Travel Forecast Now A Bit Tricky

No organization has been more bullish on post-Covid travel recovery than MMGY Global (I myself have been accused of being too optimistic). The strength, surprising to some, in both initial leisure bounce back and a now resurgent commercial recovery has proven the economic importance of travel. I look back at 2021 and find humor in the "experts" who predicted a long slog for a return to pre-Covid conditions. Oh ye of little faith!

So as recovery has hit full stride, where do we stand now?

First, let's talk about global leisure demand. Although Memorial Day will be a record and Summer '24 will be very strong indeed, intent is coming down, and although still above historical averages, we all understand intuitively that households on the edge of the economy are already dropping out of travel. But more importantly for the belly of demand I see weakness emerging in middle & upper-middle class households, especially in the U.S. This will unquestionably affect travel industry revenues over the next 24 months. U.S. consumer confidence fell to a 6-month low in April and MMGY's TSI has shown weakness for several months, which you can see in lockstep below. Suppliers such as Southwest, Expedia, and Airbnb, plus categories including mid-market all-inclusives and low-cost destinations, are seeing the early signs of weakness. Read an alarming earnings report from Q1.

Economic headwinds such as increasing household debt (credit cards and BNPL where 43% of Americans are behind on payments), plus persistent inflation and dwindling savings rates are not good signs for pockets of the travel economy. Just in the last week, Ryanair CEO Michael O'Leary warned of weak ticket sales, Target lowered prices on over 5000 items and comments from Starbuck's CEO tipped weakness. And two of these brands aren't exactly discounters.

There are still silver linings in the macro leisure demand environment:

1) Affluent consumers continue to create pricing & demand compression for: global air carriers (United, Delta and Emirates are seeing strong performance while Southwest is struggling); high-end hotel brands (see JLL comments); and lux destinations/complementary services in categories noted by AMEX.

2) In-bound US travel is coming back, reversing the trade imbalance with Europe that has been in place for two years. Not sure the dollar strength is that big of a factor, but here is the chart for those of you who think it is material. I think it is more relevant to recognize a delayed recovery in many parts of Europe (and Asia for that matter) that will now bear fruit for American destinations. You can see below the strengthening 12-month intent levels for travel to the United States.

3) Conditions in the U.S. are demanding an ease in pricing, with discount dynamics again in place (please see this as bad for some company earnings but good for stimulating some demand). 41% of travelers in MMGY's Q1 survey placed price as the #1 consideration for booking (that number was substantially lower in 2022). It is important to note, also, that growing luxury capacities cannot be entirely filled by truly affluent households. The future weakness of "travel posers" who overspent their means and helped created compression in the high-end from 2021-2024 will not sustain the behavior. Ultimately this pushes rates down and creates tougher, more competitive conditions for top-of-market offerings. Post-Covid record revenue was boosted by households in the $80k-$125k, 36% of which identified as "luxury travelers" even though they do not fit the classic definition of "wealthy." The substantial travel cohort of middle/upper middle class (to include HHI up to $200k) will not boost travel demand in the same way they did this previous four years). They instead will now be forced to return to more value-based decisions. HHI at $250k+ (approximately 1.5% of the US population) will be the remaining buyers of luxury, and even at that will demand some value pricing.

4) The leisure travel picture for domestic EMEA and Asia is improving. Despite headlines to the contrary, Europe's economy is getting better with a lowering interest rate environment, and the Chinese have been traveling intra-Asia for months, indicating that longer-haul international bookings are next. CTrip is particularly bullish. Even in Japan, where the economy has been in neutral for decades, travel is growing at its fastest pace in years. We have also been talking about the nascent India market for some time, with its massive investment in financial and travel infrastructure. India represents the fastest growing economy in the world as well as a younger, wealthier consumer that will fuel travel growth throughout the region.

5) Cruises have never been more en vogue. From the very early stages of post-Covid travel, global ocean and river cruises have exploded. RCCL earnings, the Viking IPO and the effect of an often overlooked mature traveler demographic are all clear indications to expect further growth.

Now, how about commercial travel demand? This is where the growth runway continues to extend.

Just as with leisure recovery in 2021-22, corporate and group travel have snapped back faster than many expected. Current spending/demand, coupled with intent for further investment, are both extremely positive and underpinned by strong company earnings around the world. Group travel, in particular, is carrying a historically disproportionate share of contribution.

The unique recovery dynamics for the travel industry (which will continue to produce better performance than retail or manufacturing industries) revolve around the juxtaposition of leisure demand and corporate travel investment. The teeter totter that saw revenge leisure demand surge before giving way to business travel investment, as it waned, allowed for a strong blended performance.

So we are now coming back in line with traditional demand generators, or market equilibrium, for travel suppliers.

Here's a great chart from the CoStar team to summarize how hotel demand has shifted back to corporate mid-week sources, helping for the moment to underpin RevPAR.

So:

Yesterday - revenge leisure travel, mountains, beaches, high prices, poor service, going to Europe, broad demand, remote work in leisure destinations

Tomorrow - business investment, cities, moderating prices, coming from Europe, bifurcation of high/low end demand, back in the office, meetings

While revenue managers inverted their approach from 2021-2023 to rely on leisure vs corporate, the paradigm of building base with business travel is back to boosting performance. The most obvious signs of this truth can be seen with the re-fashioned airline route maps and revenue profile. Smaller aircraft servicing smaller leisure markets have been replaced with larger equipment in major domestic and international city pairs. Look no further than the Airlines Reporting Corporation (ARC) data that shows a flattening of volume but growth in avg fare.

I think it is also interesting to look at how the airlines are plussing up revenues for "front of the bus," as fare growth for business class is outpacing coach seats on key routes. This "premiumization" pricing strategy is evident in cruise (cabin configuration & shoreex), lodging (booking window & upgrades) and attractions (special passes & extended hours). Ergo, price inelasticity still exists for those offering limited inventory to the higher end of corporate and leisure segments.

I'd like to harken back to my post last year on WFH (my bias against) but through the lens of travel. There is clear evidence that people back into physical offices equates to more business travel, both group and IBT. Remote work continues to decline, and while I could demonstrate this with a chart that shows a pandemic peak of 70% remote work now down to 29%, I prefer to chart how many people are playing disc golf on a Tuesday afternoon.

As major employers such as Boeing and Barclays continue to bring more rigor to office hours, and as unemployment ticks up, expect corporate travel to benefit. As ever, we connect our organizations' people and clients with events and meetings, so the return of work-life routines will overcome slightly higher unemployment.

My overall assessment for the go forward tells me there will be challenges coming in 2025. Yes, business investment will remain strong to buoy certain segments of travel, and emerging leisure demand in regions such as India, the Middle East and pan-Asia will boost the global picture. But the American consumer is being pushed to the brink and that portends some sort of mid-term recession to be felt by brands that can't trade entirely on the 1%. The conditions expose some big suppliers, especially Low Cost Carriers (LCCs).

As just one sign of travel's direction, 普华永道 released its projection for 2025 hotel RevPAR growth by segment. It shows current year growth, where the only weakness is in economy lodging, while demonstrating that future growth will slow in every segment with the exception of luxury.

Travel over the long-term will be a juggernaut, and virtually all parts of the world will enjoy growth that outpaces many other segments of the global economy. This said, it is time to take seriously a softening economy and the strategies necessary to address complex and challenging short-term travel conditions.

A quick word on marketing trends that we should all be tracking.

1) The, albeit overstated, AI race is on in travel, and the changes coming for content development*, generative search/shopping, booking, and compliance will re-position influence in the still heavily intermediated travel funnel. You can read about Expedia's new AI assistant, Romie, here. Plus McKinsey's four major predictions for the space:

*please note that no AI was used to generate this post :).

2) Single Source Of Truth (SSOT) is quickly becoming the most important aspect of travel marketing. With a fragmented marketplace, content that can be predatory, and current flaws in LLM data, there will be emerging arbitrators that become the new "intermediaries" of what is accurate and authentic.

3) Personal sales and service will become more important parts of the customer equation as travelers and meeting planners push back on full automation and tech-enabled support. Forbes called "human interaction" a top trend for 2024, and both bespoke planning as well as the ability for suppliers to cater to the needs of an increasingly intrepid traveler are key. Use of travel agents is growing, BTW.

4) Brand, brand, brand. For those who have read my posts in the past, you know that I believe storytelling, trust and differentiation are more important brand attributes than ever. People, in their digital and personal interactions, tell us who they are through brands they wear, eat, drive and vote. Travel behaviors are perhaps the biggest of these brags.

5) Loyalty platforms are about to evolve in some major ways as: travelers place less importance on "points only;" technology changes the equation on how miles/points are monetized; and as banks as well as large aggregators such as Amazon provide a mass consolidation of where rewards are earned & redeemed. This, to me, means all travel suppliers will lose traction in their affinity platforms (w/the possible exception of some airlines) and that new channel influencers will drive demand. See interesting views on possible outcomes, here, here and here, and expect that one-on-one relationships outside of "membership" will become more crucial in marketshare battles.

Lastly, I will return to a consistent theme, data. While we are now focused on "AI," with every company on earth packaging their version of world-conquering technology, I continue to believe those who can collect, own and activate customer data will win. Scott Kirby recently announced United's new on-board seat-by-seat ad platform (more of a programmatic media play if you ask me), but the true value here is the data that will be harvested as a result. Through marketing methods that include advertising, sales, customer service, CRM-driven acquisition/retention and tech-enabled distribution/ecommerce, best-of-class marketers will build reliable and cyber-safe data strategies. Sure, the advancements in tech matter and there will always be bright and shiny tech evolution, but a granular and actionable understanding of customers and influencers will separate winners from losers.