War, Disease, Economic Agony (And Surging Gas Prices) Will Probably Not Deter Hospitality Sector

By Dees Stribling of Bisnow

Already grappling with long-term pandemic-fueled troubles, the travel and hospitality industry finds itself confronting yet another adversary: surging fuel prices.

The sector had managed to claw its way back to a tolerable recovery in 2021 — and 2022 was shaping to look a little more like the days before the coronavirus. Summer vacations to the beach and further afield were anticipated. Business travel was ticking back up with conferences and in-person meetings on the rise.

For a while, things were looking up.

Then Russia invaded Ukraine. 

Oil prices are now spiking beyond $100 a barrel, driving sharp increases for gas at the pump and for pricy jet fuel — which, if conventional wisdom holds true, will inevitably mean higher costs for U.S. travelers this spring and summer.

So, less travel and another big knock on the hospitality industry? Maybe not.

Travel and hospitality experts told Bisnow this week that they remain optimistic for 2022, citing the fact that bookings are still strong — apparently because last year didn’t satisfy Americans’ demand for travel. Travelers might adjust their plans a bit this year, but mass cancellations don’t seem to be in the cards — yet.

“As concerns around omicron subside, we see very strong demand for leisure travel in the second quarter this year and beyond, and are expecting the travel market to continue to recover,” said Hayley Berg, head of price intelligence at Hopper, a booking service for airlines and hotels.

Bookings are still strong now despite gas prices that are about 70 cents higher than in mid-February, at an average of $4.26 a gallon, according to AAA, and $1.37 higher per gallon than a year ago.

The price of airline tickets is up as well, with Berg expecting airfare to climb to an average of $360 per round-trip through May, a 10% increase from current prices, though rates will taper off some by the end of the summer, as they do every year.

The spike in gas prices has certainly caused pain for many millions of people. That was already the case late last year when gas prices crept up slowly but steadily. Low-income Americans or those on fixed incomes, as well as small businesses that use a lot of transport, are all suffering.

Yet for that large portion of the population with steady incomes, leisure travel is still very much on the table. Spring break travel helped boost U.S. hotel performance for the week of March 19, STR reports, with some industry metrics showing improvements compared with 2019, though occupancy is still down from that period.

For the week, occupancy stood at 66.9%, off 3.7 percentage points off 2019, while the average daily rate was up 13.6% and revenue per available room increased 9.5%, STR reports. The weekly occupancy level, though down compared with before the pandemic, was nevertheless the highest since the week ending Aug. 7, 2021.

More pertinent for the outlook for summer travel, a number of organizations are reporting a sharp increase in bookings for planned travel in the next few months.

“There’s still a lot of demand for travel this year now that vaccines have been widely distributed and restrictions are easing,” Berg said.

Pent-up demand for travel had already been in evidence early this year, Berg said. Hopper’s bookings in Q1 2022 were up about 50% compared with the fourth quarter of 2021 and up a whopping 300% or so over Q1 2021.

Travelers are booking trips to warmer destinations in record numbers, according to booking data from AAA that the organization reported in early March. For March, April and May, bookings to places such as Florida, Mexico and Hawaii were all up more than 200% compared with 2021 and up 10% over 2019.

In mid-February, a AAA survey found that 52% of Americans plan to take a vacation this summer. That was before the war-inspired spike in gas prices, though prices had been creeping upward for some time. In any case, among those planning a trip early this year, 42% said they would not consider changing their travel plans regardless of the price of gas.

Pent-up demand isn’t the only factor that stands to keep travel strong during the summer in the face of high gasoline and jet fuel prices, AAA spokesperson Ellen Edmonds told Bisnow. Despite inflation and supply chain woes, other metrics point to a strong economy with a lot of job creation, higher wages and higher savings.

“As a result, people have more discretionary income to spend from not traveling for two years, though they are dealing with high gas prices,” Edmonds said.

For this summer, AirDNA, which tracks peer-to-peer short-term rents, is seeing higher demand than last year, which was a record-breaking year for U.S. short-term rentals. The main difference this year, according to the company was in the locations chosen: urban areas are losing out to coastal and mountain destinations, as guests looked for nature experiences. 

“As we look towards the summer, we see similar booking trends as 2021, though with 46% more nights booked compared to last year,” AirDNA Vice President of Research Jamie Lane said.

Bookings this summer may be also boosted by the return of international travel, though rising fuel prices could keep Americans traveling a little closer to home as well, Lane said — but still traveling. 

“It remains to be seen what effect fuel prices will have on U.S. vacation rental bookings this summer, but at the moment we aren’t seeing any decrease in demand, while supply is increasing to keep up,” Lane said.

“We continue to be optimistic that there’s still a significant tailwind for leisure demand,” Marriott International CEO Tony Capuano said during the company’s most recent earnings call in February, just ahead of the gas price spike.

“We already have more leisure on the books for months further out than we did in the same months last year,” Capuano said, adding that he believes that working from anywhere has been an accelerant for leisure demand. 

“And as more and more borders open, we think that influx of international leisure travel will also serve to accelerate the pace of leisure demand growth,” Capuano said.

That optimism in the hotel industry extends to the point that new hotel development is still underway, despite the rough time the industry had during 2020.

“There’s a lot of enthusiasm in the industry, particularly around new hotel development, because cap rates have been so compressed and it’s so expensive to acquire existing hotels,” Reveille Hospitality CEO Marco Roca Sr. said.

Roca adds that the wider pattern of inflation is actually a net positive for hotel owners. 

“Hard-asset businesses such as hotels do well in an inflationary environment, especially because they can adjust their rates as needed,” he said. 

Driving destinations reported strong business in 2021, and expect this year to be similar, and for a similar reason — people want to hit the road. 

“People were really sick at being cooped up last year and hit the road,” Wall Drug Inc. Chairman Rick Hustead said. “For us, last year was a record-breaker.”

Wall Drug is a storied tourist attraction in South Dakota, near I-90 and Badlands National Park, with cowboy-themed and other stores, a number of restaurants, an art gallery and an 80-foot brontosaurus sculpture.

As for this year, March has seen about as many visitors as last year, which was a good month, Hustead said, and he’s optimistic about the summer, even though gas is more expensive.

Another reason not to overestimate the impact of higher gas prices on summer travel is that the U.S. has been through this situation before.

Back in the summer of 2008, ahead of the recession, gas prices were at record levels. People traveled anyway, even without the spur of two previous years when travel was more difficult or impossible.

“After a reasonably good start to 2008, the industry fell into an extremely negative pattern during the last four months of the year,” STR President Mark Lomanno said in a statement at the end of that year.

That is, despite high gas prices that year — actually higher than now, adjusted for inflation — travel and hospitality didn’t particularly suffer until the bottom dropped out of the economy with the global financial panic in September. That summer, Americans might have grumbled about the price of gas, but they continued to take summer vacations. 

Data at the time did show that people started to drive less as a result of high gas prices, and use less gas, a pattern that seems to be reasserting itself in 2022. In 2008, the Federal Highway Agency reported, the number of miles Americans drove dropped 3.5% during the first 10 months of the year in response to high gas prices, while the gas consumed has declined by about 4%. 

There is a short-term response to high gas prices: drive less. And there’s also a longer-term one: buy more efficient cars, the government reported, a trend that doesn’t impact leisure travel as much.

“In the long run, there is general agreement in the literature that about two-thirds of this (fuel consumption decline) results from the purchase of more fuel-efficient vehicles and only about a third results from reduced travel,” the FHA reported.

Much of that reduced travel seems to be in day-to-day living, rather than leisure travel, which people tend to plan well in advance and save for, Placer.ai says in a report on the impact of gas prices on retailers.

Rising gas prices tend to cause consumers to consolidate their shopping trips, and as consumers try to limit their gas expenditures, they don’t drive as far as they used to for everyday purchases, according to Placer.ai.

“People still feel cooped up even after last year,” Wall Drug’s Hustead said. “Travel is still worth it to them, even if driving is more expensive this year.”