Magazine article EconSouth

On Land, on the Sea and in the Air: The Travel Industry after 9-11; the Travel Industry Was Particularly Hard Hit after the Sept. 11 Terrorist Attacks. Airlines, Cruise Lines and Rental Car Companies Are Each Grappling with Different Problems on the Road to Economic Recovery. (Regional Focus)

Magazine article EconSouth

On Land, on the Sea and in the Air: The Travel Industry after 9-11; the Travel Industry Was Particularly Hard Hit after the Sept. 11 Terrorist Attacks. Airlines, Cruise Lines and Rental Car Companies Are Each Grappling with Different Problems on the Road to Economic Recovery. (Regional Focus)

Article excerpt

In travel services, as in most industries in the United States, demand is largely a function of economic growth.

When output expands rapidly, businesses make more deals and executives shuttling between customers, suppliers and investors occupy a commensurately higher number of business-class airline seats. Meanwhile, consumers, flush from rising wages and burgeoning stock portfolios, fill economy-class cabins en route to multiday Caribbean cruises and other excursions. And everyone spends more time in rental car lines.

The process reverses when the economy contracts. As output falls and the number of business deals declines, business travelers take to the skies less frequently, and pressure on corporate travel budgets increases. Declining output affects leisure travelers too. As unemployment increases, jobs seem less secure and consumers take fewer and shorter trips, and they stay closer to home when they do take them.

So it was that the recession that arrived in 2001 had already begun to take a toll on the airline, cruise ship and rental car industries. With their enormous fixed costs, any decline in traffic has a particularly acute financial impact on these industries, and the year was already shaping up to be a difficult one, particularly for the airline industry. Needless to say, the shock of Sept. 11 and the substantially higher hassle factor associated with traveling after the terrorist attacks made a bad situation much worse.

But things have not been uniformly grim in the travel services industry. After a sharp post-Sept. 11 decline, cruise ship passenger boarding numbers are generally back to year-ago levels. Some smaller airlines have actually seen an increase in passengers and capacity. And the car rental industry, which has struggled for years with a severe excess-capacity problem, has been able to shed thousands of surplus vehicles.

Full fares sail away

To the extent that leisure travel spending is a function of consumer spending, demand for cruise ship berths over the last 10 years grew right along with the economy. This growth could be seen at Florida's ports, where, for example, multiday passenger traffic at the Port of Miami peaked at over 3.3 million in fiscal year 2001 (Oct. 1-Sept. 30) and at Port Canaveral, where multiday passenger traffic peaked at over 2 million in calendar year 2000.

Even allowing for this growth in demand, however, the U.S. cruise market remains largely untapped. As Mark Conroy, chairman of Cruise Lines International Association and chief executive officer of Radisson Seven Seas Cruises, has observed, only 15 percent of North Americans have ever taken a cruise. For the industry as a whole, then, this fact has meant that accommodating some part of that other 85 percent requires more and bigger ships. As a result, the cruise industry over the last decade has generally been characterized by growing capacity.

Because of the enormous fixed costs, the objective of most cruise lines is to sail every ship at 100 percent occupancy, according to Keith Cobb, a travel industry authority who served on the board of directors of Renaissance Cruise Lines and who was previously vice chairman and chief executive officer of Alamo Rent A Car Inc. Every berth on every voyage, whether it's occupied or not, carries a cost, so it makes sense to fill them with revenue-generating passengers. That way there's still an opportunity for the line to cover its costs--or earn a profit--through higher-margin revenue sources like bars, casinos, boutiques and excursions.

In the days immediately following Sept. 11, the main challenge for the cruise industry was simply getting passengers on board. The principal industry response was discounting fares. As Carnival Cruise Lines President Bob Dickinson put it recently, "When we got prices down to $399 [per person for a cruise], if people didn't want to fly [to a cruise ship port] they drove, they walked, they pogo-sticked to get on the ships. …

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