capacity made the situation worse for the hotel business, as new properties hitting the market in 2008 upped the number of rooms to be filled by 3 percent.
Unlike many European markets, low-cost carriers did not post the market share gains against traditional carriers seen other markets. Both airline sectors suffered declines in demand due to both the travel slump and competition from high-speed domestic rail companies.

Online travel agencies, on the other hand, fared much better. They posted a revenue growth rate of 2.7 percent, with packaging becoming an increasingly lucrative service. PhoCusWright basically indicates that this is “a bright spot in the currently bleak Spanish travel landscape.”

Airlines: why it always has to come down to price

Imagine what would be pretty much a perfect world, at least for airline CEOs. You’re running a reasonable profit – let’s say 10 percent, enough to keep the shareholders off their backs. And, they’re growing annually at a low double-digit rate, as well. Again, the shareholders are seeing an upside, so there’s no pressure on the airline’s management. Since the numbers being posted are healthy, the need for cutthroat competition evaporates, and passengers make their choices by destination and service, the latter playing a minor role, because in this perfect world, service is pretty much consistent (and high) from one airline to the next.

Blissful, right? Well, it’s just about impossible.

What shatters this fantasy, in which Santa‘s the pilot and the tooth fairy is pushing the drink cart, is the concept of price. The travel market – like any market – doesn’t carve itself up neatly into the best possible outcomes for all involved. Some people make fantastic decisions, while others behave like morons. The leaders of each company think they can find an edge. Even in the perfect world described above, the mere possibility of an advantage can send the whole system into mayhem, but we’ll get to that in a moment.

The perfectly coordinated airline industry has a practical barrier. Such harmonizing is also known as “collusion.” And, it’s illegal. Just imagine every grocery store in your neighborhood setting the same prices. In doing so, they could guarantee themselves a tidy profit, as long as all agree not to break ranks. Now, if the airlines did this, they could basically set the prices they want, regardless of service. In fact, if all agreed to provide shitty service for a universally high price, you’d be screwed.

A lesser form of this is regulation. The prices are fixed, and there are no secrets about it. We tried this for a while in the United States, and I’ve heard great things about the experience of flying in those days. But, the thought of the government setting prices for anything makes me a tad uncomfortable. Business owners should be free to make a profit that reflects their hard work and skill.

So, we are where we are now … which is pretty ugly. Most airlines are struggling to keep planes in the air. Bankruptcy announcements are not met with surprise (unlike profitable quarters). Even the layman, who knows nothing about the air transportation industry, knows that the airlines are screwed up. The challenge is finding where the blame needs to go and fixing the problem. While it’s pretty easy to beat up the airlines on this one, the reality is that the system as a whole is pretty close to unsustainable.

Fares sell by price
We may complain about having to pay for soda or not getting those crappy little pillows and blankets (which we complained about getting before they were taken away), but we still beeline for the cheapest flights available. Need proof? I’ve heard countless people wonder aloud about an airline that charged just a little more for something resembling customer service. Yet, those wheels never go up. Meanwhile, Ryanair plans to get rid of some seats and creating a standing room only section on its flights and will probably sell tickets for those torture devices before filling the cheap regular seats on the plane. We’re addicted to cheap. If there were real demand for anything slightly better than what we have now, it would exist.

There’s a reason fares sell by price
Sure, there are travelers with a little extra disposable income, and they’d pay for a class that’s lightly better than coach. Maybe they’d shell out an extra $50 or $100 – maybe more. But, there’s always the squeal point. The squeal point, per ticket, gets lower when multipliers are involved. I’d pay an extra $100 for a little more legroom and coffee in a ceramic mug. Seriously. I don’t need a pillow or a blanket; I really don’t even give a damn about getting a smile. I just want to stretch out a little and sip my coffee from a civilized receptacle. Here’s the problem: if I fly with my wife, that $100 luxury becomes $200. If we were a family of four, it would jump to $400. Legroom isn’t worth that much.

For the business travelers, the situation is even more severe. It’s easy to figure that these guys would go for the extras because they don’t have to pay for it. Well, that’s true. But, someone does. These guys are accountable to the people who write the checks. Would a client notice a weekly expense bill that’s $100 higher? Probably not. When I lived that life, I’d run up $3,000 to $5,000 in travel expenses a week. Flight prices changed from time to time. The $100 wouldn’t be noticed. If someone did notice, he probably wouldn’t care.

But, we have to deal with the multiplier.

If you have 100 consultants or other professionals on a project where each has a weekly flight and hotel stay for an entire year (call it 50 weeks to leave room for vacation), the money adds up fast. The extra $100 becomes $5,000 per traveler. For the entire project team, this small taste of luxury would amount to half a million dollars … which would be noticed and to which the client would object. Business travelers are constantly pressured to keep expenses as low as possible, which takes us right back to buying on price. With business travel off substantially this year, we’re experiencing this dynamic today.

Airlines have to live with this
Since customers make their decisions based on the cost of a ticket, this is how airlines have to position themselves in the market. Being the best can mean going out of business. Instead, an airline has to be the cheapest for a particular route in order to win in the market – there’s no alternative to this. That’s why people complain about the service they get; if they weren’t flying these airlines, they wouldn’t be complaining.

So, to succeed, an airline has to make the calculated decision that anything can be sacrificed in the name of low prices. Whatever misery is inflicted on the passengers, they’ll accept it – they made that decision when they bought their tickets. I’m not trying to be mean, here, just honest. We’re not talking about Santa any more.

The market has evolved into one in which passengers have little likelihood of being happy … in part because they are making the conscious decision to fly that way. As long as price is king, the airlines have few levers they can pull.

Of course, this isn’t universal. There are some airlines with excellent financial track records (Southwest comes to mind immediately), and their flights can be decent, even enjoyable. While customer service is an obvious way to make even a no-frills flight much better, there are structural problems in the industry that have to be overcome. An obvious thought is that the big airlines should cut back to be more like their smaller, regional counterparts, which tend to do a better job of running profitably.

Let’s think through this.

First, cutting some routes can cause a chain reaction of change in the vast network that an airline traces around the world. There aren’t any easy answers here, but it can be done. Many airlines have cut back on flights and cities this year and have lived to tell about it. Take it to the extreme. The large airlines carve themselves up into little guys, run their routes and post strong earnings. Unfortunately, profits are intoxicating – and shareholders will want more. Eventually, this requires growth into new markets (e.g., adding routes) or acquiring other airlines. It may take a while, but the airline industry would eventually return to where it is today … and would assume the problems it has now.

Doing the right thing, essentially, would lead the industry back to doing the wrong thing.

The exceptions to the rule
Alternatives do exist for passengers who want more than the claustrophobic experience that is coach. Business class and first class come to mind. The problem is that the gap is far too wide – both in terms of amenities and cost. Most coach passengers could be fairly happy with much less than business and first offer. Unfortunately, it’s all or nothing, and the prices reflect the “all.”

There are passengers who pay the extra cost for these improved offerings, but there’s always a reason. They may have the financial means to make the decision easy. Or, in the corporate world, they reside far enough up the food chain that corporate travel policies favor them.

The super-luxury travel market has plenty of services available for passengers who don’t buy on price. You could use an exclusive service (though many of them have fallen on tough times), get a private jet share or simply buy your own wings. Again, this is far more than the legroom and ceramic mug I’m looking for.

Of course, even these upscale services aren’t making as much as the airlines had hoped, even at lower prices.

Why even collusion wouldn’t work
Let’s circle back to where we started, that imaginary airline industry in which everything is perfect. Even that is doomed to failure. Take regulation out of the picture (that’s a whole different animal), and think about airlines in which passengers can get something slightly better than what we have now. They pay a little more, but air travel is no longer a dehumanizing experience.

Now, think about a smoke-filled backroom in which a guy with a new idea is surrounded by cigar-chomping investors.

“I have something for you. I want to start an airline. Yes, I know that the guys in the market now have gotten together to fix their prices – it’s an open secret. But, I’m not going to play ball with them. I figure we can cut prices and run at a thinner margin. What we lose per flight we’ll make up in volume. Hell, people will buy on price, and they’ll flock to us. We’ll grow like mad.

“The other airlines will try to make a play on service, on how they give a little extra legroom and coffee in a ceramic mug. But, we’ll only need to say, ‘We’re cheaper.’

“It starts with short flights. If you’re only flying from Boston to New York, do you really need the extra legroom? How about Boston to Washington? The slope is awfully slippery. Next thing you know, people will go for the cheaper fares on flights from New England to Orlando … and then Orlando to Los Angeles. Finally, they’ll cut their comfort when they cross oceans.

“And, they’ll be flying our airline.”

The investors would be fools not to drive dump trucks up to this guy and unload their cash at his feet … at first. For a while, this airline would dominate the skies. But, the others would catch on. One by one, they’d break ranks from the agreement to keep their prices high, and they wouldn’t stop until the industry looks a lot like it does today.

What the airlines can do
It looks like the airlines are out of options. They are doomed to a low-margin (at best) existence in which cost-cutting, layoffs and disgruntled passengers are the norm. A Hobbesian state of nature will always play itself out at the gate. Knees will always poke chins in increasingly compact quarters.

This doesn’t mean the airlines are powerless to make the experience better, though. Even with small seats and no meals, there are plenty of ways to win on service. A smile can go a long way. Being polite can defuse a nasty situation.

Of course, none of this addresses the cost and price pressures and their impacts on the industry. But, does anyone think that’ll ever change?

Online travel agencies still making money in today’s travel market

There’s still money in the travel business; you just have to look in the right places. In the United States, the online leisure and unmanaged business travel sector is where you’ll find the cash — this sector is outperforming every other travel sales channel, according to a recent study by research firm PhoCusWright. In a report that the company will release soon, U.S. Online Travel Overview Ninth Edition, PhoCusWright will reveal the details behind the online leisure/unmanaged business travel’s 7% decline relative to a nationwide general fall of 16%.

“For the first time since PhoCusWright began tracking the remarkable trajectory of the internet in travel distribution, online travel will decline in 2009,” says Doublas Quinby, senior director, research at PhoCusWright. “But,” he continues, “the 7% drop in online travel vs. far steeper double-digit declines for the total travel market and offline channels indicates that travelers are increasingly turning to the Web to shop and purchase travel amid the recession.”

The contraction of the travel market in 2009 has brought the travel industry back to pre-2005 levels. The effects haven’t been as brutal in the online space, though, which has outperformed all the other channel’s this year. When the year is over, PhoCusWright expects online travel agencies to own 39% of the total travel market in the Untied States, up from 35% last year.

[Photo by borman818 via Flickr]

“By honing in squarely on consumer concerns in 2009, heavily promoting deals and last-minute special offers and eliminating many booking and customer service fees, online travel agencies have deftly outflanked recessionary pressures and are outperforming every other distribution channel,” Quinby reports. He adds, “OTAs are taking back some share from travel supplier Web sites this year.”