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The Wall Street Journal

The Subprime Summer Vacation

By: Candace Jackson
Published: 4/26/2008Source: The Wall Street Journal

Last summer, Kevin Leibel globetrotted to Austria, Chile, Argentina and Thailand. Not this year. "This is a summer of uncertainty," says the Chapel Hill, N.C.-based research and marketing company president. "Prices are going up. Gas prices are astronomical. Traveling by air is a hassle." Instead, Mr. Leibel plans to cash in his frequent-flier miles and take his wife to Phoenix in June, when most tourists stay away because of the sweltering heat.


As families across the country plan their vacations, many are downsizing out of concern over the economy, spooked by talk of a recession, the weak value of the dollar overseas and home foreclosures. Add to that air-travel delays and the rising cost of gas, and some travelers are holding off planning, in hopes of nabbing cheap deals at the last minute.


Some resorts and tour operators are responding with discounts and other incentives to try to fill rooms. Close-to-home destinations like suburban water parks and regional resort towns say they're bracing for a spike in business as Americans look for fun things to do that don't require much travel.


At online travel agency Travelocity, researchers say they've noticed that Americans are booking shorter trips for the summer, especially for destinations overseas. The overall average length of a trip has fallen more than 5% for an overseas vacation booked on the Web site. AIG Travel Guard, a company that sells travel insurance, found in a recent survey that almost half of respondents planned to alter their vacations this year to save money. Twenty-two percent said they'd eat in less-expensive restaurants, and 17% said they'd stay closer to home.


This summer, resorts selling well are generally all-inclusives that emphasize competitive pricing and value, or those at the top end of the market that cater to the wealthiest travelers, says Donna Michaels, senior director of product development for World Travel Holdings, a distributor of cruise and vacation packages.


Atlantis, the giant Bahamian resort known for its massive water slides, dolphin excursions and shark lagoons, usually stays busy during the summer as families flock there when kids are out of school. This year, bookings are expected to be about the same as last year, says Lauren Snyder, executive vice president of global communications for Kerzner International, the resort's parent company, but they're coming in more at the last-minute. Instead of a nine-week to 12-week booking window, for example, a growing number aren't committing until four to six weeks in advance.


This summer's crunch comes after the travel industry had seen strong growth over the past couple of years, having rebounded after a significant post-9/11 slump. Hotel room rates have risen consistently since 2003, a sign of healthy travel demand. A record 212.8 million people flew last summer. But some in the travel industry aren't feeling as optimistic about coming seasons.


During a recent Southwest Airlines earnings conference call, the company's chief executive warned of a "threat of a travel recession." Although airfares have been historically low the past few years, they're expected to rise this summer in part because of fuel-cost increases. Capacity will be cut on some airlines' routes. Hotwire, a discount travel Web site that also tracks airfare trends, says average fares on many routes rose as much as 40% during spring break and the pattern will likely continue for summer.


Industry concerns are filtering overseas. With the value of the dollar against the euro near a record low, some European hotels in cities such as London and Amsterdam are offering deep discounts to draw U.S. travelers. WorldHotels, a company that does sales and marketing for more than 50 hotels in Europe, including properties such as Hotel California Paris Champs-Elys‚es and the Lindner Hotel in Berlin, have announced that U.S. passport holders can book rooms at a one-to-one euro-dollar exchange rate, which will save travelers at least 40%.


During the first quarter of this year, WorldHotels saw a 15% drop in business from Americans at their European hotels. Aside from the value of the dollar, "the American economy has really shaken people," says Tom Griffiths, the company's vice president of the Americas.


In the past few months, Suzanne Heslin, an office manager from Beaufort, S.C., has started bringing her lunch to work instead of eating out. She's still taking a Caribbean cruise in August, just like she does almost every year, but instead of getting off the boat for pricey shore excursions like snorkeling or touring a turtle farm in the Cayman Islands, she plans to mostly stay aboard ship. "We can sit and people watch," she says.


Travel agents such as Jeanne Reuter, who works for a Carlson Wagonlit in Bayside, Wis., are feeling the pinch as well. Many of her regular customers, she says, have been shortening their stays by a couple of nights this summer or downgrading by booking rooms at a midscale hotels such as Holiday Inn when they'd typically chosen upscale hotels such as Marriott. She says she's gotten more offers from hotels and tour operators of commission boosts and discounts for travelers who may be hesitant this summer.


Not everyone is concerned. Cruise companies such as Carnival say their bookings for the summer are ahead of last year's already, as travelers look for ways to lock in prices and gravitating to all-inclusive resorts and cruises, where meals are paid for ahead of time. Cruise companies and analysts say new business also is coming from people who have scrapped plans to visit Europe and stay in hotels. Instead, they're booking cruises as a cheaper alternative because they can pay in advance, in U.S. dollars.


Local attractions, like Great Wolf Lodge, a chain of indoor water park resorts that has properties all over the country, also anticipate a busy summer. John Emery, Great Wolf's CEO, says although he's noticed a slight drop in bookings in the upper Midwest near cities such as Detroit, hit hard by layoffs, there's been an uptick in summer bookings almost everywhere else. "We pick up a lot of demand when people say 'Let's do something fun, but let's keep it a little simpler this year,' " he says. As a result, the company has raised room rates instead of offering promotions and discounts.


Demand is picking up at some U.S. hotels from another source: overseas visitors. In cities such as New York, Boston and Washington, tourists taking advantage of the weak dollar are boosting business. New York had an estimated 1.8 million foreign visitors in the first quarter of this year, a 20% increase over the year-earlier period.


For Americans, however, many are cutting back in smaller ways, even staying close to home. Betty Hunter rents out her two-bedroom beachfront condo with a balcony along Alabama's Gulf Coast during the summertime. Her main market is people from Alabama and neighboring states. This year, she says, she's had to get more aggressive to make sure the condo was rented for June and July.


"I think everybody is shopping around," says the retiree who lives in Houston, Ala. She's started running specials like 10% off some weekdays. She's also had to accommodate more requests for three- and four-night stays than she did last year.


Some summer rentals areas are becoming more competitive. Celia Chen, director of housing economics for Moody's, an economic consulting firm, says markets that are a close drive to major cities, like the Jersey Shore in New Jersey, are expected to see a strong summer rental business this year. In the Hamptons, in New York, Corcoran vice president and associate broker Anja Breden says her summer rental business is up about 30% over last year.


Many travelers are still waiting to find the best deals. That's what Deana St. John is doing as she plans her weeklong vacation. Since the economy has faltered, her business as an executive recruiter for nonprofits has slowed. "I probably spend a couple hours a day reading the emails that come in from the travel companies," the Long Beach, Calif., resident says.


Ms. St. John has seen some bargains on small luxury ships that sail the Caribbean, but she hasn't booked anything yet. "I'm still looking," she says.