2007 Travel Industry Forecast

As we put away the party hats and turn our focus back to work, Travel Agent is ringing in the new year with a look at trends to expect in 2007.

According to the American Express Business Travel forecast, the costs of airfare, hotels and rental cars will increase this year by between 2 and 8 percent. But airfare to the Caribbean is dropping as more airlift to the region occurs, says Chris McGinnis, editor of Expedia Travel Watch, as noted in The San Francisco Chronicle.

It is expected that more people will book online than offline for the first time this year, but a Travel Industry Association (TIA) spokesperson says that agents who focus on the personal touch have nothing to worry about. Cruising remains robust, except for the Caribbean; however, a Caribbean product that is looking strong this year is all-inclusive resorts. Read on for the details.

Online Travel Bookings to Surpass Offline Bookings

Allen Kay, spokesperson for the TIA, says travel agents should not be worried about a recent PhoCusWright, Inc. study that projected online travel bookings will surpass offline bookings for the first time in 2007. 

Kay says the news is not surprising for any agent who has been tracking the progress of online travel bookings, noting that TIA has made several similar projections recently. 

"Travel agents have already discovered that there has been a shift in business. But you still have larger companies that do great business; they are leaving large firms and opening shop in small towns, catering personally to local clientele and demonstrating that they have experience and that they will continue to be a successful," Kay says. "The travel agents who know their business and know their customer—offer personalized customer service—will still have a place in the industry come '07, '08 and beyond." 

The report, PhoCusWright's U.S. Online Travel Overview, now in its sixth edition, analyzes the domestic leisure/unmanaged business online travel market by segment, channel and major players, projecting trends through 2008. Caribbean Pricing Down For Carnival and Royal Caribbean

After years of suppliers (e.g., airlines and hotels) outperforming online travel agencies (e.g., Expedia and Orbitz), growth rates for both channels will converge by 2008. Suppliers have enjoyed an advantage over online travel agencies due to the relatively inexpensive task of acquiring online customers from their own offline channels. This advantage, however, is disappearing, the study shows.

"It's our observation that the trend is basically that consumers are continuing to embrace online business," says Michael Cannizzaro, PhoCusWright's director of information services. "Shopping and buying online is becoming universal. They (consumers) will continue to want to transact online." 

The survey notes the growth of dynamic packaging—the ability for consumers to easily combine airline, hotel, rental car and other product purchases online—is projected to slow significantly from 51 percent growth in 2005 to 18 percent in 2008.

Also, hotels will be the fastest-growing segment online, surpassing air travel, which until 2006 had long been the fastest-growing product segment. According to the finding, "The advanced level of the U.S. online travel market creates an atmosphere in which many innovations, such as dynamic packaging, meta-search and user-generated content incubate in the U.S. before expanding to other global markets."

Many of these innovations include the new online capabilities that PhoCusWright has termed "Travel 2.0," the travel industry's application of Web 2.0 practices empowering the online consumer.

Kay, however, encourages agents to focus on local clientele, develop more personal relationships with clients and on niche markets—all ways to encourage travelers to book with an agent as opposed to online.

"We have researched this and we came up with a similar forecast so we are not surprised by this study," Kay says.

"There are some extremely popular online offerings and incredibly competitive deals. But this is still a great time for travel agents. People will shop and buy more online, but there is still a contingent of people who feel more familiar dealing with travel agents."

Cruises: Solid 2007 Except for Caribbean

Foundering Caribbean cruise pricing that reared itself in the latter part of 2006 will spill over into 2007, according to an analyst at A.G. Edwards, the St. Louis-based brokerage firm. Analyst Timothy Conder wrote in a December report that Caribbean pricing continues to modestly weaken despite a rather placid hurricane season, moderating fuel prices and the delay of the Western Hemisphere Travel Initiative. Furthermore, the upcoming wave season, which typically runs from the second week of January through March and generally accounts for 30 percent to 40 percent of the industry's annual bookings, could be downgraded to a ripple, as off-season Caribbean pricing usually is a fair barometer of wave season pricing.

Pessimism over a soft Caribbean was reflected in Carnival Corp.'s fourth quarter report, but the company, which owns 12 cruise brands, also had good news. Carnival reported that early wave season indicators, such as bookings and occupancies, were positive, especially on Caribbean cruises that exceed five days (bottoming Caribbean pricing is attributed to shorter cruises).

Carnival Corp. said that it understands that travel agents are more reluctant to sell shorter Caribbean cruises because the commissions aren't high enough. "Clearly, as prices go down, agent compensation goes down," said one Carnival executive during the company's Q4 conference call. Though citing "negative sentiment" by some travel agents, the company said it had incentives in place to motivate agents to advocate short Caribbean cruises.

While the overriding sentiment concerning the Caribbean isn't favorable, cruising elsewhere, such as in Alaska and Europe, is solid, according to the A.G. Edwards report and other analysts, such as Robert LaFleur of Susquehanna Financial Group. Most cruises outside of the Caribbean are skewed toward seasoned cruisers, who are typically more financially stable than first-time cruisers. First timers are more prone to take their maiden voyages in the Caribbean and because they may be more affected by economic factors than seasoned travelers, it is making the Caribbean a tougher sell.

Yet, the question remains as to why Caribbean pricing is down given a bustling economy and a quiescent hurricane season. A.G. Edwards said that higher interest rates and increases in gasoline prices are dampening consumer demand; also that mild Northeast weather may have lessened consumer desire to go to the Caribbean, and that experienced cruisers are tiring of the region.

All-Inclusives: Caribbean Resorts Looking Good

Going into 2007, it appeared as though cruise companies with Caribbean sailings would be occupying the catbird seat in comparison to all-inclusive resorts. After all, cruise clients weren't facing the same passport deadlines as air travelers, and fuel prices were dropping. Instead, all-inclusive resort companies are reporting strong sales for the first two quarters of 2007.

Matt Mullen

"We're looking at a very positive 2007," says Matt Mullen, senior director of sales, AMResorts. "Our advance bookings are up 15 to 18 percent for the first and second quarters of 2007 over last year."

Mullen explains that part of this success lies with AMResort's promotional push in anticipation of fallout from the Western Hemisphere Travel Initiative, which will affect travel from the U.S. to Canada, Mexico and the Caribbean. Beginning Jan. 23, U.S. passports will be required for air travelers returning from the Caribbean, Mexico and Canada, while land and cruise passengers are facing a later deadline of June 1, 2009.

In addition to the passport initiative, AMResorts was dealing with the aftermath of the 2005 hurricane season, most notably hurricanes Wilma and Katrina. "Two thousand six was a question mark in our minds," he says. "The hurricanes had their effect on people, and we really didn't know how that would impact bookings. The Mexican government did a great job in restoring Cancun and making it into an even greater destination."

According to Mullen, AMResorts' all-inclusive properties are booked at 90 percent occupancy for January, and the company is forecasting 90 percent into the year, except for shoulder seasons after Easter. "Punta Cana and the Riviera Maya are stapled into the travel agents' minds as offering great value for their clients, as well as what they bring in the way of commissions on the all-inclusive package," says Mullen. "We rely heavily on lift, and it's excellent into all our locations, including Los Cabos and Puerto Vallarta."

"We find that the booking window has been shortened going into 2007," says John Lynch, executive vice president of sales worldwide for Unique Vacations, worldwide representatives for Sandals and Beaches Resorts. "This can create confusion regarding projections into the next two quarters, although there is no significant downturn." Lynch acknowledges an increase in competition in the all-inclusive category. "But at Sandals and Beaches we feel a comfort level about our position in the all-inclusive market."

"I hate to be optimistic, but bookings are going very well," says Paula Hayes, senior vice president of sales, Club Med North America. "Our re-opened Cancun product contributed to this upswing." Hayes notes that Club Med Cancun Yucatan is currently the company's most booked family village. "Part of the increase in our figures for 2007 is our increase in price. When you move up market your prices increase," she explains. "Although our volume is also slightly up."

Hayes describes Club Med as being something of a niche product, having the only all-inclusive in the U.S.—Club Med Sandpiper in Florida—and villages all over the world. Club Med's demographic also holds up well under the exigencies of the Western Hemisphere Travel Initiative. "Even though only 27 percent of U.S. citizens have passports, we've found through our research that 80 percent of our guests from the U.S. have passports, so we're less likely to be effected by the restrictions," says Hayes. —David Eisen, Joe Pike and Mark Rogers

Airlines Cool Consolidation Talks

In December, a flurry of merger and acquisition talks blew through the airline industry, giving rise to the potential for industry-wide consolidation between such carriers as Delta Air Lines and US Airways, as well as Midwest Airlines and AirTran Airways. Rounding out the M&A discussions is speculation of merger talks between Continental Airlines and United Airlines. So far, not one consolidated carrier has materialized.

Delta has rebuffed US Airways' advances

United Airlines Corp. and Continental Airlines have yet to publicly disclose any details of their discussions. The first papers to report the potential consolidation—The New York Times and The Wall Street Journal—said specifics of the talks were not given and both papers cautioned about the uncertainty of the deal. However, the paring could be blocked by Northwest Airlines, due to a 2000 pact between Continental and Northwest that gave Northwest a "golden share" of Continental in exchange for Continental buying back some of its stock Northwest held. Northwest's stake in Continental gives the carrier the power to block any potential acquisition. Calyon Securities airline analyst Ray Neidl in a research note said a merger between Continental and United would have to satisfy "a series of operational issues as well as antitrust concerns"—the latter being a reason cited by Delta in its decline of US Airways' offer, which kicked off the merger mania in mid- November.

Delta Chief Executive Officer Gerald Grinstein said from the beginning that he was firmly against the $8.5 billion takeover bid, believing it would be difficult for a combined company to overcome internal and regulatory hurdles. On December 19, 2006, Delta formally rejected US Airway's offer, countering it with a reorganization plan to emerge from bankruptcy by the spring of 2007.

"We concluded that your proposal is structurally flawed," Grinstein that day wrote in a letter to US Airways CEO Doug Parker. "It represents an unacceptably high risk of not achieving antitrust clearance because it would harm consumers and communities due to is substantial anticompetitive effects."

Midwest Remains Independent

Meanwhile, on December 13, AirTran Holdings offered to buy rival Midwest for $290 million, the second bid in three months AirTran had made for the carrier. The first proposal on October 20 was rejected by Midwest and on December 14, Midwest Air's board stood steadfast in its original decision, declining the second merger proposal on the belief that the plan would not be in the best interests of the company, its stakeholders, employees or customers. Timothy E. Hoeksema, chairman and CEO of Midwest Air, in a statement said the board unanimously concluded that Midwest's business plan as a stand-alone company would support a "considerably better return to shareholders than AirTran's offer," adding that the carrier expects growth of more than 10 percent and higher profitability over the next three years. —Jennifer Merritt

Denver's Snow Troubles

Last Friday's forecasts called for more snowfall in Denver, which was again expected to impact travel at the city's airport as it did just before the Christmas holiday. In anticipation of complications, both Frontier Airlines and United Airlines—Frontier is based in Denver and the city serves as a major hub for United—issued guidelines for travelers and announced a waiver for those changing travel plans.

"Travel agents do have the ability to make changes to plans without any associated fees," says Robin Urbanski, a spokeswoman for United, noting that the waiver is loaded in the Apollo GDS.

Passengers traveling to, from or through Denver via Frontier or United on December 28, 2006 were not subject to standard change fees, advance purchase, day or time applications, blackouts or minimum or maximum stay requirements. Full refunds of cancelled flights are available.

For passengers who began travel after December 28, both Frontier and United made allowances for one change to travel plans without a change fee or advance purchase requirement, so long as travel is completed by January 11, 2007. Beyond that date, additional fares may apply. A rescheduled or new itinerary may be open to higher fares if it does not meet the original rules and restrictions.

Passengers forced to leave luggage behind when stranded in Denver on December 21 are having trouble connecting with their belongings. United's Urbanski advises travelers and agents to take advantage of the carrier's luggage tracking system on its web site. "What a lot of people don't know is that you can go to United.com and track your bag through the claim number," she says.

"Make sure bags are identified on the outside and the inside," advises David Castelveter, a spokesperson for the Air Transport Association. "Advise clients to put a copy of their itinerary inside, so the airline knows where they're going and how to reach them," he says. —Jennifer Merritt

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