Travel trade braced for rough ride as business falls prey to the fear of war

"Please go away often", entreats a sign outside the Harvard branch of American Express. When I looked inside the door of the travel agency in Massachusetts yesterday, there were no takers. With the US on a war footing, many Americans are choosing not to go away at all.

The repercussions of this disinclination to travel are being felt most keenly in Britain. American tourists spend more in the UK than any other nationality, and the two leading long-haul airlines, British Airways and Virgin Atlantic, depend on US travellers for a large slice of their earnings.

Fighting a 21st-century war is a capital-intensive business. So too is 21st-century travel. Running an airline or owning a hotel involves high fixed costs. To meet those costs, the travel industry's main weapon is price. Cutting fares or room rates is a blunt and messy device, not least because it enables existing customers to pay less. But as another bleak month begins for Britain's travel trade, there are few other tricks to entice people to go abroad.

A thought uppermost in the minds of many travellers is the risk that they could become caught up in hostilities, or at least separated from their loved ones, or companies. Corporate America fears the outbreak of war could trigger an aviation shutdown similar to the aftermath of 11 September. So senior managers have been told to minimise air travel, which impacts directly on airlines.

British Airways has spent the past few months building up reserves of cash to enable it to pay the bills in the event of war. "We're planning for the worst and hoping for the best," says BA's marketing director, Martin George. "We have over £2bn in cash. After the traumatic events of September 11, at worst we were seeing £2m of cash flowing out of the business every day. Very simple arithmetic says we have plenty of cash to survive whatever's going to come about." After the 1991 Gulf War, BA loads were so low that it offered return fares to Australia of £175 to almost anyone who had a friend or relation who worked for BA.

Airlines are naturally "cash-positive"; because passengers pay up to a year in advance, airlines can use earnings for future flights to pay wages now. But if people stop booking en masse, the game is up. During and after the Gulf War there was a dramatic downturn in the amount of travel. Long-established airlines from Dan-Air to Pan Am went bust, stranding thousands of passengers. Then, as now, anyone who buys a ticket direct from a scheduled airline stands to lose all their cash if the carrier shuts down. In contrast, the package holidaymaker is well protected: the tour operator Intasun went bust after the Gulf War, but its customers got their money back.

As the military temperature rises, package holiday companies are suffering on two fronts. First, customers who traditionally booked their summer holidays in January have decided to wait and see, either because of the fear of hostilities or because late bargains were widely available even in peak season last year. Second, the no-frills airlines are now biting deep into the tour operators' traditional customer base. Indeed, some low-cost carriers are making so much money that the threat of conflict is seen as a mere distraction.

Michael O'Leary, of Ryanair, said: "If a war breaks out, our response will be to lower prices and keep people flying." His airline has amassed a war chest of €1bn (£660m).

From the mercenary traveller's point of view, the threat of war is already paying dividends. Fares across the Atlantic and within Europe have been forced down to historic lows, while some five-star London hotels are selling rooms at under £100. This is the moment to go away often.