Travel Prices Are Soaring. Travelers Don’t Care

Consumers on both sides of the Atlantic are lumbering under the weight of hefty price increases for essential items. Yet, they are still splashing out on fancy vacations.

Many Brits are skiing or visiting sunnier climes this week, as the traditional half-term school break gets under way. That’s great for the battered travel industry, less so for local stores and restaurants that compete for that same pound or dollar.

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Airlines, hotels and tour operators were devastated by the pandemic, but since restrictions have eased, demand — and prices — has surged.

TUI AG, the world’s biggest packaged-tour operator, said on Tuesday that bookings for summer were 20% higher than a year ago, with reservations in the last four weeks 50% up on 2022 and 10% above pre-pandemic levels. Prices, excluding 2022 re-bookings, are up 6% for the summer compared with last year. Overall, reservations for the summer season remain 11% behind 2019, but there is still time to make up that shortfall, while pricing is already 24% ahead.

The positive update comes right behind upbeat outlooks from airlines EasyJet Plc and Ryanair Holdings Plc. On Monday, Heathrow Airport said it had the busiest start to the year since 2020. Hotels are also benefiting, with Hilton Worldwide Holdings Inc. and Marriott International Inc. recently reporting better-than-expected fourth-quarter earnings. And short-term rental bookings in Europe between February and July are 24.4% ahead of 2022 and 32.6% above 2019, according to AirDNA, which tracks the market.

The early gains bode well for the crucial summer season, when tour operators and airlines make most of their profit. Higher ticket and room rates mean companies can cover their own elevated costs, including fuel and labor expenses.

Despite the pressures on household budgets, more affluent families continue to have savings. And it seems holidays remain a priority — even in the UK, which has battled a cost-of-living crisis.

There are risks to this sunny outlook, of course. The first is that consumers rein in their travel purchases as their initial wanderlust is satisfied and savings get drawn down. Indeed, although the average spend is still up on last year, Thomas Cook, now reborn as an online travel agent, is seeing some signs of people trading down.

For example, about 80% of its business is in four- and five-star hotels. This year, a greater proportion of reservations are for four-star accommodation. Similarly, this half-term has seen more demand for four- to five-night city breaks. These may be additional vacations, but it’s also possible that they are replacing more expensive seven-day breaks in upmarket resorts. And travelers have begun to search for more affordable locations, such as Lanzarote in the Canary Islands, which tends to be cheaper than nearby Tenerife. Egypt and Morocco are also selling well.

It’s a similar picture at Trivago NV. The online room-reservation specialist said recently that it was seeing people favoring more affordable hotels and shorter trips. Customers are also showing more interest in lower-priced options than they were in 2019.

TUI said last year’s trend for adding one more day to vacations has continued. But some customers, on a budget, were choosing the Mediterranean or Egypt over long-haul destinations, where prices have risen the most.

The second risk for travel is that some jetsetters may remember the hot temperatures across Europe last year — and think twice before committing to a summer trip. Why travel to some distant beach when you could drive a couple of hours from home instead? Add in those airport disruptions from 2022 and a staycation may look even more appealing.

Travelers are indeed booking closer to the time of their trip. For example, Thomas Cook’s most popular months right now are April and May. That leaves plenty of room for consumers to hold off because of sharply higher mortgage costs or an unexpected job loss.

But these concerns may be short-lived. There are signs on both sides of the Atlantic that inflation is peaking. If that carries on, and wages keep expanding while employment remains strong, then the appetite for travel should continue, or even intensify.

Indeed, Destination Analysts, which tracks US travelers, has found that Americans’ excitement about getting away is the highest it’s been for three years. Fewer Americans are being put off by high prices for travel or the inflationary environment more generally. This suggests that if household budgets do recover in the second-half of this year, then any extra income may well be funneled into vacations.

That’s a mixed blessing for the broader consumer economy. While getting away encourages spending on a new bikini or bronzing powder, it absorbs money that would have been spent on a car, sofa or home makeover project.

But stores selling big, expensive items will just have to make do. Even with the strain on consumers’ wallets, it looks like they haven’t checked out from traveling just yet.