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Research Review

HIGHLIGHTS FROM THIS ISSUE

 

EXAMINING CURRENT INDUSTRY TRENDS

As we head into spring, many sectors of the U.S. travel industry are reporting improved performance. Most economists and consumers (but not all) are expressing greater optimism, which will hopefully translate into renewed strength in travel during the upcoming summer season.

Economic Trends
Underlying consumer fundamentals seem to be improving. Personal spending rose by a greater-than-expected 0.8 percent in February, the largest monthly rise since July, according to the U.S. Department of Commerce, causing some leading economists to raise forecasts for first-quarter growth. After expanding three percent in the final months of 2011, Goldman Sachs now expects GDP to rise at a 2.3 percent annual rate in the first quarter. On an annual basis, Oxford Economics expects growth of 2.3 percent in 2012 and 2.7 percent in 2013.

Employment gains had been helping to improve the economic situation in the U.S. While claims for unemployment benefits during the last week of March fell to their lowest level since April 2008, the March payroll report released last week was a big disappointment. Jobs increased by only 120,000 after three months of back-to-back gains of more than 200,000 jobs. The unemployment rate fell slightly to 8.2 percent. The travel industry, however, contributed 6,000 new jobs, bringing the industry's total direct employment to 7,564,000, up 131,300 since February 2011, according to the U.S. Travel Association.

Consumer Confidence Slowly Improving
The steady strong job growth over the past several months (at least until March), helped to lift consumer confidence but not consistently each month. Readings from various ongoing monitors have been mixed. On the positive side, Gallup's Economic Confidence Index improved to minus 17 in the week ending March 25, from minus 21 the prior week. Economic confidence is now (by one point) at the highest weekly level Gallup has recorded since it started daily tracking of confidence in January 2008. The Bloomberg Consumer Comfort Index reached the second-highest level in four years. The comfort index was minus 34.9 in the week ending March 18.

The Thomson Reuters/University of Michigan's final March Consumer Sentiment Index also improved, rising to 76.2, the highest since February 2011 and up from 75.3 in February. Inflation worries, however, curbed hopes about an improving job market. While other indicators have risen in recent weeks, the Conference Board's Consumer Confidence Index®, which had increased in February, pulled back slightly from 71.6 (1985 - 100) in February to 70.2 in March.

While the Present Situation Index rose, the Expectations Index declined as consumers expressed less favorable short-term and labor market outlooks. Americans were also found to be more worried about inflation in March than at any time in the last ten months. The economy and gas prices top the list of consumer concerns, with 71 percent and 65 percent of Americans, respectively, saying they personally worry "a great deal" about each. These are followed by federal spending and the budget deficit (60%), the availability and affordability of healthcare (60%) and unemployment (55%).

Gas prices - An Irritant or a Hindrance?
Inflation adjusted data from the Energy Department's U.S. Energy Information Administration confirmed that 2011 was a record year with the real annual average price for a gallon of regular gas hitting $3.56. The previous record high was in 1981, at $3.45 (inflation adjusted). In 2008, gasoline prices had the longest stretch of $4 or more, but the yearly average was $3.24, as gas prices slid from October to December to less than $2 a gallon nationally.

On April 1, 2012, the average price for regular unleaded gas was $3.93 a gallon, according to AAA's Fuel Gauge. Prices are up more than 20 percent so far this year and just slightly below the record high of $4.11 posted on July 17, 2008. As gas prices began their annual ascent earlier this year, there was speculation as to how these might affect consumer behavior, especially travel, during the summer months.

A recent Gallup poll found that 42 percent of Americans feel that the energy situation is "very serious" - slightly above the historical average of 38 percent but lower than at several other points when this question was asked. Furthermore, 50 percent think the U.S. is likely to face a critical energy shortage during the next five years.

Consumer behavior is highly influenced by expectations, and consumers are telling Gallup that surging gas prices have them anticipating $4, and even $5, pump prices where they live sometime this year. If this happens, consumers and businesses are likely to change their behavior accordingly - with consumers reducing their use of gas, spending less, in general, and downscaling where they buy, while businesses anticipate revenue declines, will also spend less and limit their hiring.

So far, gas prices have not reached the level at which average Americans say they will change their lifestyles significantly or cut back on spending in other areas. An early March Gallup survey concluded that a price of roughly $5.30 a gallon would be the tipping point at which the cost of gas would begin to have more widespread impact on consumer behavior.

There is, however, some recent research suggesting rising gas prices may already be affecting travel. According to a March AAA survey, 84 percent of respondents report already changing their driving habits or lifestyle in some way as a result of increased gas prices. Rising gas prices are likely to encourage Americans to visit tourist sites closer to home and limit their itineraries, according to AAA.

According to the U.S. Travel Association's survey, 44 percent of U.S. adults said the higher gas prices would cause them to take fewer vacation trips this summer, while 37 percent said they would take shorter trips. Nearly one-in-five (19%) expected to take fewer business trips because of higher gas prices, but more business travelers said they would cut back other spending on the road. MMGY Global and U.S. Travel will be fielding its spring 2012 travelhorizons™ survey soon and will explore this issue of rising gas prices in more detail.

 


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To view the monthly data for these and other current indicators, click here.


Other Economic Concerns
In addition to the threat of rising gas prices, other economic concerns cloud our view of the near-term forecast. The slowdown in corporate profits growth revealed in the third report for fourth-quarter 2011 GDP (+0.9%) - the slowest pace in three years - is a troubling omen for stock market returns for the remainder of the year. This could also impede the full recovery the industry still seeks in business and meetings-related travel.

In the housing market, while the long-term improvement continues to take hold in a growing number of local markets, recent data suggest housing industry recovery took a breather in February. Many of the industry metrics were down from January. Oxford Economics presents an interesting analysis if "housing has turned the corner" in its recent blog.

Lagging incomes also thwart growth. Based on a special monthly analysis of the U.S. Census Bureau's Current Population Survey, Sentier Research estimates that real median annual household income in February 2012 ($50,065) was stable with January. This was the second month that it has failed to increase, after four consecutive monthly of gains last fall. Real median income has declined significantly in the past decade. The February 2012 median annual household income was 9.0 percent lower than in January 2000.

A Challenging Year for Airlines in 2012
International Air TravelGlobal air travel improved in February, rising 8.6 percent over year-earlier levels, according to the International Air Transport Association (IATA). Several factors inflated February 2012 results and distorted comparisons with the year-ago period. These included weaker traffic during the Arab Spring a year ago and the occurrence of Carnival in Brazil in February, a month earlier than in 2011. However, according to Tony Tyler, IATA's director general, "The outlook is fragile Weak economic conditions and rising fuel costs are a double-whammy that an industry anticipating a 0.5 percent margin can ill afford."

The IATA has revised upwards the global industry's net profit for 2011 to $7.9 billion from previously $6.9 billion, but has downgraded its 2012 forecast, now predicting that the world's airlines will earn aggregate net income of only $3 billion this year. The latest downgrade primarily reflects rising oil prices. Overall, IATA projects passenger demand in 2012 to increase 4.2 percent and capacity growth to be somewhat slower than expected. IATA expects rising oil and jet fuel prices to threaten recovery in the airline industry and worries that a further spike in fuel costs could represent another "shock" that drags the global industry back into the red.

One Billion Passengers Expected on U.S. Airlines by 2024
Total revenue passenger enplanements on U.S. carriers rose 1.5 percent last year and are up 2.7 percent, year-to-date, through February 2012, according to Airlines for America.

The Federal Aviation Administration sees a competitive and profitable aviation industry continuing to grow over the long term.

The industry is forecasted to grow from 731 million passengers in 2011 to one billion passengers in 2024, three years later than projected last year. A total of 1.2 billion passengers are projected in 2032. Over the next 20 years, larger airports and regional jets will continue to grow faster than their smaller counterparts in the U.S. In addition, Next Generation Air Transportation System, or NextGen, will transform our national air space system from one using ground-based radar today to the satellite-based system of tomorrow.

Hotels: "Near-Term Nirvana"
Ever since U.S. hotel industry performance bottomed-out around January 2010, demand has led a slow-but-steady recovery, but rate is now leading recovery. In February, Smith Travel Research (STR) reported these results, as compared to February 2011: increased supply (+0.3%), increased demand (+3.8%), increased occupancy (+3.5%), increased Average Daily Rate (ADR) (+4.0%), and increased Revenue per Available Room (RevPAR) (+7.7%).

According to STR, leisure travel has recovered better than business travel. Increases in room demand and rates, and consequently RevPAR, stemmed from solid growth in leisure travel. Between 2006 and early 2012, transient demand increased 18.4 percent from start to endpoint, while group demand dropped 6.4 percent. Additionally, while overall ADR bottomed out in early 2009, group rates continued to decline throughout the year, finally reaching the lowest point in January 2010.

Better business travel-related hotel performance may be in the works, however. According to the Pegasus View, February global GDS bookings for hotels grew by 5.1 percent (+0.5% without leap year's extra day) and up from January's 1.6 percent decrease. ADR increased by 3.7 percent over the prior year.

Leisure travel keeps improving, too. February global ADS bookings for hotels grew by 2.5% (-1.6% below prior year without the extra day), yet improved from January's 5.0% decrease. ADR grew by a near-record increase of 7.6% over prior year. In North America, hotel rates jumped more than seven percent for both business (+7.1%) and leisure (+7.3%) travelers in February, marking the biggest year-over-year increase on record, according to Pegasus. Despite an expected slowdown in April, forward-looking booking data shows demand increasing at a steady pace into the spring and summer, according to the Pegasus View. STR's most recent forecast predicts ADR will grow 3.8 percent in 2012 and 4.4 percent in 2013.

Leisure and Summer Travel
With airfares to Europe climbing, Americans seem to be even more interested than usual in traveling domestically this summer, but some also express interest in Asia and the Caribbean, according to KAYAK. Online searches in January for U.S. destinations on the metasearch engine have risen by as much as 22 percent, while searches for top European cities have slumped. According to KAYAK, people usually search potential travel destinations three to four months before setting off

TripAdvisors' third annual vacation rental survey of more than 1,200 U.S. TripAdvisor travelers found an increasing interest in rental properties, with 46 percent of respondents planning a rental home stay this year as compared to 40 percent in 2011.

"We are hearing from travelers that it is not always about the destination, but also about what their passion points are, what motivates them, what they love to do in their life," according to Ellen Bettridge, vice president of the American Express Retail Travel Network. Travelers are increasingly building their trips around festivals (such as wine and/or food). Although the culinary experience is a big draw, there is also increasing interest in hiking tours and outdoor, active vacations and expedition-type holidays. American Express data show that U.S. consumers are planning to spend 11 percent more on vacations in 2012 than last year.

Related to interest in adventure travel, there is a new website spotted by SpringWise called "Rambler" that challenges tourists to complete unique experiences while on their trip. The site is similar to what is offered by Austria-based Nectar & Pulse, which creates personalized city guides based on suggestions from locals with similar personalities and preferences. But Rambler adds in a gamification slant - certainly a popular approach to reach many Millennials.

Business and Meetings-Related Travel - 2012 Should be a Better Year
Business TravelThis year, global demand for meetings and events is expected to rise, according to the "American Express Meetings & Events 2012 Meetings Forecast". Eighty percent of North American planners are expecting to increase or maintain the number of meetings this year. While spending for individual meetings will likely decrease or remain flat, American Express also believes that companies will increase their overall meeting budgets next year. Meetings are also expected to (1) be shorter and smaller, (2) be more local, (3) have fuller agendas, (4) be greener and (5) be more austere. When it comes to locations, North American planners are booking 2012 meetings primarily in large cities (71 percent), although 13 percent are shifting bookings from tier-one to tier-two destinations.

Meetings&Conventions reports that 2012 should prove to be an improvement from last year. While hotel rates will continue on their upward trajectory, this partially reflects an increase in group demand, a trend that portends a greater number of meetings and attendees. Other indicators show that incentive programs are growing again, and the trade show industry, which saw some modest growth in 2011, is geared to rise further in 2012.

The IMEX Group predicts that the trends that have re-shaped the meetings industry in the last several years - globalization, fiscal responsibility, sustainability, social media and ROI - will continue to impact it in 2012.

TravelClick, which tracks advance bookings for hotel rooms, projects that room nights sold for group business will increase 5.1 percent during 2012, while ADR in the segment will grow 4.9 percent. Room nights sold for transient business travel will be up 2.5 percent, and ADR will rise 4.4 percent. Room nights sold for transient leisure travel will increase 3.1 percent, while ADR will jump 5.6 percent.

Recent meeting planner research by RRC Associates and STR DestinationMAP revealed that, not surprisingly, during the downturn, meeting holders became much more cost-conscious. Specifically, they had become more concerned with travel, food and lodging costs as well as getting "good value" from a destination. Evidence indicated these cost concerns trumped convenient travel and a host of recreational and logistical considerations when meeting planners were selecting host sites for their upcoming meetings. The most recent study indicates cost concerns are falling off somewhat, and meeting holders are starting to place renewed importance on travel convenience and recreational opportunities at sites.

Despite better news in this sector, Rossi Ralenkotter, president and CEO of the Las Vegas Convention and Visitors Authority, recently issued the call for a new national agenda to strengthen the future of the $460 billion meetings and events industry, as he began his term as chairman of the U.S. Travel Association. He also released a new white paper identifying three major trends that will impact the future of the meetings industry: perceived availability of new technology and substitutes for face-to-face meetings; pressure to cut costs in business and government agencies; and increasing challenges to long haul travel.

2011 International Visitation Sets New Record
International Air TravelAccording to the U.S. Department of Commerce, 62 million international visitors traveled to the United States in 2011, a four percent increase over 2010. In 2011, the top inbound markets continued to be Canada (+5%) and Mexico (flat). Overseas resident visits (28 million) were up six percent compared to 2010, creating a new record level for the U.S. Twelve of the top 15 country markets for travel to the U.S. posted increases in visitation to the U.S., with nine posted new records.

Top 15 Countries by Arrivals

Country of Residence % Change 2010 vs. 2009
Canada +5%
Mexico +0%
United Kingdom +0%
Japan -4%
Germany +6%
Brazil +26%
France +12%
South Korea +3%

People's Republic of China (excl.HK)

+36%
Australia +15%
Italy +6%
Spain +9%
India +2%
Netherlands +5%
Venezuela +14%

Globally tourism is expected to continue to grow in 2012, rising 2.8 percent, marginally faster than growth in the overall economy but below its long-term trend growth of four percent, according to the World Travel and Tourism Council (WTTC). This year, the number of international travelers is expected to surpass one billion for the first time and will also pass two other milestones: a direct contribution of $2 trillion to the world economy and 100 million jobs.

But these numbers are dwarfed by the total forecast contribution of our industry - $6.5 trillion to the global economy and 260 million jobs. Over the medium-term, the prospects of the industry are even more positive with average annual growth through 2022 expected to be four percent. But the mature economies of North America and Europe will continue to struggle in 2012. North America, which saw a slight upturn in the U.S. economic situation at the end of 2011, should see growth of only 1.3 percent in travel and tourism direct GDP over the year.

Japan is a very important market for travel to the U.S. Last year, travel both to and from, as well as within in Japan was seriously depressed by the devastating March 2011 earthquake and tsunami. But Japan's travel & tourism industry is forecast to stage a complete recovery during the first half of 2012. The WTTC forecasts the full recovery of international tourism demand during the first half of 2012, having initially fallen 62 percent in April 2011. Domestic travel recovered strongly last year, and 2012 is forecast to be the year for full recovery of international visitors.

Technology Tidbits

  • The Rise of Digital Influence: A "How-To" Guide for Businesses - Digital influence is one of the hottest trends in social media, yet is largely misunderstood. The report helps companies understand how influence spreads and includes case studies in which brands partnered with vendors to recruit connected consumers for digital influence campaigns.
  • The trend to book travel online will naturally continue in 2012 - especially in emerging economies such as China, India and Brazil. The share of the online segment compared to the total travel market is expected to increase to almost one third worldwide, according to the latest "Global Online Travel Report 2012" by yStats.com.
  • European hoteliers have yet to be convinced of the value of group discount websites as a way of filling empty rooms, according to a survey by TravelClick. Only 27 percent of properties saw it as a sales tactic they would repeat. A further 33 percent of hoteliers claimed they would not use flash sale sites, while 17percent said they had tried group discounting once but would never do it again. Of the flash sale sites, Groupon was used the most (60%), ahead of Living Social (28%) and JetSetter (15%).

Economic and travel trends seem quite positive in the U.S. so far this year, and forecasts have been generally reflecting increasing industry optimism. But as has been true for the past few years, the situation remains somewhat tenuous and vulnerable to whatever the latest challenges the economy and other world events have in store. Right now, the greatest concern seems to be about rising gas prices. As I mentioned, U.S. Travel and MMGY Global will be back in the field soon to conduct our spring travelhorizons™ study and will have some new answers (hopefully positive) concerning this to share with you in next month's e-newsletter. Think positive!

 
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