As Covid restrictions ease across the United States, hospitality and leisure-focused businesses must now contend with a new risk—stubborn, elevated inflation that could further curb recovery in the travel industry.
The war in Ukraine has driven up global oil prices, pressuring already high U.S. energy costs, including jet fuel and gasoline. Consumer discretionary spending on non-essentials, including flights and accommodations, is being closely monitored. In short, what was supposed to be the summer of “revenge” travel may end up disappointing expectations.
Leaving on a jet plane
Bloomberg reports that jet fuel prices have surged 50% year to date, and are up 74% from 2019 levels. This escalation has not yet been pushed through to consumers in the form of higher fares, as airlines battle over share of the resurging leisure travel market. This competition, along with the lagged recovery in the business travel sector, has muted the pricing power of airlines.
On the road again
The pandemic-induced resurgence of the great American road trip had travelers logging extra miles; social distancing measures helped to boost the popularity of drive-to destinations during quarantine. As we head into the 2022 summer travel season, expectations for rising travel demand are high, but there is also concern that elevated prices at the pump will negatively influence traveler decisions. The price for a gallon of gas clocked in at an average $4.73 in the United States as of March 9, a 55% increase over the average price of $3.06 since 2005.
Despite the recent shock of higher gas prices, consumers’ share of wallet on energy-related goods such as gas and heating oil has been on a long-term decline, as the below chart shows. From March 1970 to January 2022, average spending on those essentials as a percentage of household budgets was 5.81%. Compare that to January 2022, when the figure stood at 4.2%, and it’s easy to see that consumer spending on energy is nowhere near its peak of the early 1980s, when the average skyrocketed to 9.5% of total household spending.
Based on research from Bloomberg, gasoline prices would need to eclipse $5 per gallon—with crude oil reaching $160 per barrel—to negatively impact consumer spending. At that point, the cost would exceed real aggregate labor income; wages have grown 5.8% year over year through February, real wages–adjusted for inflation–are down 2.6%, illustrating the impact of existing inflation on consumers’ bottom line.
Labor remains hospitality’s biggest concern
Recovery within the hospitality sector is a work in progress. Resort properties and drive-to destinations continue to experience solid occupancy and hold daily rate pricing power; meanwhile, downtown properties in central business districts are lagging amid still-muted business traveler demand.
While increasing energy prices may have an impact on the leisure traveler segment currently leading recovery in the overall industry, hotels have a more acute concern—namely, the availability and cost of labor as operations scale to meet traveler demands once the pandemic is over. It is expected that the cost of hiring and retention of labor will continue to eat into profitability.