Is the summer vacation boom over before it really started?
This summer has long been predicted as a potential boom time for the travel industry. Retailers and economists have talked a lot about how consumers are starting to buy fewer things and instead spend more on vacations and other experiences.
But that’s not the story the travel stocks themselves tell. Worries about inflation and a resurgence of Covid cases in China are starting to take their toll.
After a torrid start to the year, the shares of major hotel chains including Hilton
(WH) and Hyatt
(H) fell on economic jitters and concerns over slowing travel. All three stocks are down nearly 20% this year.
Major airline stocks, which have held up better than the broader market this year, have lost ground lately. US stocks
(DAL) and South West
(LUV) all fell sharply on Tuesday and are now in the red for 2022.
Is this a bad sign for the summer travel season and for the economy? It’s still too hard to say.
It’s worth recalling that last year’s second and third quarter earnings and revenues for leisure businesses were incredibly strong as consumers started to worry less about Covid. Many Americans tired of sheltering in place in 2020 have returned and traveled as Covid cases dwindled during what has been dubbed the “Hot Vax Summer.”
Companies in the travel sector could therefore face difficult comparisons with last year’s results. Add inflationary pressures into the mix, and the year-over-year contrast could be even more jarring.
Morning Consult analysts said in a report earlier this month that “services like air travel … saw modest spending declines as robust demand faltered slightly amid eye-popping prices.”
Morning Consult analysts further noted that despite “strong pent-up demand”, the travel industry “could be subject to spending declines if flight and hotel prices continue to soar”. Indeed, the government reported earlier this month in its Consumer Price Index Inflation Report that airline fares soared 33.3% in the past 12 months to the end of April – the biggest year-on-year increase since December 1980.
Labor shortages could also hurt the travel industry this summer, especially in airlines.
“Demand for seats on planes is growing but supply is tight, driving up ticket prices for consumers,” Christopher Raite, senior analyst at Third Bridge, said in a recent report.
“If airlines could staff their planes more reliably, there would be more flights available, but the labor situation is tough and adds to inflationary pressures in the industry,” he said. added.
Raite also pointed out that “pressures on wages and fuel costs” are a major problem for airlines and that this could “limit the recovery in profits across the sector despite soaring revenues”.
Kerosene prices have more than doubled in the past year, according to data from the International Air Transport Association, an industry trade association.
For their part, travel industry executives remain cautiously optimistic for the summer, even if inflation and other macro concerns are an issue.
“Despite the usual Covid warnings, rising inflation to worry about and of course the geopolitical situation, the pent up demand that exists for travel seems to be outweighing anything the market can throw at it. “said Peter Kern, CEO of Expedia. during an earnings conference call with analysts earlier this month.
“We continue to feel very good about a summer recovery that should be very robust,” Kern added.
And one travel CEO even seemed to appreciate the price hike.
“Inflation is a bad word, but… there’s a nice side to it, which is pricing power,” Norwegian Cruise Line CEO Frank Del Rio said on the conference call. company results with analysts this month. Del Rio said the cruise industry should be able to raise prices without hurting demand.
He even went so far as to predict that 2023 could be a banner year for the company, if the momentum continues.
Still, he had a caveat: demand should only hold as long as there are “no more black swan events,” referring to the phrase investors use to describe highly unpredictable.
The pandemic, supply chain disruptions, war in Ukraine and inflation at its highest level in four decades can all be seen as black swans. That’s why Del Rio also said, “we’ve had more black swan events in the past two years than I think we’ve had in the previous 20.”