September 15, 2008

Turbulence Ahead Travel Industry Needs Period of Stability

ANYONE contemplating booking a holiday in the near future will find their visions of idyllic resorts blotted out by the images of angry and disappointed holiday-makers prevented from getting to their destination by the collapse of an airline or travel company. The collapse of XL Leisure, the UK's third largest tour operator, hard on the heels of the package holiday company Seguro Travel, which used Prestwick as a base, and Scotland's low-cost transatlantic carrier, Zoom Airlines, has brought home to British travellers the hard reality of the turbulence ahead for the aviation business. These are merely the latest and nearest casualties in a series of collapses brought about by soaring fuel prices, the end of hedging contracts on price and overcapacity in a competitive market, and are expected to be harbingers of further airline bankruptcies. While the major airlines and holiday companies may receive an initial boost from the scramble to accommodate passengers already booked on the defunct carriers, that is likely to be cancelled out in the longer term as people adjust their budgets to accommodate higher food and fuel prices and delay booking holidays. That will now be compounded by concerns about the stability of travel companies.

The smallest airlines working on the tightest margins are particularly vulnerable and, although the major lowcost carriers such as Ryanair and easyJet are expected to survive, that will be as a result of cutting services (Ryanair has already announced a reduced winter programme).

Whether the low-cost flights which produced a boom in holiday travel, weekend breaks and the number of Britons buying holiday homes abroad will come to an end or suffer a shortterm blip remains to be seen, but the prize in the aviation industry now is stability. Even the major players are moving towards mergers and consolidation as they try to secure market share and optimum capacity for their aircraft. The proposed tie-up between British Airways, American Airlines and the Spanish airline, Iberia, the highest profile example to date, has provoked cries of "foul" from Richard Branson, who is complaining that his Virgin Atlantic and other smaller carriers will be unable to compete with this international alliance. BA counters that the joint operation will benefit passengers by providing discounted fares and better connections.

In general terms, consumers tend to benefit from genuine competition. However, price wars are usually won by the contestant who can absorb the short-term losses. With household names such as Iberia and Alitalia making a loss, the strongest players are seizing the opportunity to consolidate their position by providing a lifeline to ailing competitors. As well as the possible BA-AA deal with Iberia, German airline Lufthansa is in talks to buy Scandinavia's loss-making SAS, and even the anti-consolidation Mr Branson has said he would be interested if bmi came up for sale.

For the consumer, the immediate benefit of increased stability will be attractive compared with the chaos caused by airlines folding leaving passengers stranded at airports, but there will be a limit to how much they are willing to pay. The price of oil has come down, much will depend on whether that continues and how it translates into the cost of jet fuel and how many potential travellers opt to stay at home.

Originally published by Newsquest Media Group.

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