Air and hotel prices in Europe: Up or down for 2006?

EVEN Johnny Carson’s all-knowing Carnac would have had trouble predicting how much travel to Europe could cost next year. But this is the time that travel industry prognosticators like to dust off their crystal balls and issue predictions.

Some experts foresee more expensive airfares and hotel costs, others think more transatlantic flight capacity and the entry of low-fare players will keep costs down, and still others believe that the U.S. dollar, finally somewhat stable after three years of being hammered by the pound and the euro, has room to regain some lost ground.

For travelers who like to plan, it is also time to start making some decisions about where and when you’d like to travel in 2006. This summer’s high airfares to Europe -- often topping $1,000 for London -- and less-than-favorable exchange rates against European currencies made it a less-than-attractive destination for thrifty travelers.

I put on my turban and consulted the experts to try to divine the bottom line.

American Express recently issued its annual business travel forecast. It foresees increases of as much as 6% in transatlantic business-class fares. Hotel rates, especially in major cities, also are likely to increase. AmEx predicts, for example, that London hotel prices -- already so expensive that even the federal government allows $274 per day for lodging -- will rise as much as 15%.

“It’s a combination of occupancy and capacity,” says Ruth Philpott, director of hotel procurement for EClipse Advisors, a division of American Express.

High demand from business and leisure travelers in major European cities, coupled with limited real estate for hotel development, allows hotel owners to charge top dollar -- or euro or pound, since the American Express’ survey looks at prices in the local currency.

This is an area where, for the first time in years, there might be some light for American travelers.

The dollar has stabilized against the euro and the pound, after having taken a nose dive since 2001. It’s trading at about $1.20 to the euro and $1.78 to the pound, at or near their three-year averages.

At its worst in the last three years, it cost $1.36 for a euro and $1.95 for a pound.

How does that translate? Say a room in London is 100 pounds. In today’s dollars, it would cost about $178. Last December, it would have been $195, or about 10% more expensive than today. So if that room goes up 10%, it is essentially a wash.

“People aren’t quite sure on where things are going to go,” said Michael Stumm, president of Oanda (www.oanda.com), which provides foreign-exchange services for travelers. “The dollar has gotten quite a bit stronger and has flattened off a bit.”

Of course rates fluctuate, and it’s almost impossible to predict which way the currency winds will blow.

But in 1986, the Economist magazine in London devised a method for measuring the relative value of currencies against the dollar. It’s called the Big Mac Index, and it’s something American travelers can, well, really sink their teeth into.

By comparing burger prices around the world, it supposedly offers a digestible guide to whether currencies are at their “correct” level against the dollar. It is based on the notion that a currency’s price should reflect its purchasing power.

The basic argument is that if a Big Mac at current exchange rates costs more in France, for example, the currency is due for a correction, Stumm said.

“Ultimately the Big Macs of the world are going to end up the same price,” he said of the theory.

A Big Mac in Europe now costs the euro equivalent of about $3.40, according to the index; a Big Mac in the U.S. costs $3. According to the theory, the euro is overvalued against the dollar by about 13%. (To see this, go to www.oanda.com/products/bigmac/bigmac.shtml.)

“It’s not a bad indicator,” Stumm said. Perhaps we’re due for some more good news on the dollar.

Capacity and competition, meanwhile, usually have been reliable indicators of fluctuations in airfares. Both factors are coming into play in the transatlantic market.

Departures by domestic airlines from the United States to Europe in September increased 10.5% from the previous September, according to the Air Transport Assn., a Washington, D.C.-based industry group. In its efforts to move out of bankruptcy and into profitability, Delta has been at the forefront of this trend.

It announced last month that it would launch service to 11 new transatlantic destinations from Atlanta and New York’s JFK by next summer, which would make it the world’s largest airline across the Atlantic.

And some low-fare competition has emerged on the routes. Aer Lingus has implemented a low-fare pricing strategy that has put pressure on some of the routes it flies. Two new all-business-class airlines, Eos and MaxJet, also have launched in the last few weeks and aim to drive down the cost of business-class fares between New York and London.

But will these factors flatten out airfares for the rest of us?

“It remains to be seen,” said Terry Trippler, an airfare expert with Cheapseats.com. “That’s the $64,000 question. Domestically with the increase in seats, fares dropped and dropped and dropped.”

For budget travelers who have some flexibility in their travel schedules (and a warm coat), travel in the winter months is cheaper.

“The summer is always expensive to Europe,” said Jared Blank, editor of Online Travel Review, a blog about the airline industry. “Expect it to be the same next year as a lot of the capacity is on new routes.

“If anything, you may see airlines charging a premium on the new nonstop routes.”

Indeed, a quick check on Orbitz for fares to London, Paris and Rome for a June trip from Los Angeles indicate there are no real bargains to be had -- at least not yet.

The lowest fare to any of these cities was more than $1,000 -- with one exception: Aer Lingus to London by way of its Dublin hub was $842.

As a gateway to Europe, Dublin may be the new low-fare leader, with five airlines posting fares for June under $1,000. One strategy to save on airfares may be to book a flight to Dublin and continue to your final destination on a low-fare European carrier.

For now, though, your best bet is to monitor fares for sales or reduced prices.

“If you see a flight you like, it probably isn’t going to get any cheaper,” Trippler said.

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James Gilden can be reached at www.theinternettraveler.com. Travel Insider welcomes comments but can’t respond individually to letters and calls. Write to Travel Insider, L.A. Times, 202 W. 1st St., L.A., CA 90012, or e-mail travel@latimes.com.