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Spending Cuts By U.S. Defense Dept. To Hit Travel Industry in Big Way

Sep 06, 2013 5:00 am

Skift Take

With all government agencies and contractors saying they are cutting back travel by 10-20 percent and making the stark choice between cutting back or furloughs for employees, it won’t be a pretty fall season for the airline and hotel industry.

— Rafat Ali

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Master Sgt. Ken Hammond, U.S. Air Force  / DoD photo

The Pentagon, headquarters of the Department of Defense. Master Sgt. Ken Hammond, U.S. Air Force / DoD photo


Having enjoyed a relatively strong summer travel season, U.S. hotels and airlines face a potential hit this autumn as the nation’s defense industry and government departments rein in travel spending.

Officials at the Pentagon and top U.S defense companies told the Reuters Aerospace and Defense Summit this week that they are cutting travel by double-digit percentages to deal with the latest round of automatic spending cuts caused by sequestration. The reductions could create a replay of cuts in the spring that reduced airline revenue when sequestration first hit U.S. government spending.

“I get a list of the top 10 violators” of travel spending, said Dale Bennett, executive vice president for Lockheed Mission Systems and Training. Emphasizing the attention paid to travel, he said he now carries this list along with monthly travel reports in his briefcase.

His division, with 18,000 staff, is cutting travel 10 percent to 15 percent compared with last year. His unit oversees the company’s execution of programs for the U.S. Air Force, Navy, Army, Coast Guard and Marine Corps.

He and others are using more teleconferences to stay in touch with customers. Frank Kendall, the Pentagon’s top arms buyer, said his department has cut back on travel “a lot” as part of 20 percent reductions in headquarters budgets.

Travel cuts do little to close the large Pentagon budget gap, Kendall said, but they are weighed against staffing cuts.

“When we furloughed people … we all took a hard look at what we were doing,” he said. “Do I want to take this trip or do I want to have somebody work for another day?”

GOVERNMENT EFFECT

Overall corporate travel appears to be recovering with the economy. And defense officials and executives said they still must make trips to work with companies and governments around the world. Many international deals depend on handshakes and personal contacts.

Linda Hudson, outgoing chief executive of the U.S. unit of Britain’s BAE Systems, said employees must still make trips.

“And if we put people on long overseas flights, we’re going to put them in a cabin where they can be comfortable and work,” she said.

But weapons makers and suppliers like Lockheed Martin , BAE Systems, Boeing and EADS North America told the Reuters Summit they are reducing travel in an effort to contain costs as sequestration casts uncertainty over the weapons industry. Some are even asking their clients to put caps on travel expenses.

The unanimous caution by defense industry officials and executives at the Reuters Summit suggests continued weakness in government spending, which accounts for 3 percent to 4 percent of airline revenue. Many companies told this Summit, held in Reuters’ Washington office, that 2014 could be worse, with more cuts to come as sequestration continues.

The automatic budget cuts known as sequestration took effect on March 1 and defense spending has taken the single biggest hit from the cutbacks, with a $46 billion reduction through the Sept. 30 end of the fiscal year.

Janus Research analyst Kristopher Kelley said he did not expect the budget cuts to be “a big deal” for airlines. But after sequestration reductions took effect US Airways Group and Delta Air Lines said the cuts reduced revenue from government customers in the first half.

Unit revenue, a measure of pricing power and how full planes are, fell in April as U.S. carriers also grappled with sequestration-related furloughs of air traffic controllers. Delta and US Airways reported drops of 2 percent and 4 percent, respectively, for April.

For hotels, business travel and leisure travel have mostly recovered but one area that is still lagging is group meetings and conventions, said Patrick Scholes, a hotel analyst with Suntrust Robinson Humphrey.

Kelley said he now expects government cuts to affect airlines this fall, despite a “decent summer” season.

David Fitzpatrick, managing partner at AlixPartners, an aviation consulting firm, said that if travel falls, airlines are likely to respond by cutting capacity, so that they can keep planes full and profitable.

Hudson of BAE Systems said customers were very creative in 2013 in tapping into resources they had available. “In 2014 most of that’s going to be gone,” making companies look harder for ways to cut expenses.

For airlines and hotels, the dire outlook could foreshadow future hurt as travel goes into its autumn slump. Airlines have already seen a sequestration-related hit earlier this year, when a fall-off in government demand hurt travel revenues.

US Airways, which has a dominant share of takeoff and landing slots at Washington’s Reagan National airport, said U.S. spending cuts reduced revenue from government customers by 30 percent in March. Delta joined in, saying reduced last-minute bookings by government workers cut its unit revenue in March.

‘ATTACKING TRAVEL’

In July, Southwest Chief Executive Gary Kelly said traffic from government spending was “down dramatically.”

“I think we all know that sequestration is real,” the CEO said on a call with analysts.

Hudson said BAE Systems’s U.S. unit was “attacking travel in particular” by negotiating price discounts with airlines and urging more teleconferencing. The unit pared travel spending by 11.9 percent in 2012. Through July 2013, such expenses are down about 20 percent from a year earlier, she said.

At EADS North America, Chief Executive Sean O’Keefe, a former NASA administrator, said that although travel spending at his company was down “easily in the range of 15 to 20 percent” this year, it was not the main focus when it came to cost cuts.

O’Keefe said his company was paying more attention to items such as hiring when it came to cutting costs.

Boeing is also putting a key focus on travel costs, said Dennis Muilenburg, president and chief executive officer of Boeing Defense, Space & Security. He added that “in some cases, travel, spending time with our global supply chain, spending time with our global customers, is an investment in the future.”

Follow Reuters Summits on Twitter @Reuters_Summits (Reporting by Nivedita Bhattacharjee and Karen Jacobs in Washington; Additional reporting by Andrea Shalal-Esa and Paige Gance; Editing by Alwyn Scott and Chris Gallagher)

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