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War, terrorism concerns, SARS and financially unstable airlines have left people reluctant to make vacation plans, shaking the travel industry to its core.
By Jon Bonné
msnbc.com

Talk about bucking a trend. With most folks scared to travel overseas and U.S. airlines scrambling to stay aloft, Dallas travel agents Nancy and Jim Strong decided to fly their senior staff on hometown favorite American Airlines for a 48-hour jaunt to France. Neither the airline nor the destination is the most popular choice nowadays, but as Nancy Strong puts it: “Americans love Paris, and this too will pass.”

Forget whether the terror threat level is yellow or orange: The battle in Iraq only compounded 18 months worth of warnings and worries about everything from Osama bin Laden to the post-Enron economy. “The war was never really the primary issue,” says Jim Strong, president of Strong Travel Services Inc.

Travel agents face a public that isn’t sure where to go and what to do — if, in fact, travelers are even willing to leave the house. No one has been immune, even Jim Strong and his mom Nancy, who clear more than $15 million a year providing some of Dallas’ wealthier travelers with what Nancy, the firm’s CEO, calls “peel-my-grape type of service.”

The few clients who are calling have become hooked on instant gratification. On a recent Monday, one of their customers asked about a cruise to Tahiti. By Wednesday, he was headed for the South Seas. That was a rarity, though: Most Americans would apparently rather stay close to home — giving up Honolulu and the Caribbean for New Orleans and California.

The airlines’ fiscal misery has only compounded the problem. On the one hand, deeply discounted fares and flexible bookings have provided extraordinary opportunities for travelers to capitalize on airline woes to score great bargains. On the other, travelers may be worried about being stranded by an airline that suddenly goes bankrupt.

And travel jitters hit hard. The war in Iraq clearly hammered the travel industry. Three-quarters of travel agents reported bookings were down in the month before fighting started, according to a member survey by the American Society of Travel Agents (ASTA). Over 70 percent saw clients trade off international trips for domestic travel — and that includes the Strongs’ well-heeled customers.

“These people are as fearful as the next person,” says Jim Strong. “Why should they spend ten, twenty, thirty thousand on a trip to Europe when they could go to their home in Hilton Head?”

Summer season uncertainty
With the war quickly winding down and the peak summer travel season approaching, things ought to be looking up. The summer season usually brings a 10 to 15 percent spike in airline traffic — even last year, in the carriers’ depths of economic misery. That’s when airplanes are usually at their most packed, with passenger load factors (how much of a plane is filled) peaking near 80 percent.

Those peaks even occurred during the 1991 season, in the months after the first war with Iraq ended, though traffic was slightly down from the previous year, according to data from the Air Transport Association. And back in 1991, planes were 12 percent fuller by August than they had been in the waning days of the war.

At that point, though, fliers weren’t seeing quite so many headlines about carriers flirting with bankruptcy — and the war’s end was easy to pinpoint. These days, the airline industry is doing a decent impression of the Donner Party, its woes magnified by perceptions of what could charitably be called global instability.

“The good news is that the war has largely ended in time to salvage most of the summer vacation travel season,” says Philip Baggaley, airline analyst for Standard & Poor’s. “The bad news is that it will take a while to ramp back up. It wasn’t at good levels to start with.”

That long climb back is made even slower by the rapid spread of the SARS virus. Concern about transmission of the disease by airline passengers and flight attendants has contributed to a 25 percent drop in traffic to Asia since last December. (It was only off about 5 percent in early March.) Asian airlines have felt it even worse, with Hong Kong-based carrier Cathay Pacific even discussing whether to cancel all its flights.

That combination of elements — threatened airlines, an unclear end to the Iraq war, the ongoing worries about terrorism and SARS — makes it understandable why all but the most fearless flier might remain on the ground.

“Traffic is not going to bounce back strongly,” says Ray Neidl, aviation analyst for Blaylock and Partners.

Even if it does, increased volume may offer little more than a nudge to the airlines’ bottom lines. A proliferation of rock-bottom ticket prices has helped bring back some travelers, but cheap tickets mean less revenue — and even with cuts of 5 percent or more in capacity across major U.S. carriers, flights remain too empty for execs’ comfort. Load factors are nudging up (1 percent industrywide in February), but not enough to ease those concerns.

And with the past six weeks of refunds and rescheduled tickets, airlines have also continued to dry out their cash reserves.

At this point, carriers’ hopes are that things remain quiet long enough for them to get a stable footing. They’ve also targeted their burn rate as a key component to fix. Continental recently projected it would be at breakeven by the end of the second quarter.

“They’re pulling out of a dive and leveling off at treetop level or somewhat above,” says Baggaley. “Any further downdraft and they run out of airspace.”

For all these troubles, the potential solutions haven’t changed much since before the war — though there has been some progress:

The major airlines stand to get that $3 billion handout from Congress, which President Bush approved last week. That money is largely targeted at security costs, but it will still be a cash infusion for the majors, some of whom — Delta, for example — will net $400 million or more. The figures are modest compared to their overall fiscal shortfalls, but every little bit helps.

Some progress has been made in trimming airlines’ labor costs, which account for as much as 45 percent of revenues. American Airline’s success at winning $1.8 billion in annual labor reductions will certainly drain red from its balance sheet — if, of course, the carrier’s unions don’t rescind their support in outrage over disclosures of perks American provided its executives. United accomplished similar cuts, though it had the backing of the bankruptcy court to do it.

Reductions in capacity are likely to continue, especially as SARS fears cut into Asian routes. Domestic flights, usually easier to add and remove from service, seem to be the likely beneficiaries of any renewed travel interest, which gives the airlines some flexibility in their planning. Says Neidl: “Once they get capacity down and demand starts to pick up they’ll have control over their prices.”

A ray of hope
Travel professionals are still upbeat about this summer’s peak season, and predict Americans will modify — but not be scared off — from their summer vacations.

What’s less clear is what form those vacations will take. A survey last week from AAA showed plans for car trips had been barely impacted by the war, bolstering predictions that Americans would still travel but stay closer to home. Many travel bookers are seeing a lead time of just 1 to 3 weeks for vacation plans. With these more modest plans in vogue, no one expects to get much advance notice before a sudden traffic spike.

“I think you’re going to see a decent summer — but it’s a lot of last minute stuff,” says Richard Copland, ASTA’s president and CEO.

That inability to make long-term plans is never welcome news to the airlines, who survive largely by advance planning. It’s only hampered by the tetchy state of relations between the airlines and travel agents — who take a big role in promoting the leisure travel that makes up much of the industry’s summer spike. Agencies are still livid at air carriers for trying to market flights without their help; 67 agents filed a federal class-action suit last week, alleging a conspiracy by the airlines to get rid of agents’ commissions, which were essentially eliminated last year.

“They still have their arrogance,” Copland says. “We realize that most trips begin and end with an airline flight, and we’re willing to help them. But it’s like in labor negotiations. It’s a give and take — and we’re willing to give and they’re willing to take.”

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