Higher travel options for hotels and automotive supply chain

Supply chain is a term that was only used by business or logistics. Today we hear daily why infant formula is not available or why containers are stacked up in a port. At Dario’s Italian Restaurant at Boston’s Logan Airport, on a recent visit, no cream was delivered, so was unable to prepare some of the menu items. The waiter said “you know, the supply chain problem”. Airlines have used supply chain excuses to explain the late delivery of planes or why they cannot reach a pre-anticipated level of capacity. In many things we buy, we realize our dependence on supply chains when the products are not available as we would have expected.

Air travelers also face supply chain challenges in other areas. Package tours, i.e. purchased vacations that include a flight, hotel, possibly car and experiences, were affected because not all opportunities were available or prices were particularly high . Although leisure travel in general was strong in the summer and remained strong in the fall, this category of leisure travel is under stress and represents a low risk for a full recovery in the airline demand.

Large segment of leisure travel

People travel for leisure for many reasons. Package tours make up a small segment of all leisure travel, but this segment is larger for some destinations. About 30% of travelers say they want to incorporate many experiences into their vacation. For these people, an organized trip can be the way to fill the days. In 2019, my family took a two-week vacation in Vietnam. We worked with a local travel agency who arranged our domestic flights, all hotels, and advised us of many different activities. We probably could have arranged all of this ourselves if we had taken the time to explore and research, but buying the tour was worth it for us and we had an amazing and memorable time.

Especially internationally, package tours can be a way to see things and gain access that would otherwise be difficult or more expensive. When hotels are unavailable or certain activities are unavailable due to supply chain shortages, it could change the desire to visit a place. Although the number of trips or the number of travelers will not change, these supply chain challenges could affect international leisure destinations the most and, consequently, the airlines that serve these routes.

Staffing issues affecting hotels and resorts

One of the major issues affecting package prices is the steep increase in hotel and resort rates. An industry executive said that while employee shortages were more acute last year, many properties maintained the higher rates put in place then, even as some of the pressures eased. Like airlines, price elasticity affects hotels and resorts, meaning higher fares reduce demand. While the idea of ​​a “revenge trip” may somewhat mitigate this, higher fares will eventually dampen demand.

Consumers often decide on a trip based on the total price. Higher prices for airfares and hotel rates mean one of two things: some places will experience absolute volume, and others will receive visits, but for shorter stays. For airlines and hotels, one of the advantages of a fixed price is that the amount paid for the airfare and hotel is opaque to the buyer. This allows the airline or hotel to offer promotional rates to fill otherwise unused capacity, but in a way that does not invite a competitive match or dilute “posted rates”.

Car rentals still disputed

Car rental companies returned many vehicles right after the pandemic hit and are still facing vehicle shortages in many places. Just as new cars face supply issues, due to chips or other supply chain issues, it means rental companies often don’t have enough vehicles to meet demand. On a recent trip to Florida, we were told that at check-in no cars would be available for two to three hours. When we got out to the car area, we were able to take a Ford F150 that had just been returned, although we had rented a midsize.

Another industry executive said car rental rates remained “incredibly inflated”. This, like the flight and hotel issue, adds more uncertainty to the package opportunity which is likely to be more in evidence during busy holiday periods. It also means ride-sharing, like Uber or Lyft, will likely be used more often for some trips. As hotels do, car rental companies are likely to try to maintain their higher rates even as they bring car inventories down to levels that meet demand.

Accommodation prices may affect this trip

An often underestimated aspect of package holidays is the relationship to accommodation prices and valuations. For some demographics, home equity loans are the primary way to fund those vacations. When home values ​​are high and interest rates are low, there’s more equity to tap into a loan to take this kind of family trip. With interest rates soaring and home values ​​stagnating, this limits the ability to take out such a loan or raise rates to an uncomfortable point for many potential buyers.

This does not affect all buyers of these products, but does affect some. The industry has seen it in other environments, such as during the housing crisis of 2008-2011. Meanwhile, some of the more price-sensitive trips have simply disappeared as people’s source of funding has evaporated.

Contributes to income uncertainty

In Delta Airline’s recent earnings release, CEO Ed Bastian spoke optimistically about the demand environment. He focused on the normal fall from summer to fall not happening and stressed that there are no signs that demand is weakening. Most of his comments focused on higher priced business travel and leisure travel. While higher-priced leisure may be an industry force over the next year, there are still many pressures impeding a full volume return to business travel.

Airline industry revenue can be leveraged more on business and high-end travel, but the industry’s high fixed costs mean airlines often have to fill the gaps with sensitive leisure travelers to prices. When prices for hotels, rental cars and other prices for vacationers increase, it adds uncertainty to the income environment. While many trends are positive, as Delta pointed out, this force is not top-down and it creates some uncertainty in total revenue. Different airline business models may be more at risk than others for some of these trends.

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