Travel: Folks Are Finally Packing Their Bags

>>The rebounding U.S. economy is already fueling a modest turnaround
>>Airlines will need to keep finding ways to cut costs and avoid overcapacity

Coming off of terrorism fears, recession, war, and the SARS epidemic, it's small wonder the travel industry is emerging from 2003 as limp as a passenger staggering off the red-eye from Bangkok. The solace? Better times for airlines, hotels, and car rental companies are ahead. "I'm looking forward to 2004 more than any other year in a long time," says Henry C. Joyner, senior vice-president of planning at American Airlines Inc. (AMR )

Barring new disasters, the major airlines should see at least a modest turnaround. Analyst Susan Donofrio of Deutsche Bank Securities Inc. (DB )expects the nine biggest U.S. carriers to eke out a net profit, excluding special charges, of about $123 million in 2004. That's a relief after 2003's $5.1 billion loss -- and the big carriers' three-year, $16 billion red-ink spill.

Already, the improving economy is boosting business and leisure travel. But trouble might loom if airlines significantly increase capacity, adding pressure on fares at a time when business passengers are more price-sensitive than ever. For consumers, this means a 1% to 2% hike in domestic economy fares, predicts American Express (AXP ) Global Consulting Services. "Pricing will remain fairly soft, but [airlines] will be flying more planes and filling them up, so there will be some revenue and earnings improvement," says Standard & Poor's (MHP ) Philip Baggaley.

Industrywide capacity is expected to grow nearly 7%, after three years in which the total of seat miles flown contracted by 8%. Regional affiliates of the network airlines and low-cost carriers like Southwest Airlines Co. (LUV ) and JetBlue Airways Corp. (JBLU ) are poised to grow the fastest. Expansion by the network carriers is expected to be relatively low-cost and low-risk, as they fly planes more hours per day or bring planes back from storage. American will add seats to some of its planes, at the expense of legroom, to expand capacity while trimming the fleet.

Even with a recovery, the airlines cannot relax in their high-stakes struggle to cut costs. In the face of encroaching low-fare competition, Delta Air Lines Inc. (DAL ) and Northwest Airlines Corp. (NWAC ) are still wrangling for wage cuts and other labor concessions. Continental Airlines Inc. (CAL ) is looking to technology for some of its hoped-for $500 million in annual savings in '04. For example, it's banking on wireless bag tracking and Web-based passenger check-in systems. But savings through tech will be partly offset by rising health-care costs and airport fees. And even a slight rise in fuel prices this year could turn the industry's shaky profits into losses.

Higher Demand

The economic recovery will likely delay consolidation among the so-called legacy carriers. Even struggling US Airways Group Inc (UAIR )., which will soon face Southwest at its Philadelphia hub, is not in imminent financial peril, says Baggaley. United should emerge from Chapter 11 this year, helped by federal loan guarantees and some form of pension relief.

The hotel and car-rental industries also expect a boost in demand. But don't look for prices to soar. Travelers can expect "slight price increases across all products," says Rick Weber, vice-president of business travel services for online travel company Orbitz. Budget players in cars and hotels will help keep rates in check, and customers can easily find the discounts online. For hotels, one key to improving their results will be better managing the mix of business "rather than just looking for opportunities to increase prices," says Ted Teng, president of Wyndham International Inc. (WBR )

Hotel-industry revenues should climb 6% this year, to $121 billion, according to PricewaterhouseCoopers' Bjorn Hanson. He also expects profits to jump 16%, to $15.8 billion. If so, it will be the first increase since 2001. But he worries that hotels might add capacity too quickly -- with construction this year and next pegged at nearly double the rate after the 1991 downturn. For now, though, travel players are looking forward to a long-awaited recovery.

By Wendy Zellner in Dallas

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