This week’s musings, reflections and observations about travel affiliate marketing…

1. I think that American Airlines (AA) needs to ‘wake up and smell the travel affiliate roses’.  AA just released its second quarter financials, and – surprise, surprise – they reported a net loss of $390 million.

In a prepared statement to employees, Gerard Arpey, American’s chairman and CEO, said that despite the availability of jet fuel at prices far lower than their historic highs of the previous summer, jet fuel prices remain volatile, having doubled in recent weeks since plummeting to below $34 in December.  Additionally Arpey noted that “While we have been able to keep our planes reasonably full, the competitive landscape prevented us from being able to charge fares sufficient for us to make money.”

American Airlines is addressing other challenges common throughout the industry; for example with respect to credit card fees, AA has reached an agreement with one of its credit card processors that limits the amount of the reserve the processor can hold back from American’s credit card receivables through the end of 2009.  To help improve margins, they are also seeking further reductions in their distribution costs.

Well, one way that AA could improve its margins is to change its posture on refusing to distribute through travel affiliates.  By working with the affiliate channel, AA would not only lower its distribution costs (it’s a well known fact that because affiliate marketing is performance based, it represents the lowest cost channel for any travel supplier, including the travel company’s own consumer-direct efforts), but they can also reach some traveler segments that by definition AA is unable to reach on their own.

To be fair, most of the world’s airlines are mired in the same turmoil as American Airlines, however some are faring better than others (read about the warning from Fitch Ratings regarding the possible bankruptcy filings by United Airlines, American Airlines, and US Airways in our June 29th blog post). Delta Air Lines will be reporting their second quarter results on July 22; it will be interesting to hear how Delta fared, particularly as Delta is one of a handful of U.S. carriers that does distribute through travel affiliates.

2. I think that the seemingly endless stream of downward revisions of the U.S. hospitality industry’s performance by industry analysts are unlikely to end any time soon; rather they will continue and the news will remain rather grim.

For example, take the recent estimates and projections by STR Global, one of the leading and most respected hospitality research and consulting firms in the world.  STR now says that their earlier estimates for the U.S. hospitality industry’s performance for the balance of this year were rather ‘optimistic’.  Citing heavy rate discounting as the main culprit, STR now expects revenue per available room (RevPAR) to drop 17.1% this year industry-wide, versus their previous ‘revised’ forecast which came out in April which suggested the industry’s 2009RevPAR would be down 9.8%.

In the Company’s press release announcing the new projections, STR Global’s President, Mark Lomanno said: “One of the things we felt was that the industry would hold pricing more than it’s been able to.  If you’re looking at the last downturns, a lot of the commentary that we heard from the brands and the revenue managers is that they learned their lessons in 2001-2002 and they would be able to react better the next time around.”

Lomanno added that “For whatever reason, maybe because this downturn is so severe and so dramatic and so different than they were expecting, what they learned they weren’t able to apply,” and that “Whatever the reason was or [however] it transpired that way, the decline in pricing is more dramatic than it’s ever been, more than we thought it would be, indeed more than we think it should be.”

We agree with Lomanno and STR on most of their observations, but truthfully, we’re also a bit puzzled as to why STR didn’t pick-up on the forces and trends back in April…after all, those same trends and forces were in play then, and as such, we think were pretty hard to miss or downplay.

We’re curious if any of our readers share a similar viewpoint…what are your thoughts on both the STR projections and the short-term prospects of the U.S. hospitality industry?  Drop us an email and let us know…

3. I think the U.S. tour operator industry lost a bit of its luster, when, after almost 30 years of continuous operations, Certified Vacations shut down last week.  In the Company’s press release, Michael Egan, Certified Vacations’ founder and still CEO, cited the “…current global economic conditions of the travel industry,” as the principal reason for operator’s demise.  While we agree that the sour economy had material impact on Certified, we suspect that last year’s loss of both Delta Dream Vacations and Continental Airlines Vacations private labels were the principal reasons for Certified’s shuttering.

Egan, along with fellow tour operator visionary Bill LaMacchia of Mark Travel Corporation, were among the first – and most ardent – proponents of the private-labeled vacation-package business model.  While it is fairly common today to see airlines, hotel and resort companies, and even car rental firms employing the private label model for their tour packages, back in the late 1970s and early 1980s, this concept was a rather radical idea.

Indeed, Certified Vacation’s launch in 1980 was possible only as a result of Egan’s convincing Delta’s senior management that the airline’s in-house tour brand could be better and more efficiently managed via an outsourced model.  That notion may have come around full circle, as today both the Delta and Continental tour brands are managed by MLT Vacations, the in-house tour operator for Northwest Airlines, which Delta Airlines (though its merger with Northwest) now owns.

Details about the Company’s wind-down are available on Certified Vacations’ website.  While they don’t specifically rule out a future return to the tour operator business, our sense is that this scenario is highly unlikely.  We do however wish Mike Egan (who has also been a strong supporter of the travel affiliate channel) and his team much success as they move forward with their other business, 2Go Media, which provides website sales and marketing tools and solutions to travel agents and the hospitality industry.

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