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Airlines Buckle Up for a Descent in Overseas Travel

By Sholnn Freeman,December 11, 2008

Overseas travel is looking like another casualty of the hard economic times.

The Travel Industry Association expects 25.5 million overseas travelers to visit the United States next year, a 3 percent decline from this year. The number of visitors coming into the country had grown in the past two years mainly because of the weakened dollar. But that traffic could dry up as the dollar strengthens and recession takes hold in economies around the world, the association says.

Troubles from a prolonged downturn could ripple through the U.S. economy as travel-shy globe-trotters shun hotels, rental cars, cruise ships, even restaurants. Struggling airlines could also further reduce capacity -- cutting flights, grounding airplanes -- which could put more pressure on jobs.

The slowdown is bad news for U.S. airlines. Large U.S. carriers have been dismantling domestic hubs and cutting flights to small cities while at the same time expanding internationally -- pinning their hopes on deep-pocketed business travelers. Airlines, including United, Continental and Delta, raced to add nonstop overseas flights, offering Americans quick access to distant parts of the world.

"The international piece has been the growth story -- the only growth story over the last three or four years," said William Swelbar, a research engineer at the MIT International Center for Air Transportation. "We are starting to see an awful softness. This recession is not just a U.S. recession. It's a global recession."

The International Air Transport Association, the Geneva-based industry trade group, said earlier this week that it expects worldwide passenger air traffic to drop 3 percent in 2009, the first year-over-year decline in traffic since 2001, after the Sept. 11 terrorist attacks.

IATA said international air travel is still growing, but at a slower rate. Revenue from international routes grew 8 percent last year to $270 billion. The growth rate this year is expected to be 3 percent. International travel has grown on average by 5 percent annually over the past decade.

"We're heading into a major world recession," said Brian Pearce, IATA's chief economist. "It's causing everyone to retrench and be more cautious."

One of the biggest slumps has come in the transatlantic market. Business traffic slid in recent months, coinciding with the collapse in the financial services sector. The Asian market, which had been growing strongly, is also surprisingly weak. In October, U.S. carriers to reduced commercial flights to Asia by 5.1 percent, compared with a year ago. Capacity in Latin America, another strong sector, has also slipped in recent months.

U.S. airlines started to focus on international travel several years ago. Many were rethinking their route networks as they emerged from bankruptcy protection. The U.S. economy was growing, but they had little room to ratchet up ticket prices because of discount carriers like Southwest Airlines.

As they pushed into international markets, the airlines rolled out increasingly luxurious accommodations for business travelers who sometimes pay as much as four times what leisure travelers pay for tickets.

Even with the slowdown, airlines don't appear to be giving up on the market. Analysts say U.S. carriers still see international growth as important to their long-term health. Swelbar said part of Delta's drive for a combination with Northwest Airlines was obtaining the Asian routes held by Northwest, which has a hub at Tokyo's Narita International Airport. Swelbar called the Asian routes the "crown jewels" of the merger. Additionally, Delta last week announced it will add 15 international routes next summer, including eight to Africa.

So far, the only winners appear to be savvy world travelers are who expect prices to drop on routes the airlines once dedicated for business travelers.

Sean Fox, a 40-year-old business consultant who lives on Capitol Hill, is considering making trips next year to Hong Kong, Brazil and Argentina. He said he's staying tuned to the financial news.

"There seems to be carnage in the job market," he said last week after an especially gory government jobs report. "I think 2009 will be a great opportunity to travel."