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Business Traveller

Will the Current Crisis Send More Airlines to the Graveyard; From Planes to Hotels, Responding to the Financial Crisis; A Look at the Mojave Desert Aircraft Graveyard.

Aired October 12, 2008 - 13:30   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

RICHARD QUEST, CNN HOST: Hello, and welcome to "CNN BUSINESS TRAVELLER." I'm Richard Quest, this month reporting from the aircraft graveyard in the Mojave Desert.
All around me is the evidence of bankrupt airlines and planes that are no longer economic to fly. And now in 2008, the cycle is going around again. With oil over $100 a barrel and the financial crisis that means travelers are cutting back, this is the perfect place to begin our special look at how the travel industry is responding to this crisis.

Coming up, ask not for whom the bell tolls. It tolls for thee. Will the current crisis send more airlines to the graveyard?

Weathering the storm, from planes to hotels, responding to the crisis on "CNN BUSINESS TRAVELLER."

I will show you around this junk yard a little later in the program. Let us start though with today's airline industry.

There's one thing upon which all the experts are agreed, the number of airlines in the world is going to shrink through a combination of bankruptcy and consolidation. In other words, yes, it's true. The plane's tails are a' changing.

The hunt is on and there is nowhere to hide. Predators are eyeing their prey. The world's biggest airlines are looking for food. Not everyone will survive.

Lucrezia has already swallowed up Brussels and is circling Austrian and BMI. Scandinavian SAS might also be food for the German giant, and is itself hoping to get rid of its Spanish airline, Spanair.

In these waters there is safety in numbers. Airlines merge to become stronger, better able to battle the waves of economic forces.

Delta and Northwest will probably be one before the end of the year. B.A. and Iberia hope to merge and have an alliance with American pretty soon. Alitalia is bankrupt but still flying, and hoping either Lucrezia or Air France will help out.

MAXJet, EOS and Silverjet all went down, and with them, the all- business class sector bit the dust. Budgets are at rock bottom. Aloha, ATA, Futura, Zoom and XL all sank without trace. Twenty-six airlines this year have gone under.

If oil stays at $100 a barrel, airlines will lose more than $5 billion, wiping out last year's profits.

The airline organization IATA says this crisis is worse than SARS and 9/11. It's reshaping an industry.

The sharking is under way. The mighty will survive. They will be the ones to clean up.

So how is this crisis going to play out? To get a better idea, I've come to San Francisco International Airport, known as SFO. We're going to look at it through the eyes of one group of carriers, the Virgin branded airlines. Not only does Virgin Atlantic fly here, but it's also the headquarters of Virgin America.

Atlantic, Blue, American, Nigeria, the club of airlines that share the Virgin name and which are all part owned by Sir Richard Branson. Each is responding to the downturn in different ways.

Virgin Atlantic is 24 years old. It's weathered the storm of two Gulf wars, the dotcom burst and several recessions. This year's financial crisis is testing the metal of its chief executive, Steve Ridgeway.

STEVE RIDGEWAY, CEO, VIRGIN ATLANTIC: We have made a lot of decisions, I think, early, which have put us in the best shape we can. We've got a lot of cash in the bank, which you need in these situations. And we've got a big hedge book. We've invested a lot in our product in the last four or five years. So our franchise is in good shape.

But, you know, we're telling everybody, telling our staff, we have to be very, very fleet of foot because we still don't know what's coming yet.

QUEST: In Australia, it's Virgin Blue that's flying the name, a domestic low-fares carrier that's expanding its reach.

BRETT GODFREY, CEO, VIRGIN BLUE: We've gone basically into New Guinea. We've gone into as far as Dempasa, Bali. We've gone more into the Tasmania. So we've gone more into markets where -- traditional holiday markets where we think we can actually stimulate some demand and taken out of the Australian economy which is -- I won't say struggling, but it certainly had an excess capacity brought into it by all the carriers.

QUEST: Virgin America may be the newest member of the family, but it has great experience of flying in a crisis. It began business last August, right at the start of the credit crunch.

PORTER GALE, VP, VIRGIN AMERICA: We can't control outside influences but what we can do is we can watch every penny. We're doing a lot of things to reduce our costs. For example, on our planes, you don't see in- flight magazines, which add extra weight. We also have trained our pilots to learn how to reduce the fuel that they're using on their approach so we have a more fuel efficient approach.

QUEST: The Virgin airlines know that a single response won't work in all cases. Take fuel surcharges.

GODFREY: I mean, it's pretty idiotic for us to even put on more fuel surcharges because, put on $5, you lose $5 worth of passengers in that context. So we're beholden to the market.

RIDGEWAY: While fuel prices come down a bit, of course, the dollar is strengthened so one is being off-set by the other. And all the time, while the fuel surcharges has been there, it's been competed away in the underlying fares. The industry is not just adjusting. It doesn't seem to be able to adjust fast enough to the realities of what's out there.

QUEST: Ultimately, all airlines have to find ways to raise extra revenue beyond the ticket price. For Virgin Atlantic that's not so easy. Passengers on long-haul flights expect free food and drinks.

For low-fares America, there are plenty of opportunities to squeeze extra dollars out of the passenger.

GALE: What we've discovered is that people will actually spend up to $21 dollars on a long-haul flight for extra things like food, beverages, in-flight Wi-Fi, and so it's a big opportunity for us to drive incremental revenue when the economy is suffering.

We found if you give guests or consumers the right choice, they'll buy the movie. They'll buy a $10 Champaign cocktail. They'll buy a fruit and cheese plate. And so we're trying to give people more options and, therefore, giving us more revenue.

QUEST: The Virgin brand is one of the most recognized in the world. And each airline reinforces the existence of the others.

All the Virgin branded airlines have several great advantages. They have deep pockets and an internationally well-known brand.

But what about those low-cost, low-fares airlines that don't enjoy such necessities in today's world of aviation?

They are the three big names in the low-cost world.

Michael O'Leary of Europe's Ryanair.

MICHAEL O'LEARY, RYANAIR: We're releasing one million free seats for travel in November and December. It's never been cheaper. In fact, it's never been free to travel on Ryanair.

QUEST: Herb Kelleher from Southwest in the U.S.

HERB KELLEHER, FOUNDER & CHAIRMAN, SOUTHWEST: There's always blood on the ring floor. (LAUGHTER). It's a bloody business.

QUEST: And Tony Fernandes of Air Asia.

TONY FERENANDES, CEO, AIR ASIA: Well, I've got an ego.

QUEST: In their part of the world, they perfected the low-cost model. They're not immune from the downturn, but they have deep pockets and experience to ride out this crisis.

Ryanair's O'Leary is gleeful of the fact there'll be less competition.

O'LEARY: I think this winter's fares will continue to fall. There's going to be more casualties I suspect. Probably, the two long-time survivors in Europe will be Ryanair and EasyJet. We will be significantly larger in the next couple of years and definitely be stronger. And most of the other smaller kind of second and third-tier, so-called low-fare airlines, let's face it, have never made money when oil was at $50 a barrel. Most of those will go broke this winter.

QUEST: No one should under estimate the power of experience.

When Herb Kelleher spoke at a low-cost conference in London, he was feted as a guru for good reason. He just about invented the low-cost airline. He knows Southwest's cash cushion has saved it more than once.

KELLEHER: Generally speaking, the person that wins the war is the one that has the most munitions. And of course, in our business, capital is the munition. And so they've been under capitalized. They haven't been able to survive the bad times. If you have any sense of historicity, you'll understand that you're going have these upsets in the airline industry economically. And if you have any sense of futurity, you prepare for them in advance.

QUEST: For smaller airlines, it's a case of merge or die. No matter how good the product, if your costs are high, you won't be flying long.

Clickair in Spain is grounded eight planes this year. It's trying to merge with its rival Yuling (ph).

ALEX CRUZ, CEO, CLICKAIR: I'm not sure that we have survived yet. But I think we're in the right way at the moment, in the right direction. Everybody agrees that there will be farther consolidation. All the larger airlines are looking for smaller ones to buy at the moment. We are merging. There should be farther moves in the next months.

QUEST: Carriers, like Air Asia, are still introducing the low-cost model to new countries and populations who are flying for the first time.

FERENANDES: There's always a silver lining. And the silver lining is that there will be obviously less airlines coming into the business. There will be greater pressure on costs at the legacy end. So I think fares will be separating more and more. And there will be people who will trade down from the full-service airlines to the airlines such as ours.

QUEST: Legacy carriers, watch out. The low-cost fighters have proved they can fight in the sun.

Now, with the winter upon us, there are airlines for all seasons.

When we come back, IHG's Andy Cosslett, he's got 4,000 hotels. Is he filling the rooms?

(COMMERCIAL BREAK)

QUEST: Welcome back to "CNN BUSINESS TRAVELLER" where this month we're looking at the effect of the financial crisis on the travel and tourism industry.

Here in Los Angeles now I'm at the conference of the Americas for the Intercontinental Hotel Group. Here the owners and investors of some 3,000 hotels, part of IHG, the largest in the world, are getting together. It's an interesting place to take the temperature of the hospitality industry.

Everything you need to set up a hotel is right here, from bathrooms to bedrooms and all rooms in between. If hotels cut back spending, these suppliers will be the first to feel the effects. And so far, they're noticing small changes, for instances, hotels cutting back on some of the trinkets in rooms.

UNIDENTIFIED HOTEL SUPPLIER: A lot of people are cutting down on the amount of amenities they're putting in, so instead of four bottles they usually put, it's just the soap and the shampoo and the lotion.

QUEST: So basically, instead of offering the shampoo, conditioner, body wash, hand lotion, you might just offer the shampoo and...?

UNIDENTIFIED HOTEL SUPPLIER: And the lotion.

QUEST: In simple terms, everyone in the food chain is affected.

UNIDENTIFIED HOTEL SUPPLIER: Ordering patterns have changed and in quantities. You know, if they're going to order ten dozen bath towels, let's say, they're reducing it to five dozen. So the cycle of ordering is being stretched out.

QUEST: If hotels are cutting back on some of the expendables, they haven't slashed away at the basics, such as the bed. In many cases, they're actually investing in improved mattresses and bedding.

At some point, don't you think there must eventually be a trickle down to suppliers? I mean, travelers are changing their habits. Hotels are changing their habits. Eventually, it must trickle down.

UNIDENTIFIED HOTEL SUPPLIER: I don't think so. I think that the bed will continue to be a very important part. And whether it's new hotels in the pipeline that are being built or as hotel occupancy may fall off a little bit, it gives their owners an opportunity to retrofit the rooms without losing revenue nights.

QUEST: Is there a danger (AUDIO PROBLEM). With 4,000 hotels under his control, Andy Cosslett is well qualified to talk about what is happening in the industry.

ANDY COSSLETT, CEO, IHG: We seem to be quite resilient. The industry seems to be bucking the trends pretty much around the world, including here in the states. We've got occupancy levels which are down a bit, but rates per room has actually compensated for that. We're very busy. We're still opening and we're still signing a lot of hotel deals, so, you know, we're actually pretty pleased with our position.

QUEST: And that's a surprise. While the rest of the world seems to be in crisis, hotels are busy and rates are remaining strong.

Mature markets, like the U.S., have their head above water. New markets, like China and Russia, are growing.

The object, wherever you are, if make sure you have an offering for every sector of the market.

COSSLETT: For us, we're well positioned because we have many more hotels in that mid-scale cluster than we do at the top. We have Intercontinental right at the top of the tree. Some of that business is actually protected quite well because these are very high net worth individuals who are just traveling transiently and they're making their own decisions.

As it relates to company business, yes, I mean, definitely people are making choices to try and get their executives into the mid-scale. And we can manage that transfer for them. So we don't necessarily have to drop our rate because they're actually making a saving by bringing the traveler down a class or two into the mid-scale.

QUEST: Other hotel groups, like Marriott, describe conditions as unusually challenging. And that's something with which these owners in Chicago agree.

MICHAEL VAUGHN, OWNER, HOLIDAY INN EXPRESS: Well, one of the things we're seeing is the market in the Chicago area is very soft compared to the previous years. Occupancy rates are down. And it looks like the rates are going down a little bit too.

QUEST: Ultimately, there isn't a huge amount that can be done, short of shutting down the hotel. Owners need to grin and bear it and keep offering value.

BRETT COLEMAN, OWNER, HOLIDAY INN EXPRESS: I have to do an inclusive price with the amenities that we offer, which is the free breakfast and high-speed Internet and all the things that go with it.

QUEST: Are you worried that, you know, as things -- as we go into the next stage of this financial crisis, are you worried?

NIPUN JOSHI, OWNER, HOLIDAY INN EXPRESS: To be honest, no, I'm not worried. I'm not, because I know we have great products. We have great, excellent service at our hotels. And I'm not worried because I know that it's going to turn around.

QUEST: And that's where we see a tale of two very different industries. The airlines being hammered by oil prices and the hotel world seeing a downturn but business is still steady.

See, I'm hearing this again and again and again from the owners that things aren't that bad.

BILLY NIM (ph), OWNER, HOLIDAY INN EXPRESS: No, not really.

QUEST: So what I'm wondering is, is this something that's just waiting to hit you in another six-months time?

NIM (ph): Well, people's been saying that the last few months. But I don't see that in the future. But we'll see. Only time could tell, but...

QUEST: What sort of moves have you taken to cut costs or to keep things under control? I mean, are you giving smaller portions at breakfast?

NIM (ph): Oh, no, not at all, no, no. We haven't really...

QUEST: Smaller bars of soap?

NIM (ph): Nope, not at all. Everything's been...

QUEST: You've cut the coffee?

NIM (ph): No, not at all. Everything's been the same.

QUEST: Fewer guests at lower rates with lower yields, it's a triple whammy. Surely, it's impossible to face these facts and still give customers what they want.

COSSLETT: Customers know when they're being chiseled. And if you start cutting corners and turning the lights off early, people see that and they note it. They want to know that even if times are getting tougher, you're going to respect their needs and what they like.

People are trying to move executives down in flight class, what cabin they're flying in the planes, and probably in terms of the standard of hotel and the class in hotel that they're staying in. And I think people are making that choice. The choice they're not making is not to travel. So the business people are still traveling. And we can see that in our numbers. And they're still coming through the front doors.

QUEST: Coming up, at this airport in California, you can check in but never leave.

(COMMERCIAL BREAK)

QUEST: Welcome back to "CNN BUSNIESS TRAVELLER" in the aircraft graveyard.

Seeing all these millions of dollars worth of planes sitting in the sun, doing nothing, you'd be forgiven for thinking "what a waste." But you'd be wrong because, although these planes will never fly again, they still have an important role to play in today's aviation -- yank them open, cut them up and sell off the parts.

Drive along Highway 58 about 100 miles from L.A. and you'll find an airport like none other, an airport whose runways are the last stop on the line.

From the road, it looks like an overcrowded airport during a strike by air traffic control. Cross the runways and you realize these are planes that have touched down for the last time. They've taxied to their final destination, Mojave, where planes come to die.

Overseeing operations here for the past 26 years is Mike Potter, a former pilot who never stopped loving planes. He piloted this TWA Convair 880 into this airport for the last time.

MIKE POTTER, OWNER, MOJAVE AIR & SPACE PORT: Well, it's a resting place for old pilots and airplanes. And in a way, it brings tears to your eyes because, to us, the airplanes here are home. And I see them come in and I know that it's their last fight.

QUEST: Once they get here, the planes are usually repainted to spare the blushes of airlines still flying. But you can't run and ride. Obviously, that's a former KLM 747. And that's a Continental DC-10.

It's difficult to know exactly how many planes are here. Some are in pieces, having been ripped open for parts. Those parts go on to breathe life into planes still in the skies.

POTTER: They come in fully dressed out for flight. And then slowly they are dismantled and all of their parts are taken off and they end up with just a skeleton left of a plane. And I can't help, when I look at these airplanes, thinking back at when I flew them or other people and all the stories that are involved and where they're been, how many thousands and millions of people have ridden on them and changed their dreams.

QUEST: The desert is a perfect place to keep planes. The dry air means parts remain in good condition, which is why airlines also store planes here. On the other side of the runway, Air Canada has got these 767s that have been pickled. The engineers are sealed to protect them from the sand. Some day, they hope to fly these planes again. But if that doesn't happen and a buyer can't be found, then they'll be broken up for parts.

If the aviation industry does get crushed, then it's good business for Mike Potter.

POTTER: I expect that if the airline industry keeps going in the direction that it's headed right now, there will be a couple of hundred airplanes here in the next 12 to 18 months. And whether they go back into service or not will depend on the age category of the airplane.

QUEST: The Mojave Desert airport has a lot of aviation surprises. This scene from "Speed" was filmed here, as were scenes from "Air Force One" and the hit TV show "24." The airport has two special sets where planes can be stored, crashed or simply blown up for the cameras.

With no passengers but lots of planes, this is a very special kind of place. All around me, evidence of an industry that's been brought to an all-time low. And there's every chance this graveyard will start filling up fast.

Just think, all the passengers on all the flights and these planes will now never leave the desert. It's rather sad to a plane geek like me.

And that's "CNN BUSINESS TRAVELLER" for this month. I'm Richard Quest, in the aircraft graveyard in the Mojave.

Wherever your travels may take you, I hope it's profitable. And I'll see you next month.

END