Morgan Stanley Forecasts A “Chilly Season For Travel” Amidst Middle-Class Consumer Constraints

Morgan Stanley has expressed concerns over the approaching season, forecasting a potential decline in consumer spending, particularly in the travel sector. Michelle Weaver, the firm's US equity strategist, stated in a recent note that companies predominantly reliant on "lower-income consumers" are witnessing a gradual decrease in demand.

This observation aligns with a series of forewarnings from Wall Street analysts, elucidating the deteriorating conditions for consumers. Brian Heavey of JPMorgan similarly painted a bleak picture of the US consumer on Sept. 20, and Morgan Stanley's Chief Investment Officer, Mike Wilson, delineated the predicaments of the consumer sector in another note, emphasizing the deteriorating savings and increased reliance on borrowings.

A CONSUMING CONCERN

Weaver’s insight emerged after the Fed’s latest beige book revelation, which highlighted a probable exhaustion of savings by consumers, pushing a rise in borrowings to sustain spending. The situation has been exacerbated by the termination of the three-year hiatus in student loan payments, compelling around 28 million borrowers to resume payments and imposing a $15.8 billion monthly – or $190 billion per year – burden on US consumer spending.

THE TRAVEL SECTOR WOES

According to Weaver, the initial repercussions of the slowdown would be palpable amongst travel companies catering predominantly to lower-income consumers, already indicating demand weakness. This sector includes low-cost airlines and economy hotels, which are now experiencing diminished demand and weakened revenue per available room (RevPAR). These trends are suggestive of the consumer’s inclination to shift towards more economical modes of travel, with domestic travel plans that exclude flights being preferred, indicating the selection of destinations accessible by road or rail instead.

SECTORAL DISTINCTIONS

A notable distinction in demand trajectories was observed at Morgan Stanley's Industrials Conference between Ultra-Low-Cost Carriers (ULCCs) and Legacy Airlines. ULCCs, who might have a larger base of low-income consumers, have reported a substantial downturn in demand, whereas legacy carriers still reflect positivity, their primary concern being escalating fuel costs.

LUXURY VS. ECONOMY

The luxury segment, contrastingly, has not witnessed a comparable downturn. Economy RevPAR has been persistently down by 3-4% year-over-year since April, while luxury RevPAR oscillated between -4% and -2% through summer, before settling at -3% in September.

CONSUMER’S ADJUSTING PREFERENCES

Morgan Stanley’s AlphaWise Consumer Survey substantiates the assumption of an ongoing consumer desire for travel, with 58% of respondents intending to travel in the ensuing six months. However, there is a clear inclination towards cost-effective alternatives and reachable destinations, underscoring a potential resilience in consumer travel desires amidst financial constraints.

THE IMPLICATIONS:

In this scenario, Weaver conjectures a broader implication on company margins and earnings, with the potential for more downside, particularly in the Consumer Discretionary sector. The sluggish recovery in airline stocks and diminishing personal consumption data further reinforce the apprehension surrounding consumer spending capabilities.

CONCLUSION:

While the Biden administration’s economic strategies have seen fleeting success, there is an apparent and swift deviation from the anticipated robustness in economic data, necessitating cautious observation of consumer trends. The travel industry, primarily those sectors exposed to lower-income consumers, needs to brace for impact in this fluctuating economic climate, remaining vigilant and adaptive to the evolving consumer preferences and financial landscapes.

This convergence of warnings from distinguished financial entities illuminates the precarious state of the consumer sector, emphasizing the necessity for strategic preparedness and adaptive resilience to navigate through these uncertain economic weathers.