Get Ready for Higher Airfares!

Get Ready for Higher Airfares!
By Mark Murphy

Have you given any thought to next year’s vacation plans? Not your plans, but those of your clients, friends and family? Most of them don’t realize it right now, but travel is about to get a lot more expensive. That is, if they plan on flying anywhere.

With the price of oil remaining relatively high despite our current economic climate, and airline capacity being cut across the board, air travel is already quite costly today on the most popular routes. It’s about to cost a lot more.

If you thought the price of summer flights to Europe was bad this year, just wait for 2012. According to one recent survey, capacity to Europe is forecast to be cut by 5-10 percent and demand is not expected to wane anytime soon, so that will mean higher airfares.

Who is going to pay for that increase? The consumer will, of course, but there are many others who will be impacted as well. For example, land-based resorts will see occupancies drop in those destinations that are most impacted by the high cost of air travel that brings in their guests.

There is only so much elasticity in price today, meaning something is going to have to give when airlines price into the stratosphere. The resorts end up subsidizing those increased fares by dropping their yields on their rooms. The total cost of the booking is what the consumer is looking at, not just the individual components.

Unless they can swim to a particular resort, they will be flying, and they will only go so far out of pocket for any given trip. Resorts will have to brace themselves for higher airfares and find creative ways to create value at the margin without reducing the quality of the product that they deliver.

Cruise lines are in a slightly better position for two key reasons: First, they can move their ships to homeports here in the U.S., which are within driving distance of many of their customers. All of those ships now sailing out of ports like Baltimore, Boston and Charleston are due in large part to the headaches and costs associated with air travel.

Second, cruise ships can be located in foreign markets where they increasingly target local consumers in these areas, which will lead to a higher ratio of foreign to American passengers. Royal Caribbean, for example, recently reported that its passenger ratio of Americans to the rest of the world has dropped below 50 percent for the first time. That doesn’t mean cruise lines are immune to the impact of higher fares. If you looked at any European cruise last year you saw that the cruise fare was a bargain in comparison to the airfare.

Regardless of which segment might get the worst of it, yields on all other travel products will suffer to subsidize the higher airfares that are here to stay for the foreseeable future. Restaurants, taxis, attractions and other sectors of travel will also feel the economic impact.

Now I believe the industry can handle this, as it has handled every other hurdle, based on one simple law: the law of supply and demand. Eventually the airlines will price the product to a point where demand suffers as consumers change their behavior. Until that point, however, get prepared for some of the highest airfares in years.