Travel: flying into trouble?

The travel industry is currently dealing with a number of significant challenges:

• Energy prices: High oil prices have affected fuel costs. While hedging means that many companies have yet to feel the full effects of record oil prices, a number of airlines, including British Airways and Virgin Atlantic, have increased the fuel surcharges they charge passengers.
• Shallow pockets: The credit crunch and economic slowdown, particularly in the United States, have affected many people's disposable incomes, meaning that discretionary spending is starting to fall.
• Weak currencies: The weak dollar, and a weakening pound, means that it is becoming more expensive for residents of the United States and United Kingdom to travel abroad.

Air travel: dropping like flies

One obvious victim is air travel, which has also had to cope with rising airport and landing fees. Some 24 airlines have failed so far this year, and International Air Transport Association (IATA) Director General Giovanni Bisignani expects more to follow.

• Business-class bombs: Relatively expensive business class-only carriers have been particularly affected, such as MAXJet and EOS.
• Vulnerable no-frills: Many budget airlines are also vulnerable because fuel accounts for around 30% of costs; while major Irish low cost carrier Ryanair claims its operations are efficient enough to allow it to withstand high fuel costs, it has announced it is grounding up to 20 of its aircraft over the relatively lean winter period.

While at least one low-cost carrier, Hong Kong-based Oasis, has already fallen victim to current conditions, others in this section of the market, such as Ryanair and the other low-cost giant, UK carrier Easyjet, are relatively well placed to withstand difficulties.  A large proportion of these companies' customers are discretionary travellers, but they are likely to pick up increasing numbers of business travellers -- particularly in the case of Easyjet, which flies between major airports and offers relatively flexible fares that are clearly pitched at the business market. 

Cheap flights over?

Yet the era of extremely cheap flights may be over, at least for the foreseeable future:

• Passengers are likely to face additional charges for services such as checking-in luggage and priority boarding, and existing charges may well also be raised.  The number of very low fares on each flight may also be cut.
• Fewer aircraft in service could well mean that the range of destinations budget airlines offer will be cut.

Tour companies: recession proof?

The effect of economic slowdown on other parts of the travel market is less clear.  Major tour operators such as UK travel agency Thomas Cook have insisted they are well placed to withstand current conditions, because even when economic conditions are challenging, consumers are unwilling to forego foreign holidays.  Figures for the first half of this year for Thomas Cook and other major UK operators suggest that they remain in a strong position.

Nonetheless, this does not mean that their current strength can be maintained:

• Most major operators, like airlines, have been able to avoid the worst effects of rising fuel prices by hedging.  This means that, unless oil prices fall significantly, they will face much more challenging operating conditions and expenses next year.
• Travel demand tends to lag overall consumer spending by around six to twelve months.  This means that, as the effects of high fuel prices start biting, consumer demand for travel services may be begin to drop.