Hitting the road in 2011

Ah, January. It is again time to pull out my crystal ball and gaze into the future, offering my best predictions on what the next year will bring the travel industry.

Before we start on our best guesses for 2011 we have to review how we did with my predictions for 2010. Last year we made only eleven predictions and we were “basically” correct on all eleven. We based last year’s guesses on the foundation of weak economic growth, high unemployment, and a hope that fuel would remain below $85 per barrel. We were correct about weak economic growth and high unemployment. And fuel remained between $75 and $85 until the fourth quarter.

This year we base our predictions on several factors. We think the absolute lowest unemployment can be by yearend is 8.5 percent. We think the price of a barrel of oil will continue to increase and could easily top $100 during the year. We think if the GDP grows by more than 3.5 percent annually it will have been a good year. We see signs of positive growth in some areas, but signs of continued weakness in others. Many “experts” predict more problems for the housing industry and say we have not yet reached the bottom. If any (or several) other European countries need financial assistance, it could cause major problems for the Euro as a currency and the worldwide economy.

Now, with these fun thoughts in mind, here is what we think might happen this year:

• There is no question it will cost more to travel in 2011 than it has cost to travel in any of the past three years. (See the current fare sale above and take advantage now for your travel in the first quarter!)
• The airline industry will report a profit in 2010. It is estimated to be a 2.7 percent profit. Profit estimates for 2011 are expected to be less, in the 1 percent-2 percent range. (See more comments on airline profit below.)
• Demand for airline seats will be higher in 2011 as the economy continues to slowly improve. It is our guess that base airfares could rise more than 10 percent if fuel costs and demand both continue to increase.
• Base airfares are fares without the cost of any additional fees. When base fares are added to additional fees, the real increase could be between 10 percent and 20 percent. New additional fees could be in the form of fuel surcharges. Delta’s CEO has said he would like to see fuel surcharges for domestic flights in 2011.
• The airline that has the greatest percentage of its fuel hedged at the best price will be the most profitable in 2011.
• There is no question the airlines are now addicted to fees. With the exception of a domestic fuel surcharge fee, it is hard to believe they can think up any new fees. But you can bet your last upgrade the fee amounts will increase if demand continues to increase.
• The only other fee we can think of is a “Membership into a Club Fee”. This membership would allow you to prepay your favorite airline a set amount that will make the fees you were going to pay less.
• Airlines will be committed to not increasing the number of seats they put into the air in 2011. By limiting supply, airlines can keep prices from decreasing. (We saw a $20 per roundtrip increase last week.)
• Hotels are seeing increases in demand as well. Hotels have been a bargain since late 2008. They will still be economical, but more expensive in 2011.
• Car companies have raised prices faster than the airlines or hotels. We think this trend will continue.
• We expect to see more start-up carriers show up. The climate is right for new carriers. There is a lot of investment capital sitting on the sidelines just looking for an investment, and the price of capital remains at historic lows. Fares are increasing, used planes are inexpensive, and the combination of major carriers not expanding while demand increases is making some markets around the country underserved. And, for some strange reason, investors love to gamble on the airline industry.
• This year is sure to bring labor problems, both here in the U.S. and worldwide. The airlines will make a collective profit for 2010. The amount of return on investment is still very poor, but a small profit is much better than a large loss. With any profits you can expect unions to want some of their benefits and pay cuts to be restored. Management will say no and this could lead to skirmishes.
• We think airline mergers will continue in 2011. American, USAir, JetBlue, Alaska and Frontier will all be looking for partners. We recently shared with you the wild rumor of USAir buying American. Our guess is there will be many wild rumors this year with some of them actually coming true.
• The United and Continental merger will be completed this year and the two carriers will officially operate as one. We have high hopes for this combination and think UA/CO will become the leading airline in the industry if they can manage to handle the details of merging well. We are most impressed with the management of the new carrier.
• Southwest will complete its purchase of AirTran and then you can expect to see a real fight commence that will take a couple of years to complete. At stake is who will dominate Atlanta and the battle will spill over to the entire U.S. domestic market. I would pay good money to watch this knock-down-drag-out battle that is sure to be highly interesting.
• We have no idea what this year will bring for Frontier in Denver. They seem to be comfortable with their spot in Denver. We are just not sure being between United and Southwest is a comfortable spot.
• There is a battle raging between American Airlines and online travel agencies. As of January 3, 2011 you can no longer book an American flight through Orbitz or Expedia. As with most battles, it involves money. We do think this battle is just getting started and will go on throughout 2011. This battle does not affect our ability to book you on American, or to compare American fares to everyone else. I think it offers just one more reason to use a real brick and mortar travel agency!

What is your best prediction for 2011? We would love to hear your thoughts!
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Robert Polk is CEO of Polk Majestic Travel Group, Denver’s largest independent travel agency. He welcomes your comments at Robert@polkmajestic.com and invites you to stay informed by subscribing to his weekly travel industry newsletter at www.polkmajestic.com.