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Tarnished travel

Looking for a silver lining among airline and hotel financial reports? Don't bother. The travel industry is taking a beating, and it's hard to see when it will improve.
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The first weeks of every year bring a blizzard of travel industry data: fourth-quarter and full-year financial reports, granular traffic stats, analyst pronouncements and all sorts of statistical minutia.

It's rather dull stuff, frankly, but this year I plowed through it all with a single-minded determination to find the proverbial silver lining to the current collapse of travel.

No such luck.

The silver linings weren't just elusive. They were non-existent. See for yourselves:

Things are bad all over
If you harbored any lingering hopes that travel's woes were either shallow or segmented, forget it. Travel is in decline across the board.

Forty of the nation's 50 largest airports suffered a downturn in commercial aircraft departures. That's dreadful news considering the most recently released statistics only cover the 12 months ending last June — and the biggest cuts in airline capacity, about 10 percent, didn't come until after Labor Day. Despite that late-in-the-year seat capacity reduction as well as the sharp drop of fuel prices, the fourth quarter was calamitous for the nation's largest airlines. They lost a cumulative $1.5 billion before special charges and extraordinary items like fuel-hedging losses (see below).

Even Amtrak is suffering. It carried 28.7 million passengers in 2008, a record number. In the last three months of the year, however, traffic declined slightly compared with the last three months of 2007, and passenger loads were 5 percent below the railroad's projections.

Worst. January. Ever.
The first month of the year is never a good one for travel, but this January will go down as the worst one in recent decades. The nine largest U.S. carriers all saw traffic declines. The slump ranged from modest (2.2 percent at Delta Air Lines) to huge (8.2 percent at Northwest Airlines) to alarming (11.7 percent at American Airlines and 12.4 percent at United Airlines).

The decline of the hotel industry was even more pronounced. For the week that ended January 31, just 48 percent of the nation's estimated 4.5 million hotel rooms were occupied, average daily revenue fell 7.3 percent, and the all-important revpar (revenue per available room) tumbled a startling 19 percent. Only one of the nation's top 25 hotel markets — Tampa-St. Petersburg, host of the Super Bowl — was able to register a year-over-year increase in all three categories.

Laid low up front
As discussed in last week's column, airlines are disproportionately reliant on revenue from business travelers buying business- and first-class tickets. Unfortunately, that is the part of the airline business unraveling fastest. British Airways, the most carefully watched among international carriers, recorded an eye-popping 13.7 percent drop in premium traffic last month.

“We're seeing a significant degradation in front-cabin RASM [revenue per available seat mile] with a combination of lower front-cabin yields and [passenger] load factors,” added Continental Airlines president Jeff Smisek. “Business travelers appear to have shifted their flying from the front to the back” of the plane. Airlines are also preparing for a permanent reduction of up-front flying. United Airlines, for example, says its overall premium-class passenger capacity is being slashed by 20 percent as it completes the installation of new business- and first-class cabins.

Lost in the hedges
Things are so bad in travel that even the good news — plunging oil prices — has a negative effect. The large hub-and-spoke airlines were reluctant to hedge fuel costs as prices rose throughout the decade, then leapt in too late as oil prices surged as high as $147 last year. The result? Huge hedging losses as prices sank as low as $34 in December. Delta Air Lines, for instance, reported a $507 million loss on its hedges in the forth quarter. United Airlines lost $370 million. But even Southwest Airlines, whose fuel-hedging strategy is legendary, was blindsided. It took a $117 million charge in the fourth quarter and has all but abandoned its hedging for the next few years.

Like a Virgin
The travel industry's biggest publicity hound, Sir Richard Branson, talked about launching a U.S.-based airline for seven years before Virgin America finally made its debut in August 2007. Then his minions spent almost as much time trying to keep the privately held carrier's financial results out of the Department of Transportation's public files. Now we know why. According to statistics released last week, the airline lost $175.4 million in the first three quarters of 2008 on revenue of just $259.6 million. In the third quarter, Virgin America's unit revenue (8.8 cent per mile) was far below the industry norm and its costs (13 cents per mile) far above the industry average. And it had just $25.4 million in cash. Needless to say, Branson, a British citizen restricted by U.S. law to minority-stakeholder status, is looking for new domestic investors.

Hotel junk
The rapid expansion of the lodging industry this decade was partially fueled by mixed-used developments that stressed residential condominiums and time-share projects as much as traditional guestrooms. Condo projects ground to a halt in the housing crash, of course, but “vacation ownership” (industry jargon for time-shares) has also tanked. In the fourth quarter, for example, Starwood Hotels, parent of Westin, Sheraton, W and other lodging brands, reported revenues from vacation ownership and residential sales decreased 48.7 percent compared with 2007. Fitch, the credit rating agency, promptly reduced Starwood to junk status.

Cashless in Chicago
The woes of Chicago-based United Airlines are well known and frequently chronicled. But now the airline is burning through cash and selling or mortgaging assets and renegotiating loan covenants to keep its corporate head above water. The carrier consumed almost $1 billion in the fourth quarter and ended the year with just $2 billion in unrestricted cash. That's no more cash than US Airways, about half United's size, has on hand.

Seldom-heard discouraging words
If all these figures don't distress you, consider this discouraging pronouncement from Southwest Airlines: “Fleet growth plans are suspended indefinitely,” said chief executive Gary Kelly. Southwest saying it won't grow is the real-world equivalent of Chicken Little warning the sky is falling. The former intra-Texas carrier has recorded 36 consecutive years of profit and grown into the nation's fifth-largest carrier. Most of that growth has come while traditional competitors have struggled during recessions. In 2009, however, Southwest expects to shrink by 4 percent.

And, of course, the fine print ...
If you must have a silver lining, try Frontier Airlines. Flying in Chapter 11 since last April, Frontier reported a net operating profit of $18.7 million in December. That means the Denver-based carrier might find the funding it needs to exit bankruptcy.