Carnival Corp.’s flagship division had the busiest booking week in its history between March 28 and April 3 after the U.S. Centers for Disease Control and Prevention dropped its Covid warning about cruise travel and as redemption deadlines for travel credits approached. Global airline passenger traffic improved in February from January as the effects of the omicron variant faded and demand more than doubled from the year-earlier period, the International Air Transport Association said Wednesday. The trade group called on airport infrastructure providers to prepare for a “huge increase in passenger numbers in the coming months.” Spending on air fare was up about 8% from 2019 levels in the week ending April 2, while lodging purchases were up 17%, according to a Bank of America Corp. analysis of U.S. credit and debit card trends.
“We have seen extraordinarily rapid recovery, not only of demand levels, but pricing power,” Marriott International Inc. CEO Anthony Capuano said at a JPMorgan Chase & Co. conference in March. “You’ve got historically high levels of savings. You have folks that have been cooped up for two years. You have a lot of pent-up demand for leisure.” For example, there has been no discernible impact yet in Las Vegas on leisure visits from the expiration of stimulus benefits in the U.S., rising gas prices or fluctuations in consumer sentiment, BofA analyst Shaun Kelley wrote in a March report, citing conversations with casino executives.
When household spending power is squeezed, consumers typically cut back first on big, expensive items and things that are nice to have but not completely necessary. That includes home furnishings, big do-it-yourself projects, cars and — typically — holidays. There are some signs that spending growth among lower-income consumers is slowing, particular on clothing and furniture, according to a separate BofA report published this week. To that end, Melius Research analyst Rob Wertheimer downgraded his view on toolmaker Stanley Black & Decker Inc.’s shares to “hold” last month, citing concerns about a fade in consumer spending. “The huge dip in restaurant spending during the first stage of Covid powered huge sales increases in things like tools,” he wrote in a March note. “The past few months, though, have shown a worrisome break in the long trendline of spending, with consumers seemingly unable to stop spending on other things as restaurant spend came back.”
There are only so many new TVs, kitchen counters and Peloton bikes a person can buy, though. Consumers have spent the past two years investing in making their homes more comfortable. What the average person hasn’t been able to do as much during the pandemic is go on vacation in farther-flung corners of the world. As a result, many are prioritizing expenditure on travel.
It’s not just that passengers are willing to hold their nose on higher prices; they’re increasingly choosing more premium options. Room rates for American luxury hotels were up 25% in March compared with March 2019, a reflection of travelers’ willingness to splurge, according to STR, a CoStar Group Inc. company. Average daily rates for vacation rentals are rising the most in urban areas, which were shunned for much of the past two years, according to AirDNA, a short-term rental data provider. Airlines previously thought that customers would choose business class or pay the extra cost for roomier seats only if their company was footing the bill for a business trip. It turns out leisure travelers like those options, too, especially as they venture back out again into the world after spending so much time in their own homes during the pandemic. The pace of the airline traffic recovery has been similar across cabin classes, IATA said.
In a sign the airlines expect the current robust demand to not only hold up but grow, all of the top U.S. carriers with the exception of Delta Air Lines Inc. expect to be flying at or above their pre-Covid capacity by the third quarter, according to analyst Helane Becker at Cowen & Co. Delta isn’t restricting flights because of a lack of interest. The carrier reported the highest cash sales day in its nearly 100-year history in March, even though it has restored only about 87% of its flying capacity. Delta is deliberately bringing back seats more slowly to ensure it can staff flights amid widespread labor challenges while keeping a close eye on fuel prices.
To compensate for the higher energy costs, Delta needs to recapture about $15 to $20 each way on passenger tickets, President Glen Hauenstein said at the JPMorgan conference in March. That’s manageable in the context of an average ticket price of about $200 and the generally wealthier air traveler that Delta targets, he said. “We see the increase in fuel that we’d have to pass through as something that is very, very achievable for the demographics that we have without demand destruction,” Hauenstein said. Ultra-low-cost carriers may run into bigger issues with sticker shock because their customers tend to be more price sensitive, he said. Normally, it takes Delta about 60 to 90 days to adjust its pricing power and capacity plans to offset higher-than-expected fuel costs. That timetable has been accelerated thanks to the robust demand, and Delta expects to balance out higher fuel prices in the second quarter, Hauenstein said.
“If higher commodity prices persist, we will have to see what impact they have, but please bear in mind, the industry was able to cope with $100 oil between February 2011 and September 2014,” Aengus Kelly, CEO of plane lessor AerCap Holdings NV, said on the company’s earnings call last week. “We have every confidence that it will do so again this year.”
There is a natural limit to customers’ willingness to tolerate inflation in travel. Already there are some warning signs, according to Destination Analysts, which has been polling more than 1,200 travelers since March 2020. More than 60% of those surveyed between Mar. 15 and 23 said that prices were too high, and almost a third said this had kept them from traveling in the past month. A quarter said recent inflation in consumer prices had led them to cancel an upcoming trip. Meanwhile, the amount that American travelers said they would spend on trips this year fell to just over $4,000 in mid-March, from $4,283 in mid-February. Even so, some 61% of travelers said vacations were a high budget priority for the next three months.
After those first few trips post-pandemic are out of the way, higher prices will force many to think twice before booking the next one. Or they could force vacationers to trade down from a luxury property to a premium one, or exchange a suite for two connecting rooms. But for now, travel executives appear justified in thinking this robust demand will last.
More From Writers at Bloomberg Opinion:
• Consumers Are Finally Poised to Trim Spending: Andrea Felsted
• U.S. Economy Is Doomed Without Stronger Spending: Gary Shilling
• Aerospace Supply Troubles Are Far From Over: Brooke Sutherland
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.
Andrea Felsted is a Bloomberg Opinion columnist covering the consumer and retail industries. She previously worked at the Financial Times.
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