Weak dollar does not bode well for travel industry

The effect of the four C's - crude oil, currency exchange, (airline) capacity and consumer confidence.

dollar 88 (photo credit: )
dollar 88
(photo credit: )
Readers of this column have come to realize that while my disposition by nature is quite positive, my overall consensus of the travel industry is quite critical. Recently, while perusing an insightful email that a client sent me, I realized that the underlying theme was a concern for the four "C's" which may cause an upset this year as it unfolds. Industry leaders, whether they are airline executives or travel professionals, are by nature optimists. Call me pragmatic, but I'm more concerned with the four "C's" - crude oil prices, currency exchange rates, (airline) capacity and consumer confidence. Crude oil affects us all. Be it public transportation, your private vehicle or the plane that flies you across the ocean - they are all powered by fuel. Some airlines hedge their risks by purchasing oil contracts years in advance. Similar to an insurance policy, airlines which have cash reserves pay a premium to lock in the price of oil in the future. This allows them to make a firm budget with the knowledge that the largest external cost of operations - oil - will be fixed. Unfortunately, the vast majority of airlines did not have a large cash reserve, or like El Al, didn't want to borrow the funds, naively assuming that gas wouldn't top $100 per barrel. They were wrong. Barreling past the $80-$90 range, oil broke through the psychological barrier and topped $100. Adept airlines passed on the increase to the consumer with little objection, and in the short term had record profits. I've already experienced the backlash, with some customers questioning whether that long weekend in Tuscany is worth the expense. Currency exchange rates are bewildering the world. Pundits say the weaker dollar is forcing basic commodities to rocket sky high and predict that the US currency will be supplanted by the euro this century. Odds are that I won't be around at the end of this century, but suffice it to say that the weak dollar does not bode well for the travel industry. Unless you reside in the United States, where welcoming the hordes of tourists can only add to the cash registers of hotels, tourist attractions and every department store on the Lower East Side of New York, for the bulk of readers of this column, the weakened dollar's exchange rate against the shekel has no benefit. If your savings are in dollars, then the reality that all prices of air tickets originating in Israel are based in dollars offers you no solace. While Israeli airline executives chortle with glee that in shekels, the fare is much lower than 12 months ago, the fact that the dollar price is 25% more means you're paying 25% more. My British clients, though, are giddy with joy as their beloved pound is now worth twice as much as the dollar. Until the dollar gains in strength against the euro and the Japanese yen, airline prices will continue to increase. When I write about "capacity," it is in the context of airlines or, more to the point, airline seats. Delta Airlines just added a second daily flight from Tel Aviv to New York, increasing the capacity to New York by another 270 seats a day. Lufthansa has requested permission from the Israel Airport Authority to add a flight to Munich. Bottom line, Israel is seeing an increase in the capacity of airlines to dozens of cities. The airlines are making this move in reaction to increased demand. More often than not, this results in prices decreasing, but in Israel, fares magically continue to rise. P.T Barnum's axiom rings true: "A sucker is born every minute." Rather than checking out alternative options, consumers too easily are hoodwinked with the new offerings. The fourth "C" is consumer confidence. Measured in countless surveys yet impossible to scientifically gauge, this is the unknown factor. If consumers grasp that the economy is in a recession how does this influence their purchases? We know they have to buy food and water. Conversely the income of movie theatres increases as people want an escape from reality. The level of consumer confidence is less clear when it comes to travel. Do I put off that business trip because the US may be in a recession and hesitant to purchase my product? Do I not pop over to the Continent to take a break from the hustle and bustle of everyday life in Israel? The fear of a terrorist attack is in the forefront of every tourist's mind before embarking upon a trip to Israel. Whether it is rockets falling in Sderot or a massacre in a yeshiva, this factor has long been a major consideration when planning a trip to Israel. Consumer confidence is another factor in making that decision. If my job situation isn't secure, or if I've just finished my MBA and don't have a job, traveling abroad may not be my first choice if my confidence has ebbed. So with last year's record profits fading into the history books, my forecast for 2008 is a strident "C" across the board. And where I come from, a "C" is just a passing grade. Mark Feldman is the CEO of Ziontours, Jerusalem. For questions and comments, email him at mark.feldman@ziontours.co.il.