Tourists Are Packing Their Bags Again

Across Europe, the travel industry sees signs of sunnier days

Michael Frenzel is breathing a bit easier these days. On June 18, the chief executive of German travel company TUI told shareholders gathered in Hanover for the company's annual meeting that bookings in June were down 10.7% from a year ago. Most years, shareholders would thrash a CEO who reported such dismal results. Not this year, which started out as one of the worst in decades for Europe's travel industry as tourists stayed home, spooked by the war in Iraq, fears over SARS, and economic stagnation. TUI's June numbers were up from the beginning of May, when sales were 15.2% below the year-earlier level. That's one of numerous signs that Europe's tourism industry may have hit bottom. "I am absolutely convinced that the positive developments of recent weeks will continue," said Frenzel, who runs Europe's biggest tourism group, with $23.3 billion in sales.

The signs of a travel uptick are tentative but promising. Lufthansa registered a slight rise in passengers in May from the year before. Thomas Cook, Europe's second-largest tourism company, based in the Frankfurt suburb of Oberursel, says bookings are up 8% since major fighting ended in Iraq. And Paris-based Club Med eked out a first-half operating profit of $14 million, vs. a $5 million loss the previous year.

Tourists are returning to Europe, though not in the droves of years past. Germany, Italy, Spain, and Britain all greeted more visitors in the first four months of 2003, says the World Tourism Organization, which expects the trend to accelerate. France is seeing fewer foreign tourists, but the Transport Ministry is forecasting a 2% increase for the full year. France's opposition to the Iraq war has kept some Americans away, says François Delahaye, director of Paris' luxury hotel Plaza Athénée. To lure them back, he is planning a July publicity tour in New York to "tell Americans that we love them."

Concerns about security may trump politics, though. Britain, a staunch American ally, saw a 12% drop in U.S. arrivals in the first four months of 2003. But that was more than offset by a surge in visitors from other European countries, who are largely responsible for the overall improvement in the European tourism industry.

You don't have to be a travel agent to be rooting for a recovery. Tourism accounts for 12% of gross domestic product in the European Union and some 20 million jobs. Because tourism is highly discretionary, it's a good barometer of consumer sentiment. Gordon Hunter, a 44-year-old British accountant, wishes the economy were stronger, but that didn't stop him from traveling to France this summer. "This is a family trip, so we will enjoy it," said Hunter as he strolled the Champs Elysées.

Still, it's clear that the industry won't emerge unscathed from the crisis of the past two years. Budget airlines such as Ryanair and easyJet profited from travelers' heightened price-consciousness. That's a continuing threat to carriers such as British Airways (BAB ) PLC or Swiss International Air Lines. Package-tour operators are also having to swallow price cuts. The average cost of a Thomas Cook nine-day vacation fell to $711 in the first half from $734 the year before.

What's more, the downturn has raised questions about the soup-to-nuts business model of such companies as TUI, Thomas Cook, and Club Med. Their goal is to own the whole vacation. TUI customers, for example, get travel advice from one of the company's 3,700 travel agents, fly to their destinations aboard its fleet of 90 planes, and sleep in one of its 150,000 hotel beds. The strategy protected TUI from shortages of rooms and airplane seats during peak travel times.

But when the market slumped, TUI was stuck with tons of excess capacity. Losses for the traditionally weak first quarter widened to $110 million in 2003, from $95 million the previous year. Analysts expect TUI to post a modest profit for the full year, only because of asset disposals. "It's too early to say the business model is outdated, but the climate has become more difficult," says Nils Lesser, an analyst at HSBC Trinkaus & Burkhardt in Dusseldorf. Clearly, it'll still be a while before travel industry executives can afford to spend a day at the beach.

By Jack Ewing in Frankfurt, with bureau reports

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