27 August 2008

Winter is coming early - September 2nd

So we are in the last week of the US summer and the first week of "un" summer in Europe. As people head back to work from their summer vacations. BBQs will be put away, Swimming Pools closed for the season. etc etc

For the travel industry as a whole this marks the first few days of a different world. A world where planned cuts are going to amount to at least a 5% global drop in flight capacity and probably a drop of 15+% in the world's largest market - the USA.

This is a pretty significant loss any way you present or try to spin it.

We recently reviewed all the cuts that have been announced so far in the airline market and then we looked at the impact. We have examined the likely changes that will occur within the airline sector both in the US and other worldwide markets. Its going to be sobering.

So far our assessment is as follows: (this is just a headline - we have lots of empirical data).

A) We don't think the cuts in aircraft have been fully reflected in the number of staff cuts. Even accounting for more efficient use of the remaining aircraft - there is still a significant amount of human resource cost that has not been removed from the equation. We believe therefore that there will be further redundancies and shedding of labour from all levels of an airline. Some more than others.

B) Accommodation needs to ratchet back capacity and costs. We believe that there is not enough cost and reduction in capacity in the accommodation market to mirror the reductions in airline capacity cuts. Further we believe that there are certain sectors who will be disproportionally affected. Specifically at the mid-upper segment of the market which has now a surplus of capacity.

C) Selected markets will be adversely affected. We are already seeing cuts in key markets which will feel a disproportionate impact. Specifically - we believe that Las Vegas will feel a greater degree of chill. Key markets like Los Angeles will show dramatic reductions.

D) Some vendors will be affected far greater than others. Again specifically those who are tied to declining sectors or dependent on declining suppliers. Steer clear of United in Denver for example.

E) We will see some more failures. The big 7 carriers have all made strong efforts earlier this year to reduce their operations, some more successfully than others.

Now it is time to see if the impact will be positive. Let's pay attention in the next few months to the key indicators. Passenger count, Load Factors and Yield.

Good luck everyone - this is going to be a rough ride.

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