Airline woes pinch Arizona tourism

PHOENIX -- Airline flight cuts and higher airfares this fall will bring fewer visitors to Arizona, delivering a punishing one-two punch to the state's limping economy.

In Phoenix, more than 1 of 10 flights are gone from a year ago. Nearly 70 daily departures have disappeared from Sky Harbor International Airport's schedule, the equivalent of losing service from almost every major airline except US Airways and Southwest.

Fewer seats for sale means airlines can charge more. Tickets for Phoenix flights departing in October are up an average 28% from a year ago, according to Farecast.live.com. Flights to Boston and Chicago are each up 50%.

In a tourism hotbed where the majority of visitors arrive by plane, fewer flights and higher fares mean fewer customers for hotels, restaurants, spas and golf courses.

At risk: A substantial slice of $19 billion in annual visitor spending in Arizona.

This comes after months of reduced numbers in hotel occupancy and airport traffic as people struggle with a plunging stock market, the housing meltdown and other economic woes.

"We know we're in for a period of some rough times," said Steve Moore, chief executive officer of the Greater Phoenix Convention and Visitors Bureau.

The fuel factor

Airlines are trying to find their footing against soaring fuel prices. When oil was near its peak of $147 a barrel this summer, US Airways said its fuel bill was running $2 billion a year higher.

The flight cutbacks, which began after Labor Day, are designed to cut airlines costs and force fares higher. The size of the cuts vary by airline and airport, with a handful of carriers slashing 10% or more of their U.S. seats this fall.

The cutbacks after the Sept. 11 terrorist attacks were deeper but temporary. Most airlines' flight schedules returned to normal within months.

US Airways CEO Doug Parker said these flight reductions are permanent as the industry adjusts to the likely reality of permanently higher oil prices. Prices have retreated below $100 since summer, but the airline's fuel bill is still running $1.6 billion higher than a year ago.

The fallout for Phoenix, where US Airways is the busiest carrier: 11% fewer seats overall, slightly above the national average for airports.

The city is losing non-stop service to a handful of destinations, including Birmingham, Ala.; Little Rock; Eugene, Ore.; and Cedar City, Utah.

The bulk of the cuts are in the frequency of flights between cities. It will still be possible to fly to most places, but with fewer choices and higher fares.

US Airways dropped six daily flights to Las Vegas, four to San Diego and three to Tucson. Southwest, whose cutbacks are about half the norm in Phoenix, also trimmed flights to Vegas and other cities in addition to dropping Birmingham and Little Rock.

Airport impact

Sky Harbor traffic, already down each month this year but one, is projected to sink.

By the end of 2009, airport officials see passenger totals down 10 to 15% from last year's peak of 21 million round-trip passengers.

That's 2.1 million to 3.2 million fewer passengers, a mix of local passengers who won't grab a magazine before their flight, connecting passengers who won't ring up a food and bar tab and, most important, visitors who won't hop in a rental car and head for a Valley resort.

Ripple effects

The impact of fewer visitors, or visitors who stay for shorter periods, can cascade across the economy. Grand Canyon attractions, resorts and restaurants, and those who do business with them all would feel a pinch.

"Just about every business trickles down somewhat from that tourism and business travel," said Rachel Sacco, chief executive officer of the Scottsdale Convention and Visitors Bureau. "That's why this is such an important conversation and important concern."

Sacco worries about hotel occupancy, retail sales, weaker small businesses that might not last through peak season and her marketing budget for next year.

No one is pushing the panic button.

Phoenix still has nearly 550 daily departures, frequent flights to top destinations and healthy fare competition between US Airways and Southwest that could help keep fare increases down.

Other cities have lost a higher percentage of flights.

Tucson has lost about one-fifth of its airline seats, ranking it 11th nationally in terms of percentage of flights dropped, according to an analysis by consulting firm LECG. The city has gone from a peak of 89 daily departures last year to 66 and is left without non-stop service to the East Coast beyond Atlanta.

Las Vegas, target of US Airways' largest cutbacks, is down about 15%.

Hawaii, which lost service from two airlines earlier this year, has two islands at the top of the list, each having lost nearly a third of its flights.

Still, Phoenix is more vulnerable than many cities to airline-service cutbacks because it's a tourist and convention destination reached primarily by air. Unlike New York City, Boston, Chicago and other big cities, most visitors do not drive or take a train to Phoenix.

PKF Hospitality Research listed Phoenix, Miami, Orlando and Denver among the cities that have seen the most significant relationship between flight cuts and hotel demand.

It's not unlike after 9/11, when Arizona was one of just a dozen states pegged as sustaining a negative blow because of its above-average dependence on tourism.

That dependence has inched up since then, according to Moody's Economy.com.

Tourism matters here, accounting for 4.23% of the state's economic output, compared with 3.56% for the United States. In Greater Phoenix, the total is even higher: 4.37%.

Construction, real estate and high tech may represent larger pieces of the state economy, but drops in tourism will be felt.

That's why the unfolding airline changes are a big concern.

"I think everybody's now just getting their arms around it," said Robert Hayward of Phoenix hospitality consulting firm Warnick & Co. "The industry as a whole is going to be watching that very closely over the next several months as the cuts start to take place."

Already this year, several negative trends have been detected:

• Hotel occupancy in Greater Phoenix is down 9% year to date through July, the worst performance of a major market in the country, according to Smith Travel Research. Demand is down 6.3% while room supply is up 3.2%.

And more rooms are on the way, including the 1,000-room Sheraton opening next week in downtown Phoenix, the W Hotel that opened earlier this month in Scottsdale and the InterContinental Montelucia Resort in Paradise Valley due to open by the end of the year.

• Taxable sales at hotels and motels in Arizona were down 3% from January to July, and car rental revenue is flat, according to the Arizona Department of Revenue.

• Airport traffic has fallen every month this year but February, the month in which Glendale hosted the NFL's Super Bowl. The declines accelerated in June and July, with traffic down 6.2% and 6.4%, respectively, from the previous year.

• Sales at Sky Harbor restaurants and retailers are down 5% through July.

Cuts and deals

No one is sitting still.

Sky Harbor has cut $8 million out of its operating budget, shelved projects such as a $13 million taxiway repaving and frozen 121 positions.

Hotels, resorts, golf courses and tourism promoters are watching every penny, trying to stretch their tight marketing budgets. Some have laid off workers or cut shifts.

One money-saving marketing tactic is to zero in on loyal customers rather than cast about for new ones. The Scottsdale Convention and Visitors Bureau has scrapped plans to advertise in new markets to focus on tried-and-true East Coast and Midwest markets.

"We're definitely focusing on who brought us to the dance," the bureau's Sacco said.

Another strategy: tout hotel deals. To fill rooms left empty by the travel slump, hotels and resorts throughout Phoenix and other cities are discounting rates and offering spending money, a free night and other money-saving deals.

"What we need to be doing is show people how they save money on the ground to offset the (airfare) sticker shock," Moore of the Phoenix bureau said. "The visitor industry needs to demonstrate the value of this destination."

Slow recovery?

It's unclear when it will all shake out. Sky Harbor Airport says it expects traffic to start climbing again in 2010, though not regaining last year's levels until a few years after that.

Airlines apparently aren't done shrinking, either. US Airways' Parker and Wall Street analysts this summer repeatedly said the fall flight cuts wouldn't be enough to get fares where they needed to be for them to break even.

But oil prices have fallen nearly $50 a barrel since then. Airlines are talking about being profitable in 2009, leading some to hope for a reprieve, or at least for fares to stabilize.

Even at $100 a barrel, however, oil is higher than it was at the start of the year and more than double the price of just a few years ago.

Said Hayward, the hospitality consultant: "Airlines may find this is where they need to stay."