Americans are more concerned with the price and
availability of hydrocarbon energy petroleum and natural gas than
at any time since the oil shocks of the 1970s. This summer’s
unprecedented hike in the cost of oil and gasoline was driven
higher by the destructive arrival of hurricanes Katrina and Rita in
September, both of which damaged the country’s vital oil-producing
infrastructure in the Gulf of Mexico.
Throughout the U.S. economy, higher energy prices are driving
up the cost of living and doing business. On Aug. 30, the price of
crude oil reached an all-time high of $69.91 per barrel, according
to the U.S. Energy Information Agency. For all of 2005, the average
price per barrel of crude oil will be about $60, up from $20 per
barrel in 2001.
Within the meetings industry, suppliers are feeling the pinch.
“Our gas, laundry costs and other production expenses have gone
up,” says Jeff Duglin of Oldsmar, Fla.-based Duglin Linen,
providers of specialty linen and chair covers to event planners.
“We’ve passed along a fuel surcharge to our customers. While they
don’t like it, it’s a small percentage of our real costs.”
Such charges are becoming more familiar to meeting planners.
“We have definitely encountered energy surcharges again,” says Kay
Granath, CMP, director of meetings and conventions for the
Association Management Center, based in Glenview, Ill. “As a
homeowner who sees how expensive it’s becoming just to operate one
household, I can only assume the fees are going to go up.”
Like many of her peers, Deborah Krant, conference director for
the nonprofit National Center for Employee Ownership in Oakland,
Calif., has yet to see fuel prices hurt attendance or meeting
budgets. However, she adds, “I don’t know if that means we won’t
see that in the future.”
Chances are, we will, says Gregg Talley, CAE, chairman of the
board of the Professional Convention Management Association and
president of Mt. Royal, N.J.-based Talley Management. “I think
we’re just starting to see that energy costs are a danger going
forward,” he says. “Surcharges, higher ticket prices and costs at
the pump impact decisions about travel. And increases in energy
costs will cause people to question attending meetings.”
Just how much might energy prices rise? Will the airlines
survive? Are fuel surcharges here to stay? M&C went to the
experts for insights and advice.
Transportation woes
The meetings industry is dependent on transportation
suppliers to function. Airlines, shipping companies, motor coaches,
vans, shuttles and limos move attendees and goods to planners’
events and are key to their success.
Among transporters, commercial airlines are perhaps the most
sensitive to rising energy costs and 2005 was not a good year.
Carriers have gone bankrupt, merged, reorganized, cut capacity and
routes, and reconfigured pricing structures. Of the six legacy
airlines, three are bankrupt, typically citing the cost of fuel as
the root of their financial troubles.
“Today’s jet fuel prices are crushing and could prove the
knockout blow for some,” says John Heimlich, vice president and
chief economist of the Air Transport Association, a trade group
representing U.S. airlines. “Thanks to the high price of crude as
well as a range of issues with refining capacity, product
distribution and market speculation, jet fuel prices have soared.
And keep in mind, unlike other modes of transport, airlines have no
alternative to jet fuel.”
IS IT TIME TO WORRY?
In many cases, surging energy prices already are reshaping meetings and events. “I’ve noticed that events out in Malibu, an 80-mile roundtrip, are happening less frequently,” says Mary FitzGerald, event planner and owner of Mary FitzGerald Events in Beverly Hills, Calif. “You want to have an event closer to the city so people won’t have to drive and pay for gas.”
“It is affecting freight,” says Jacqueline Seltzer, senior convention manager with Bedford, Freeman & Worth, a book publisher in New York City. “We’re already being told to conserve on our shipping.”
Others, however, have yet to feel the burn. “Our budgets or plans have not really been affected,” says Debbie Kaylor, executive director, convention and meetings, with the National Cattlemen’s Beef Association in Centennial, Colo. “The places we’ll see increases are in airfares and maybe freight, but it’s not extremely bad.”
“Energy prices actually haven’t had an effect on us,” echoes Sharon Bennett, director of meetings with the American Society of Plastic Surgeons, based in Arlington Heights, Ill. “The only small effect it had was a shuttle-bus surcharge. Our attendance hasn’t been affected.”
Energy worries have been somewhat eclipsed by Hurricane Katrina and the new visa requirements, says Gregg Talley, chairman of the board of the Professional Convention Management Association and president of Mt. Royal, N.J.-based Talley Management. “Energy is on the list,” he says, “but it hasn’t cracked the top two or three concerns.” However, he inisists, “It will move up the list.” -- B.M.L.
Fewer flights?
“Energy costs are driving airlines further into the red,”
says PCMA’s Talley. “I think there’s a possibility we could lose an
airline entirely. For planners and meeting attendees, that is a
loss of lift and choice.”
Indeed, signs of desperation in the airline industry are
ominous. On the same day in mid-September, Northwest and Delta Air
Lines both filed for Chapter 11 bankruptcy, citing fuel prices. “In
addition to a noncompetitive cost structure, our efforts have been
overtaken by skyrocketing fuel costs,” noted Doug Steenland,
Northwest’s president and CEO. The airline’s fuel bill for 2005
will be approximately $3.3. billion, compared with $2.2 billion for
2004 and $1.6 billion for 2003. On Oct. 2, Northwest eliminated its
unprofitable daily JFK-Tokyo flight, blaming the cost of jet
fuel.
Likewise, Delta cited “persistent record-high fuel costs at
unpredicted and unprecedented levels” when announcing its
insolvency. Weeks later, the carrier downsized operations at its
second biggest hub, Cincinnati-Northern Kentucky International
Airport.
It is not just the bankrupt airlines that are trimming routes
in response to high energy prices. In late September, American
Airlines canceled 15 roundtrip flights from its two largest hubs,
Chicago O’Hare and Dallas-Fort Worth. With this decision, cities
like Atlanta, Denver, Houston and Minneapolis all lost air service.
“It was the 39 percent rise in jet fuel costs last month alone that
pushed us,” explained Dan Garton, American’s executive vice
president. “It is no longer economically viable for us to maintain
the current level of convenient service in those markets, given our
fuel costs.”
According to Chicago-based OAG, the cuts in domestic service
have added up. Within the past 12 months, carriers have flown
19,000 fewer flights domestically a 2 percent drop in service
overall. The biggest reductions occurred at airports in two cities
with significant meetings business: Washington Dulles (-25 percent)
and Chicago Midway (-19 percent).
Searching for solutions
Besides slashing schedules, airlines have raised prices
and imposed surcharges to counter rising fuel prices. “So far in
2005, we’ve witnessed nine increases around $5 per one way to $10
per roundtrip,” says Terry Trippler, airline analyst with
CheapSeats.com. “While all increases don’t apply to all fares and
markets, this year an average leisure fare increased by $40 to $45,
basically due to fuel costs.”
And it is not just domestic airfares that have seen hiked
prices. Following Hurricane Katrina, for example, new surcharges
were levied by British Airways, Lufthansa and Virgin Atlantic.
“Our fuel bill of around £1.6 billion is now our second-largest
cost after employee costs,” notes Martin George, British Airways’
commercial director. “This latest surcharge is very regrettable,
but we have little choice to pass some of our extra costs on to our
customers. It now costs almost 400 percent more than it did in
December 2001 to fill up a plane.”
And the increases should continue into 2006. New York
City-based American Express Business Travel predicts U.S. domestic
economy fares will rise from 3 to 6 percent in 2006, while
business-class fares will jump 3 to 5 percent. “Many traditional
airlines have adopted the low-cost carrier business model; however,
with the ever-increasing price of oil, many could be forced to
increase fares,” says Matthew Davis, director of global consulting
for American Express.
Likewise, a survey of 130 travel managers by the National
Business Travel Association found they expect airfares to increase
by 6 percent in the coming year as a result of fuel costs.
Terry Trippler sees fares increasing even more in the coming
months. “I’d say a bigger increase should be expected, from 10 to
15 percent, or possibly 20 percent on some routes. The airlines
cannot continue to bleed this red ink. Airfares will still be
affordable, but a $198 roundtrip coast-to-coast fare is not going
to cut it anymore.”
DRILLING DOWN
One imaginative solution to painful energy costs has been proposed by British business iconoclast Richard Branson, founder and CEO of Virgin Atlantic Airways. The carrier is considering building its own oil refinery to produce kerosene, which is the same as jet fuel. This would allow Virgin to avoid paying an ever-growing profit margin, known as the “crack spread,” added to the cost of jet fuel by refiners.
“If we don’t start now to get more refineries built,” Branson told cable news outlet CNBC in September, “then fuel prices could literally rocket to $100 to $200 [per barrel], and the world economy would come to a grinding halt. We’re talking about a $2 billion investment. We’re willing to put the money in, and we’re trying to encourage other airlines to put money in as well. It’s a great way of hedging against fuel prices.” -- B.M.L.
Cruise and rail lines
Well beyond rising airfares, all transportation could become more
expensive. Consider cruise lines, which run ships on bunker fuel, a
heavier kind than diesel. Carnival Corp. reported its fuel costs
rose by $50 million during the third quarter of 2005. While the
cruise giant has yet to impose a fuel surcharge, several smaller
cruise lines have done so.
“We recently imposed a $5 per-person, per-day fuel surcharge,”
notes Mario A. Villalobos, director of sales, charter and incentive
sales, with Radisson Seven Seas Cruises. “We budgeted for fuel
price increases in 2006, but we never expected prices to go up this
much. The charge doesn’t even cover our real costs, which are more
like $11 to $12.”
Other lines imposing the surcharge include Crystal Cruises and
Asian operator Star Cruises. And beyond expensive luxury liners,
the cost of traveling via a ship of any kind could go up in price,
from charters to ferries. For instance, the Alaska Marine Highway
System recently added a 10 percent fuel surcharge to all passenger
fares on its ferries.
Riding the rails is no different. In September, Amtrak raised
fares between 5 and 7 percent: “Rising oil prices have
substantially increased the cost of locomotive diesel fuel and all
other goods and services Amtrak consumes,” the railroad explained
in a release. “Fuel costs have risen nearly 40 percent over one
year ago and are expected to continue to rise.”
Ground transport/delivery
In today’s pricing atmosphere, planners might be wise to
anticipate jumps in rates from any supplier that relies on gasoline
or other hydrocarbon energy to conduct business. Ground
transportation and delivery firms surely will pass along high fuel
costs as some are doing even now.
“We have implemented fuel surcharges to cover some costs,” says
Nicole Rossmango, sales manager with Academy Bus, based in Hoboken,
N.J. “Some bus companies on the West Coast are charging a 15
percent surcharge, but ours is less than half that. There is
acceptance among our customers, all of whom seem to be taking a hit
themselves.”
“We’ve had to institute a fuel surcharge and raise our prices
about 5 percent,” says Wayne Couturas, vice president, national
sales, for Hawthorne, New York-based Leros Worldwide
Transportation, providers of limousines. “And the cost is not just
the ride. An oil change can be $30, and you have to factor that in.
We would love to find an electric or hybrid limo of some kind.
Everybody is looking for fuel efficiency.”
Shipping and delivering goods could jump in cost as well. “We
get hit with fuel surcharges ourselves when using airlines or
ground transportation,” notes Irina Constantine, owner of GO
Express, a Brooklyn, N.Y.-based courier service that specializes in
servicing corporate conferences. “Some of the truck companies are
charging a 20 percent energy surcharge. Our independent contractors
are having a hard time making ends meet. To make it easier on them,
we’ve imposed a 5 percent fuel surcharge per pound. It’s put us in
a bad position because nobody likes to raise prices.”
Some companies are trying to exploit new technologies to bring
down their costs and avoid raising prices. “We have a facility that
is doing research and development into converting grease into
biodeisel fuel,” says Debbi Baker, account executive for special
events with Mr. John, a Keasby, N.J., company that supplies
temporary restrooms to events. “Our restroom trailers are delivered
by trucks that run on diesel, the cost of which is up more than 50
percent.”
Hotels and venues
The cost of hotel rooms and venues might rise as well due to energy
costs: Buildings must be heated, cooled and lighted, and all of
that means big energy bills. But many hotels are simply boosting
rates rather than adding surcharges.
“All of our properties are seeing the effects of higher energy
costs in the materials we purchase, such as cleaning supplies and
renovation materials,” says Brian Burke, director of energy
programs with Hyatt. Yet Hyatt, Marriott and other large chains
have held off on imposing energy surcharges thus far.
Jim Butler, chairman of JMBM’s Global Hospitality Group, a Los
Angeles-based law firm specializing in the hospitality industry,
says surcharges can be misleading: “Energy surcharges lead guests
to believe the money will go straight to the local power utility,
when really it’s a more arbitrarily set fee that goes into hotel
pockets. Especially if the fee isn’t disclosed until check-in or
later, it presents a real problem.”
Planners should look to increased room rates in the coming
months, which can be partly explained by rising fuel costs. “We’ve
heard about hotels charging energy fees, and especially among
resort hotels, more will probably crop up,” says Bjorn Hanson,
global practice leader for PricewaterhouseCoopers Hospitality &
Leisure Practice. “But average daily rates are expected to increase
by
5.5 percent in the meetings and conventions sector this year alone,
and with such aggressive price increases, it isn’t likely that
hotels will be able to pass along their energy costs on top of
that.”
Nevertheless, “We’re going to have to make this money back
somehow,” says Tom Blackman, director of sales and marketing for
Seascape Resort Monterey Bay in California. “We don’t think it’s
fair to charge an energy fee instead of just bumping up our room
rates or F&B charges. We have to come up with an answer to
these increased energy costs.”
Other meetings and convention venues face the same challenge
even electricity will be pricier, since electric plants are most
often run on hydrocarbons.
“The new electric costs mean we need to reassess what we charge
promoters and exhibitors,” says Chet Jasinski, event manager at the
155,000-square-foot New Jersey Convention & Exposition Center.
“We’ve had meetings and made some calls to those who use the
building. I hate to see what the heating costs are going to be this
winter.”
Additional reporting for this story was contributed by Tom Isler
and Morton D. Rosenbaum.