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Travel sector watches fiscal cliff talks warily

Monday, December 31, 2012

Travel sector watches fiscal cliff talks warily

As the countdown to 2013 begins, many people are eagerly awaiting the stroke of midnight to begin their celebrations. However, executives, investors and service providers are anxiously watching the U.S. Senate, as discussions continued as to how the nation's top politicians can avoid plunging the country's economy over the fiscal cliff. If action is not taken, it poses a serious threat not only to the average American taxpayer, but also the business travel and recreational tourism sectors.

Declines in tourism predicted
The fiscal cliff refers to the expiration of tax cuts established for the wealthiest Americans by former President George W. Bush in 2004. If these cuts are permitted to expire, dramatic steps will have to be taken to address the contributions to the national deficit. In the worst-case scenario, many individuals earning between $50,000 and $75,000 per year could see tax hikes of up to $2,600 per year. This, in turn, is likely to discourage many people from taking recreational travel trips.

"The uncertainty over the economic impact of the fiscal cliff and potentially significant tax increases is delaying decisions about travel," said Roger Dow, president and chief executive officer of the U.S. Travel Association (USTA), as quoted by The Washington Times. "If unresolved, millions of American families may be left without the means to take a vacation and businesses are certain to roll back their travel spending."

The second component of the fiscal cliff that has many executives worried is the mandatory reductions in government spending set to take effect January 1. Virtually all federal agencies will be subject to extensive budget cuts, including U.S. Customs and Border Protection, the Transportation Security Administration and the Federal Aviation Administration. Officials at the USTA warned that such reductions, referred to as sequestration in Washington, D.C., could further negatively impact both business travel and recreational tourism.

Fading optimism
In today's uncertain financial climate, cost-effective accommodation such as serviced apartments and corporate housing are becoming increasingly attractive to budget-conscious executives. While many frequent business travelers are worried about the potential ramifications of the fiscal cliff, service providers in the travel sector have expressed much less concern.

According to Travel Weekly, speakers at the International Luxury Travel Market conference held in France earlier this month expressed doubts that the Senate would allow the political stalemate to continue into the new year.

"President Obama got a lucky break [just prior to last month’s election] with Hurricane Sandy, and he could be lucky in the next few weeks, as well," keynote speaker John Andrews, consulting editor at The Economist, told delegates at the conference, as quoted by the news source. "I can’t really believe that even a gridlocked Congress will allow such collective suicide. They’ll either kick something down the road or come up with some sort of grand bargain."

Lasting impact
If the Senate fails to reach an agreement on how to avoid the looming financial crisis, it could have significant implications for the business travel sector.

According to the Global Business Travel Association, if the fiscal cliff scenario comes to pass, the U.S. will enter another period of recession. This, in turn, will have a financial impact of up to $20 billion on the business travel sector during the next nine quarters, a decline in spending equivalent to 2.5 percent and more than 32 million cancelled business trips. This is likely to have a negative impact on both companies seeking to weather the storm and service providers in the hospitality industry.

While New Year's Eve may be a cause for celebration for many people, it will be an anxious time for millions of business travelers, executives and industry officials.