I'm glad to be with you again this year. It'll mark the fifth year for these mid-year reviews, and I hope they've been helpful to those of you who have been attending them.

What I'm going to do today are three things. First and very briefly, look back at the five-year period over which I've given these presentations-from where the industry was in 200 and 2001, to where it is five years later. I think some historical perspective is important in understanding where we are today.

Next, we'll get into this year's performance, and what we can expect for the balance of the year, and into 2007. Finally, I want to close out my presentation with a discussion of what I believe are some fundamental changes that have now occurred in the travel market ... changes that present new challenges and opportunities.

Historical Perspective

Let's start now by tuning the clock back to the year 2000. It was a year in which the U.S. economy had reached new heights, growing by more than 20 percent over the previous five years. The Dow Jones Industrial hit 11,700 in January of 2000, a level it has yet to reach six years later. The NASDQ was at 5,000.

For travel, it was also the best of times. A record 13 million Americans traveled to Europe . Airline traffic, both domestic and international, had grown by an impressive 20 percent over a five-year period, wit ha record run of profits for the carriers. Hotel sector profits hit an all-time high. Everybody was making money, and lots of it. But then ... all that would change.

The year 2001 saw the beginning of a series of events that would essentially cripple our industry for three full years: a year-long recession, as the dot.com bubble burst ... the shocks and fallout from the events of 9/11 ...SARS in the Far East ... and, finally, in the Middle East, the Iraq War. During the three-year period, domestic travel came to a virtual standstill, and international travel fell almost 10 percent.

Recovery for our industry didn't come until 2004, when we saw the first year-over-year gains. This was followed by a good 2005, with a return to historic rates of annual growth. While most all sectors of the travel market have regained their 2001-2003 losses, there are still a few laggard sectors that I'll be discussing a bit later.

  The Current Year

Well, it's now 2006 and we've half way through the year. What do we see? From my vantage point, we see a year of solid, but not overwhelming travel demand. Domestic trip volume, through April, is up a respectable 2.7 percent, using national hotel room night demand data from Smith Travel Research as an overall measure of performance. As for air travel, though planes are flying full, actual enplanement gains are nil, one percent below last year.

Business Travel is solid, and its strength can be seen in hotel occupancy figures for properties used most by business travelers. In metro New York , Smith Travel data show January-April occupancy at 78 percent, well above the national average 61.3 percent and 10 percentage point above that for all U.S. urban properties.

Leisure travel destination demand is also respectable, but matching or slightly above the levels of last year. These include Walt Disney World, Las Vegas and Hawaii , the major domestic destinations.

As I've ticked off these first half-year results, many of you are probably thinking - hey, the demand numbers aren't that great, so why does most every sector of industry seem so pleased with its performance. The answer lies in the fact the revenues are rising, quite handsomely, but the increases are now being driven by pricing increases. If there's and overall theme for 2006, it's pricing not demand that's the story. Average domestic hotel room rates are up 6 1/2 percent. In New York , a strong 11 1/2 percent. In major leisure destinations, while demand is flat, Walt Disney World room rates are up 11 percent; Las Vegas and Hawaii , 14 percent. Cruise line yields are up an estimated 5-7 percent. In rental rates, an estimated 8-10 percent. In total, the composite travel index, that I report in my newsletter on a year-to-date basis, is up 10 1/2 percent. That's three time the year's increase in the Consumer Price Index, for all goods and services.

What has enabled our industry to restore its pricing power is the fact that in most every sector, capacity increases have been minimal. Over a five-year period, domestic hotel capacity has grown by less than 1 1/2 percent annually. Domestic airline capacity, less than one percent. This growth in supply us well below historical averages, as commitments for new capacity were postponed during the 2001-03 downturn years. Car rental operators, who can quickly adjust their fleet size, have also kept their inventories lean. As all of us remember from Economics 101, when demand (no matter how modest) exceeds supply, prices rise.

Importance of Pricing

Pricing power is not only driving up revenues, but, more importantly profits as well. The Mckinsey Consultants estimate that for the average U.S. Corporation, a one percent increase in yields an eight percent increase in operation profits. There's clearly far more profit leverage in pricing that increases that can be generated from higher sales, or by cutting costs. Astute travel marketers, today, understand the opportunities associated with pricing moves. They also understand that price and margin improvement can come not just from across-the-board increases in brochure prices or rack rates. It can be generated from:

... changes in one's business mix (more higher- versus lower- paying customers).

... identifying less-sensitive segments of the market, and charging these higher prices.

... reducing third party commission override payments and discounted inventories to third parties.

... using lower-cost distribution channels (such as the Internet).

... and through the sale of more upgrades and extras.

These opportunities are available to every marketer, regardless of the sector of the industry you're in, or the product or service you sell. As we look at the second half of the year, I think we'll continue to see pricing as the dominant industry theme.

Balance of Year Outlook

For the rest of 2006, in spite of the turbulence we're seeing in the financial markets, the economic fundamentals that drive our business all appear to be positive. The lead business travel indicators, that I track, say that the fall business travel season should be solid, and that 2007 corporate rate negotiations that occur during this period should favor travel providers over buyers. Corporate profits for the year will approach double-digit levels, and businesses remain in a growth and spending mode. Outlays for new plant and equipment will rise for the third consecutive year. These, and other indicators, all bode well of business travel spending in the months ahead.

For leisure travel, there's more of a mixed picture. While consumer spending for all goods and services has not fallen as a result of slow income growth and above average inflation that erodes incomes, the lower end of the market is being squeezed. Wal-Mart sees this in its traffic and customer spending. But for upscale Saks and Neiman Marcus, it's not a factor. In travel, high-end products this year are clearly outperforming other sectors of the market. European and Alaska cruises are outperforming lower-priced Caribbean cruises. Air vacation travel to Orlando and Las Vegas is doing far better than that from lower-spending drive vacationers.

Industry Concerns

At the outset, I indicated that I wanted to talk briefly about what I believe are important changes that have occurred in out business over this historic 2000-05 period. The first of these is the fallout that i see occurring for the airline industry's problems. What happens in this sector is extremely important, for it's the airlines who deliver customers to car rental counter, help fill hotel rooms, and generate visitors for our theme parks, gaming sites, and other tourist attractions. The airlines are clearly in trouble, but are making headway. What's worrisome to me is that this recovery process they're shrinking in size. Aircraft have been grounded the six largest airlines have grounded 700 aircraft. Where the growth in passenger traffic historically outpaced GDP growth, it is now lagging behind. Marketing budgets, used to stimulate air travel, have been cut drastically. Since 2000, airline advertising and promotion expenditures, per revenue passenger mile, have declined by a third. Let's all hope that this retrenchment will end and the carriers resume their important role as a driver of demand.

Moving to another area, a second worry is the continued weakness in the inbound foreign arrival market. International arrivals are still 8 percent below those in the year 2000. New York City , which had almost 7 million foreign visitors in 2000, still hasn't matches its 2000peak. Unfortunately, much of the problem appears to be a function of the extensive anti-Americanism that exists abroad. It's reflected in the Pew Research worldwide studies that show a steady downward trend in the U.S. favorability ratings, largely they say, traceable to U.S. foreign policy and the Iraq War. These negatives are a real barrier to an improvement in inbound travel. Even the favorable exchange rates fro foreign visitors don't seem to be working as that have in the past stimulating demand.

Industry Opportunities

Moving to more positive developments, I'd like to mention two opportunity areas in which I think more can be done to capitalize on the potential that they offer - one is a consumer market opportunity, the second is in the travel distribution channels. They should be an important part of your 2007 marketing plans.

Earlier, I noted the growing importance of the up-market and its opportunities. Every day new data is released showing the widening income and spending gap between consumers at the top end versus the bottom end of the market. A fifth of all households, 23 million in all, control half of all earned income and hold almost three-quarters of household net worth. In the U.S. , there are now 9 million households, a number equivalent to all households in the state of Texas . Forgetting statistics fro a minute, for those of you who were in Las Vegas last month, you saw it all firsthand ... plush hotel rooms, designer boutiques and celebrity chef restaurants. No more $9.95 buffets! Luxury hotel properties are being built everywhere. Would you believe, Hilton now plans to build a Waldorf Astoria at Walt Disney World? As an indication of the growing importance of luxury brands in our economy, last week the Wall Street Journal reported that numerous businesses schools now include luxury tax marketing as part if their curriculum.

For those selling international travel, there are lessons that can be learned from the transatlantic airlines. They're now walking away from the mass middle-market and focusing on upscale business and leisure travelers. Rather than more jumbo jet flights to London, Paris and Rome, opportunities in smaller niche markets are being developed, with flights to such cities as Barcelona, Nice and Budapest. Niche demographic, geographic and special-interest market are now the focus, rather than the mass market.

No presentation today would be complete without some commentary on the growing potential of the Internet as a travel distribution channel. Study after study show that today more than two-thirds of households who travel use the Internet for planning and/or booking the travel arrangements. While supplier Web sites are now a given, in my contacts with travel organizations, I've been surprised by the limited amount of information that they are gathering from their Web site visitors, information that can make their site more effective. The information voids include:

... how visitors are attracted to their site.

... who they are in terms of demographics and travel profiles.

... how effective the site is in terms of the clarity and completeness of the information provided.

... the site's booking capability and its ability to convert lookers to bookers.

Similar types of information should be gathered from travel intermediaries and journalists who visit the site. They're important travel influencers. Online research can help answer questions, and should now clearly be an important part of your 2007 research budget.

Summary

Well ... let me summarize. We've looked back a bit at where our industry has been ... the peaks reached in the year 2000, the prolonged downturn period of 2001, 2002, 2003 ... the recovery years and return to normalcy in 2004 and 2005 ... and, now, 2006 - a year of solid but not spectacular demand, but one in which renewed pricing power is driving industry revenues and profits. The outlook for the balance of the year is good, but with some caveats that I've mentioned earlier. As you plan for the month ahead, and 2007, again, I urge you to keep abreast of some of the fundamental changes that are occurring in our business, changes that may require changes in your longer-term business strategies.