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In travel services, as in most industries in the United States, demand is largely a function of economic growth.

When output expands rapidly, businesses make more deals and executives shuttling between customers, suppliers and investors occupy a commensurately higher number of business-class airline seats. Meanwhile, consumers, flush from rising wages and burgeoning stock portfolios, fill economy-class cabins en route to multiday Caribbean cruises and other excursions. And everyone spends more time in rental car lines.

The process reverses when the economy contracts. As output falls and the number of business deals declines, business travelers take to the skies less frequently, and pressure on corporate travel budgets increases. Declining output affects leisure travelers too. As unemployment increases, jobs seem less secure and consumers take fewer and shorter trips, and they stay closer to home when they do take them.

So it was that the recession that arrived in 2001 had already begun to take a toll on the airline, cruise ship and rental car industries. With their enormous fixed costs, any decline in traffic has a particularly acute financial impact on these industries, and the year was already shaping up to be a difficult one, particularly for the airline industry. Needless to say, the shock of Sept. 11 and the substantially higher hassle factor associated with traveling after the terrorist attacks made a bad situation much worse.

But things have not been uniformly grim in the travel services industry. After a sharp post-Sept. 11 decline, cruise ship passenger boarding numbers are generally back to year-ago levels. Some smaller airlines have actually seen an increase in passengers and capacity. And the car rental industry, which has struggled for years with a severe excess-capacity problem, has been able to shed thousands of surplus vehicles.

Full fares sail away

To the extent that leisure travel spending is a function of consumer spending, demand for cruise ship berths over the last 10 years grew right along with the economy. This growth could be seen at Florida's ports, where, for example, multiday passenger traffic at the Port of Miami peaked at over 3.3 million in fiscal year 2001 (Oct. 1-Sept. 30) and at Port Canaveral, where multiday passenger traffic peaked at over 2 million in calendar year 2000.

Even allowing for this growth in demand, however, the U.S. cruise market remains largely untapped. As Mark Conroy, chairman of Cruise Lines International Association and chief executive officer of Radisson Seven Seas Cruises, has observed, only 15 percent of North Americans have ever taken a cruise. For the industry as a whole, then, this fact has meant that accommodating some part of that other 85 percent requires more and bigger ships. As a result, the cruise industry over the last decade has generally been characterized by growing capacity.

Because of the enormous fixed costs, the objective of most cruise lines is to sail every ship at 100 percent occupancy, according to Keith Cobb, a travel industry authority who served on the board of directors of Renaissance Cruise Lines and who was previously vice chairman and chief executive officer of Alamo Rent A Car Inc. Every berth on every voyage, whether it's occupied or not, carries a cost, so it makes sense to fill them with revenue-generating passengers. That way there's still an opportunity for the line to cover its costs--or earn a profit--through higher-margin revenue sources like bars, casinos, boutiques and excursions.

In the days immediately following Sept. 11, the main challenge for the cruise industry was simply getting passengers on board. The principal industry response was discounting fares. As Carnival Cruise Lines President Bob Dickinson put it recently, "When we got prices down to $399 [per person for a cruise], if people didn't want to fly [to a cruise ship port] they drove, they walked, they pogo-sticked to get on the ships." According to Cobb, the premium lines Crystal and Silver Star, in an effort to protect their brands, did not reduce rates. But it was the response of choice for nearly every other cruise line.

And it seems to have worked thus far. Cobb says cruise traffic was back to normal levels within 60 days of Sept. 11, and traffic figures from Florida's major cruise ports back him up. Multiday passenger numbers for the fiscal year to date at the Port of Miami and Port Everglades are just about equal to fiscal year 2001 to date, and cruise traffic at Port Canaveral hit its highest level ever in the first three months of 2002. Reservations during the industry's critical peak booking time, or "wave" period, in January were strong as well. At Carnival Cruise Lines, for example, bookings during the first five weeks of wave season were 8 percent higher than in the same period last year. As for rates, Cobb says the cruise industry began to rebuild its price structure in January, and executives say rates are approaching their pre-Sept. 11 levels.

On a wing and a prayer

For the airline industry, 2001 began with a difficult national economic climate. Falling demand and revenue, high fixed costs and--at some companies--labor turmoil combined to place many airlines' balance sheets under considerable strain. The Sept. 11 attacks, of course, made a bad situation much worse, with the temporary grounding of the nation's civil aviation fleet, the establishment of costly new operational and security standards, and the ongoing reluctance of many travelers to return to the skies.

The financial distress prompted airlines to press Congress and the Bush Administration to enact the Air Transportation Safety and System Stabilization Act, which, among other things, provided $5 billion in cash aid and established the Air Transportation Stabilization Board to administer $10 billion in loan guarantees to the industry. Even with the financial assistance, however, the industry incurred losses of $6 billion in 2001, making it the worst year in commercial aviation history.

Like cruise lines, the airline industry responded to plunging post--Sept. 11 traffic by cutting fares. A $75 New York--Atlanta round-trip ticket, offered by several carriers, was commonplace. To reduce costs, airlines began by paring schedules. At every major U.S. airline last year, available seat miles (ASM), a measure of capacity derived by multiplying the total number of miles flown by the total number of seats available, declined. Capacity reduction had implications for personnel too. At Delta, for example, staffing was reduced by around 15-19 percent in 2001, a level typical of layoffs at other airlines.

The bad news has continued for most major airlines in 2002. With the exception of Southwest Airlines, whose profit was 82 percent lower than in the previous year's period, every major carrier posted a loss in the first quarter of 2002, with lower revenue passenger miles (RPM) and fewer available seat miles. In April, America West, the nation's eighth-largest airline, secured $380 million in loan guarantees from the Air Transportation Stabilization Board, and in May, US Airways announced that it too would soon seek loan guarantees.

There was, however, at least one bright spot in this sea of gloom. Although fourth quarter 2001 RPMs were 6.1 percent lower than in the fourth quarter of 2000, Orlando-based AirTran Airways actually posted a 9.5 increase in revenue passenger miles for the year and a 6.1 percent increase in revenue passenger miles in the first quarter of 2002 over the same period of 2001. AirTran also added capacity last year and in the first quarter of 2002, increasing ASMs 11.6 percent and 12.8 percent, respectively.

Unfortunately, though, AirTran remains the exception to the rule in the airline industry, circa 2002. For one thing, even allowing for its expanding capacity, the airline is still a small carrier. By comparison, Delta's RPMs in the month of March 2002 were more than 50 percent higher than AirTran's for all of 2001. For another, although its hub is in Atlanta and it serves several major cities, AirTran is focused on mid-sized cities such as Wichita, Kan., Pensacola, Fla., and Newport News, Va. These traditionally underserved cities may be a great opportunity for AirTran, but they cannot begin to absorb the planes and personnel idled by the major airlines over the last year.

Fleet reductions all over the map

"The vehicle rental industry is characterized by intense price and service competition." That statement, from the 2001 annual report of Avis owner Cendant, neatly summarizes the state of the rental car industry over the last several years. It is a brutally competitive business. ANC Rental Corp., owner of the Alamo and National rental brands, entered Chapter 11 bankruptcy protection last year, and several of the other big car rental companies posted losses for their corporate owners.