Rising inflation and interest rates have made Americans wary of overspending, cutting back on purchases of food and electronics while also holding off on big purchases like new homes.
But there’s still one area they’re happy to splurge on: travel, and this summer is shaping up to be another record-breaking season.
AAA predicts that about 70 million people will travel more than 50 miles from home this year, while the Transportation Security Administration plans to screen more than 32 million people between June 27 and July 8, a 5.4% increase from the 2023 record.
The luxury Mauna Lani hotel on Hawaii Island is seeing about a 50% increase in leisure travelers from last year, with many booking longer stays, said Ian Milley, director of revenue management.
People are also traveling further afield: Intentions to travel internationally are at an all-time high, according to data from the Conference Board and Mastercard Economics Institute.
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Ava Hyland, a 19-year-old college student from Woodstown, New Jersey, visited Cancun, Mexico for the first time last weekend. After months of planning, she and her family spent four days at an all-inclusive resort with a group of family friends.
“I’ve never taken such a big vacation in my life,” Hyland said by phone. Barons.
Behind the surge
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The surge in travel demand may come as a surprise, given recent data showing consumers becoming increasingly price-sensitive and forgoing almost everything else.
Experts say there are many reasons why travel is surging.
For one thing, the labor market has been fairly resilient, meaning households still have some discretionary spending room, though many Americans are choosing to splurge on experiences rather than big-ticket items, wrote Moody’s Ratings analyst Claire Lee.
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Last summer, Barbie, Taylor Swift and Beyoncé all won the triple crown. This year, a string of high-profile events, including the Paris Olympics and the UEFA Europa League, are shaping up to be a strong season, Wedbush analyst Scott Devitt wrote in a note last week. Hotel occupancy in Paris during the Summer Olympics has risen to nearly 80% from about 60% in April, he said.
These spending trends aren’t likely to change anytime soon, Lee wrote, and he expects consumption growth in the coming quarters to continue to be driven by spending on services rather than goods, even as overall spending slows.
Falling airfares are also encouraging people to travel. After two years of increases, ticket prices are trending down. Airfares were 5.9% lower in May than a year ago, according to the latest Consumer Price Index report. Fitch Ratings senior director Joe Laurena said fierce competition among airlines is helping “keep the average airfare reasonable.”
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Not only are airfares cheaper, but the overall cost of travel is also cheaper: Car and truck rental prices are down 8.8% from last year, and hotel rates are down 1.7%, according to the Consumer Price Index.
The slowdown is a welcome respite after the past two years of rising prices and may encourage previously reluctant travellers to travel.
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While there is a strong desire to travel, Mastercard said consumers are also becoming more strategic about when, how and where they go.
Investors should be similarly cautious when considering taking advantage of this trend.
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US Global Jets ETF
Shares rose about 13% from the start of the year to their recent peak in mid-May, then fell about 8% since then as investors began to worry about a fall slowdown and whether consumer spending would hold up through the end of the year.
But as Wedbush’s David points out, recent data and comments from travel companies suggest that even if demand eases in the fall, it won’t fall precipitously and some sectors of the industry may still be able to thrive.
International travel, for example, is likely to benefit from a rebound in Chinese tourism and strong demand from higher-income earners: Nearly 50% of households earning more than $100,000 a year said they planned to increase their vacation spending over the next four months, according to an April spending survey by the New York Fed.
This bodes well for an airline like Delta that focuses on corporate, international and premium revenue segments.
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“Airlines that cater to domestic travelers, such as Frontier Group Inc. and Spirit Airlines Inc., could fall further,” Deutsche Bank analyst Michael Linenberg wrote.
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He rates both as holds.
Luxury travel, one of the fastest-growing segments of the industry, could also continue to thrive. Indeed, that bullish stance on high-net-worth travelers is a key reason why Viking Holdings shares have risen 18% since their initial public offering this year, and many analysts see even more upside ahead.
Cruises are generally becoming more popular with lower and middle-income groups as they seek the best value for their money. Baron‘s I also mentioned Royal Caribbean when I named it a potential stock investment earlier this summer.
Fasten your seatbelts, everyone: we’re in for a long fight.
Contact Sabrina Escobar at sabrina.escobar@barrons.com.