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How High Oil Prices Benefit Travelers … Really!

Airlines and hotels. They’re related businesses—two peas in the same pod. Both are travel-related services; both are commodities. It would seem logical to expect them to succeed and fail more or less in lockstep. They don’t. In fact, their fortunes have differed markedly in recent years.

The executive summary of the airlines’ recent history is of depressed ticket prices due to discount carriers’ low fares and travelers’ price-sensitivity. That’s been good for consumers (cheap flights), but disastrous for the airlines ([% 2634315 | | crushing financial losses %]).

During that same period, the hotel chains have been steadily raising room rates—great for the hotels’ bottom lines, but an increasing drag on consumers’ wallets.

Fast forward to today, and we find the airlines, rocked by the spike in fuel costs, desperately raising prices. When the dust clears, some analysts project that travelers will be paying as much as 40 percent more for their flights.

The hotels have also been affected by high oil prices. According to Forbes, “Oil is casting a crude shadow over the U.S. lodging industry. The commodity’s record prices are discouraging summer travel, which means widespread vacancies for lodging companies like Marriott International and Starwood Hotels & Resorts Worldwide.”

In Marriott’s second quarter financial reports, J.W. Marriott, chairman of the hotel company that bears his name, had the following to say about the U.S. hotel scene: “But while our hotels outside the U.S. continue to benefit from solid global demand, business conditions have deteriorated in the U.S. While there is much uncertainty, we expect weak economic growth and soft U.S. lodging demand to persist into 2009.”

Vacancies, soft demand… it leaves hotels no choice but to lower their rates.

A large part of what distinguishes the airlines’ current situation from the hotels’ is structural. While the airlines can shed jets and discontinue flights—which both reduces their overhead and increases their ability to charge more—the hotels are effectively stuck with their current supply of buildings and rooms, forcing them to lower prices when demand falls.

So, what’s it all mean? For consumers, it portends a continuation of the good-news/bad-news scenario. Except that the positions of the airlines and hotels will be reversed. Air travel, previously a bargain, will be significantly pricier. But the cost of the hotel portion of a trip, until recently a large and growing slice of the travel budget, should ease off.

At the end of the day, the bottom-line cost of a trip won’t change that much. What will change is the relative costs of the airline portion (more) and the hotel portion (less) of the total travel bill.

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