Travel: Going Nowhere Fast

-- Airlines face more multibillion-dollar losses

-- Weak demand from business travelers will drag down hotel revenue growth

Some forecasters believe the travel industry is rebounding, but U.S. airlines and hotels won't be celebrating. A weak economy, a more frugal business class, and fears about a war with Iraq will leave the U.S. travel sector limping in 2003.

Barring an invasion of Iraq, though, this year may not be as bad as the last one. U.S. airline industry losses should shrink, from more than $9 billion in 2002, to between $3 billion and $6 billion this year, says David A. Swierenga, chief economist of the Air Transport Assn. But that still means serious pain. Analyst Susan M. Donofrio of Deutsche Bank Securities Inc. thinks the nine major carriers alone will lose $3.1 billion this year, excluding one-time charges. That's about half of last year's loss, on flat revenues of $78.5 billion. Among the majors, only low-fare king Southwest Airlines Co. (LUV ) and Alaska Air Group Inc. (ALK ) are likely to turn a profit.

The year's big story will be on the cost side. Bankrupt United Airlines Inc. (UAL ) and US Airways Group Inc. (U ) are trying to slash labor costs by changing wage rates and work rules. If that succeeds, American Airlines Inc. (AMR ), Delta Air Lines Inc. (DAL ), and others will rush to match them.

In the meantime, airlines aim to reduce costs at hubs by scheduling the use of gates and employees more efficiently, freezing or cutting management wages, and eliminating paper tickets. All told, American is seeking $4 billion in annual cost savings--although it has identified only half the amount it says it needs to be competitive with such low-cost players as Southwest and JetBlue Airways Corp. (JBLU )

Rising revenues won't bail the sector out. Industrywide capacity reductions of about 3% this year should help the carriers firm up pricing by eliminating the deepest discounts. But "nobody thinks the robust revenue atmosphere we were in in '98, '99, and early 2000 is going to return--ever," says analyst Ray Neidl of Blaylock & Partners. At best, Continental Airlines (CAL ) is expecting revenue per seat per mile to rise a modest 4% to 5%.

With their fate so closely tied to the airline industry's, hotels can also expect a "disappointing rebound" this year, predicts Bjorn Hanson of PricewaterhouseCoopers. Business travel will remain weak, even as the hotel room supply grows slightly.

As a result, he forecasts, the hotel occupancy rate will creep up only a smidgen. It will rise to 60% this year, up from 59.3% in 2002, which was the industry's worst performance in 31 years. Revenue per available room should climb 2.1%--assuming there is no war in Iraq--after falling nearly 3% in 2002. Overall, industry pretax profits are likely to grow 5.3%, to $16.9 billion, on revenues of $113 billion, up 3.4% from 2002.

Some travel managers are pressing for deeper rate cuts by concentrating their business among fewer hotels. That helps explain why Cendant Corp.'s (CD ) hotel group, which franchises such brands as Ramada and Howard Johnson, is striving to maintain customer loyalty and boost market share. Last year, it started "Project Restore," an attempt to weed out 200 underperforming properties from its 6,000. This year, it will roll out a loyalty program. In short, the customer is now king. And any hotel company or airline that overlooks this axiom might find itself banished.

By Wendy Zellner in Dallas

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