Categorized | OP/ED

Is the Travel Industry seeing a recovery?

Posted on 20 July 2009

July 20, 2009. Southlake, TX. The federal deficit has topped $1 trillion for the first time ever and could grow to nearly $2 trillion by this fall, intensifying fears about higher interest rates, inflation and the strength of the dollar.

 

According to the June 2009 unemployment report the US has now reached 9.5% unemployment which is a 26-year high and surpasses the current Administrations forecast of 8% used in the $787 billion American Recovery and Reinvestment Act of 2009 (January ’09 Stimulus Package). An approximate 20% miss! Additionally, the Stimulus Package was supposed to increase jobs by 1-2 million and shorten the recession, however, just the opposite has occurred where over 2 million job have been lost. So much for forecasting!

 

Unemployment is but one outcome of the recession we have experienced since mid-2007. Yes, I believe we were in a recession in 2007. From a technical standpoint, one can argue we did not have a true economic recession in 2007 which can only be confirmed if GDP (Gross Domestic Product) growth is negative for a period of two or more consecutive quarters.

 

However, the roots of a recession and its true starting point actually rest in the several quarters of positive but slowing growth before the recession cycle really begins. Often in a mild recession the first quarter of negative growth is followed by slight positive growth, then negative growth returns and the recession trend continues.

 

Whereas the recession did not impact the Travel Industry in 2007, the rhetoric by those in Washington, DC during the last quarter of 2008 and early 2009 had a more devastating and lasting impact on the Industry. The criticism of lavish spending started in September 2008 when AIG, just six days removed from receiving bailout funds from the US Government, held an incentive program at a resort/spa in California. It matters not that the program was planned long in advance of AIG accepting $182.5 billion in Troubled Assets Relief Program (TARP) funding from its 80% owner…the US Government, or that cancelling the program would have cost more than actually following through with the program. The incentive program was for Independent Insurance Agents (IIA’s) who sold AIG insurance products, and who met/exceeded their previously set goals/objectives. It should be noted the IIA’s being honored were not remotely involved with the acute problems in AIG’s financial products unit, nor the firm’s exposure to subprime mortgages and credit default swaps! None the less…it was guilt by association!

 

Criticism flames were again stoked in November 2008 when AIG held another event at a luxury hotel/spa in Phoenix, AZ. The corporate excess rhetoric was intensified on November 18, 2008 when the CEO’s of the Big Three Automakers flew to the nation’s capital in private luxurious jets to make their case to Washington that the auto industry was running out of cash and needed $25 billion in taxpayer money to avoid bankruptcy.

 

This was the start of dominos which have fallen and impacted the Travel Industry. In addition, the Travel Industry waited too long to marshal the “troops” and find a spokesperson(s) whom could counteract the damage done the Industry by the same Congress who put our economy in its current malaise! Although the rhetoric has diminished, the economic impact on the Industry has not.

 

No one has published the actual number of jobs lost in the Travel Industry to date due to the unwarranted criticism/rhetoric of Congress and the Administration of lavish spending by corporations. According to the US Commerce Department, 247,000 travel related jobs will be loss in 2009. From conversations with individuals and companies in the Industry as well as those who provide product and services to the Industry…I estimate 8% of Travel related jobs will be lost in 2009. From doormen, to housekeepers, to program managers, to salespeople, to delivery people, to pilots and flight attendants, to baggage handlers, to longshoremen, this economic crisis has had an impact across the Industry and beyond. Beyond? Many small and medium size companies who are suppliers/vendors to the Travel Industry (i.e. motor coach and limo companies, florists, caterers, food purveyors, etc.) have been severely affected by the reduction and/or elimination of meetings and programs.

 

The full magnitude and impact is evidence in a 2008 Travel Industry Association (TIA) report which reflects the importance of travel in the US;

           

            Travel Generated Payroll                    $194 Billion

            Travel Generated Employment              7.7 Million    

 

While unemployment is calculated by the Bureau of Labor Statistics (BLS) within the US Government, what is not calculated are the wages and benefits which have been lost/reduced. In addition to eliminating jobs, some employers have made significant cuts (5-20%) in employees salaries, eliminated matching 401-k contributions, reduced or eliminated health benefits, providing time off without pay and/or furloughing employees in order to reduce their cost. The Travel Industry has not been immune to the these cost reduction efforts.

 

Corporate earnings are on the decline, double digit joblessness is on the horizon, wages are flat-lining, consumer confidence due to job losses is lagging, consumers have made little progress in shrinking the mountain of debt previously incurred, and those that can are saving more and spending less which will impact the goods and services sectors. Just how deep is the tangential impact of consumer debt? It could take six to eight years to payback/deleverage the $13.8 trillion in consumer debt! And interest charges continue adding to this debt bill.

 

The twin collapse of the housing and stock markets has destroyed more than $12 trillion in wealth since 2007.

 

Previously, economic indicators projected the recession easing by the second quarter 2010. However, given the new indicators we continue to hear and observe…I do not believe this timeframe is a reality.

 

Today, we hear of economists, including Nobel laureate Paul Krugman, and Warren Buffet who are recommending a second Stimulus Package in the fourth quarter of 2009 which they believe could further assist this economic malady. Unfortunately, given all these factors, we may not see a significant recovery until mid-year 2011. I am mindful there may be sporadic rays of hope along the way…such as the mid-term elections which occur in 2010 when the “spin doctors” will be out in full force.

 

Besides the Congressional optics imposed on banks receiving TARP funding, many corporate CEO’s are concerned about shareholder optics of their salaries and expenditures. Therefore, there will be continued scrutiny in boardrooms as management prepares plans for future meetings as well as employee recognition and incentive programs. Already, business travel has been curtailed considerably…just observe the routes being eliminated by the Airlines.

 

Further evidence of declining business travel is in a recent survey of 285 senior finance executives around the world, whereas 87 percent said their companies plan to spend less on business travel this year. The American Express/CFO Research Global Business & Spending Monitor found 44 percent of the executives expect their companies’ travel to decline more than 10 percent.

 

The survey did find that most companies will continue to spend on travel that could generate revenue. and predicts that clients will continue to expect a financial return on their investments in travel, even after the economic recovery.

 

Business planning in the Travel Industry requires a new paradigm as we move into 2010.

 

There is good news to report! Several banks who received TARP funding are paying it back and quickly. It seems the banks do not like/want the watchdog (or you can insert Rottweiler here) of the American taxpayer, Congress, looking over their shoulders and evaluating every expenditure they incur. Banks who accepted TARP funding undertook a “stress test”  which indicated the banking system is alive and well. Some of the banks have had to raise additional capital, and most, if not all, have done so. Lending by banks is finally underway and there are several government programs to assist small and medium enterprises (SME’s) survive during this recession.

 

According to the Mortgage Bankers Association, demand for U.S. mortgages to buy homes and refinance loans bounced from seven-month lows during the first week in July, with average 30-year borrowing rates unchanged at 5.34 percent.

 

The final analysis; The hypocrisy of it all is while the Congress and Administration believe they are doing all that can be done to boost employment…their recent rhetoric, criticism, and actions actually have had an opposite effect on those who work in and around the Travel Industry!

 

Who said this recession is not complex?

 

Doyle J. Girouard

CEO and Senior Managing Partner

The Cypress Group

email; doyle@thecypressgroup.com

Phone: 817-421-4774

 

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