Travel

Cautious Optimism Is In The Air For Carriers

Who wants to visit the Parthenon if the rest of Greece could be in ruins? And who wants to go to Venice and risk getting stuck at an airport closed by a cloud of volcanic ash? A vacation closer to home, say on a sultry beach on the Gulf of Mexico might be nice — if it's not covered in oil.

Airline executives have reason to be concerned about recent geopolitical and geological events as people finalize or rethink summer vacation plans. While industry experts say violence in Athens and Thailand, as well as sporadic ash-related airport shutdowns in Europe, are a concern to some travelers, the strengthening of the dollar against the euro is pumping up demand for European vacations and will more than offset the impact of those concerns.

"As long as the European Union situation results in a weakening of their currency to ours, that is a net positive for U.S. carriers," said Hunter Keay, an analyst with investment adviser Stifel Nicolaus.

Keay said U.S. airlines are poised for a profitable summer as business travel has started to come back and carriers have gained pricing power and seem to be adequately hedged against the threat of higher oil prices.

"I'm pretty bullish," said Keay, who expects double-digit revenue growth for the U.S. carriers this summer.

A stronger dollar tends to make European hotel stays and meals in European restaurants cheaper for those paying in U.S. dollars, and it makes American vacationers more inclined to fly across the Atlantic. The euro sank to a four-year low recently. As recently as November a euro fetched as much as $1.50.

"The dollar is packing more punch right now," said Rick Ardis, a travel agent in East Rutherford, N.J. "Sometimes currency exchange rates do affect demand."

The euro's drop comes amid concerns Greece could default on its debt, and that the recently announced $1 trillion European Union rescue package to prevent the sovereign debt crisis from spreading may be insufficient.

Greece's debt problems led to cuts to civil servant pay, prompting worker protests and rioting in Athens that resulted in three deaths. The violence has made some American tourists think twice about visiting that nation this summer.

Thailand may be off travelers' itineraries after anti-government protesters in Bangkok were suppressed by security forces.

The Air Transport Association, which represents the largest U.S. carriers, predicted on May 12 that its member airlines' international passenger traffic for June, July and August would increase 7 percent from a year earlier, while international and domestic traffic combined would rise by a modest 1 percent.

"We would like to see even more growth," said James May, the group's president, in a statement. "But this slight uptick in the number of air travelers is a positive sign for an economy and an industry in recovery."

Airlinefinancials.com estimates that the top nine U.S. carriers combined will post a net profit of more than $1.4 billion in the second quarter after losing $1.03 billion in the first period, generally a weak time for travel. The companies reported a combined net loss of $3.43 billion last year.

Meanwhile, the International Air Transport Association in March cut in half its 2010 loss forecast for carriers worldwide to $2.8 billion, based mainly on economic recovery in Asia and Latin America. The group forecast that North American airlines would lose $1.8 billion this year.

The international trade group said that global traffic was down by 4 percent in April because of shutdowns tied to volcanic ash over Europe and that carriers would lose an estimated $1.7 billion as a result. Sporadic airport closures have continued as the volcano in Iceland continues to spew ash, which can damage the engines of planes.

While European carriers are bearing the brunt of ash-related losses, Continental last month estimated it lost $24 million because of ash-related cancellations and disruptions. Rival Delta Air Lines put its losses as of April 20 at $20 million.

Travel agent Ardis expects ash to remain a concern throughout the summer for U.S. travelers who want to vacation in Europe because no one knows when it will stop. "It may cause them to rethink northern Europe destinations like Ireland, England and Scotland and, to a lesser degree, Scandinavia," he said.

Rick Seaney, co-founder and chief executive officer of FareCompare.com, predicts people will pay more to fly to many of the top tourist destinations in the United States this summer because of increased demand from travelers opting to avoid Europe's ash and the Gulf of Mexico oil spill.

"New York, L.A., Chicago and Vegas will see more demand than they expected," Seaney said.

Airlines have been able to raise fares on many routes this year because they have reduced the number of available seats over the past year or so and business travel has started to rebound, Seaney said.

Mary Buckley, executive vice president for the Republic of Ireland's industrial development office in New York, said she does not expect that country's debt problem to hurt trade or travel between Ireland and the United States.

The Republic of Ireland had a deficit last year that was 14.3 percent of its gross domestic product, well above the European Union's 3 percent limit. Like Greece, it has raised taxes and cut public employees' pay to try to get its deficit under the 3 percent limit by 2014, but unlike Greece has not experienced any upheaval.

The stronger dollar may help draw more foreign investment and international business travel, Buckley said.

"We haven't seen a negative impact at all," she said. "When companies are looking at locations, having a strong dollar makes it somewhat cheaper," she said. "Construction prices (in Ireland) are down nearly 30 percent in past three years. Rents are down and labor costs have decreased," she said.

Dun & Bradstreet recently announced it will open an operations center in Dublin that will employ 100 people, and car-rental company Hertz, which has been in Ireland since 1997, is planning an expansion in Dublin where it will soon employ about 900.

The ATA's May said the biggest obstacle U.S. airlines face in returning to profitability this summer may be fuel prices, which are expected to be about 20 percent higher than last summer.

Airline fuel surcharges, last seen during the record-high oil prices in 2008, are poised to return, said Clem Bason, chief executive officer of online booking agent Hotwire. Airline industry revenue has been growing at a steady clip year-to-date, but jet fuel prices are climbing just as fast and are eclipsing potential profits.

"Even as demand continues to gradually improve for air travel, we face rising fuel prices once again, which could hamper recovery efforts," May said.

For every penny increase in the cost of jet fuel, the industry pays an additional $170 million to $190 million in annual operating costs, he said.

  Comments