2024 Travel Outlook: Continued Strong Leisure Demand

In this episode of the Wheels Up Podcast Series, Helane Becker, Airlines and Aircraft Leasing Analyst and Kevin Kopelman, Online Travel and Hotel Analyst discuss the 2024 outlook for the travel sector.

They discuss inflationary pressures, improving air traffic control, competitor growth, and other industry trends.

Press play to listen to the podcast.

Transcript

Speaker 1:

Welcome to TD Cowen Insights, a space that brings leading thinkers together to share insights and ideas shaping the world around us. Join us as we converse with the top minds who are influencing our global sectors.

Helane Becker:

Hello, it’s Helane Becker, TD Cowen’s airline and aircraft leasing analyst here with Kevin Kopelman, TD Cowen’s online travel and hotel industry analyst. So, Kevin and I work closely together, and we like that. We’re really fun colleagues. And so, Kevin and I are talking about how we’re ending 2023, how we’re thinking about 2024 in the travel space because I just had a big report come out. I recently had a big report come out talking about what we see happening in the North Atlantic and after the stellar year we had this year.

So, Kevin, let’s bring you in right away. How are you seeing 2023 end? Thanksgiving traffic was better actually than I thought it was going to be. Our forecast was for a little over 27 million passengers to travel, and actually 29.9 million traveled. The Sunday after Thanksgiving was the most traveled day, the most number of people TSA screened ever, which was surprising to me because we hadn’t really seen that in November. And one of the things we’re hearing from some of the airlines is that after Thanksgiving or maybe that week, we saw a big increase, and bookings suggest we’re going to have a big increase for the year-end holidays too. So, what are you hearing from your companies?

Kevin Kopelman:

Yeah, Helane, and thanks for inviting me on. It’s great to be here chatting with you. If you look at the hotel industry, particularly in the US, the numbers have been really stable going back to second quarter of 2022. You’re looking at pretty modest nights growth. So, nights in the industry, right around where they were in 2019. The year-over-year growth is in the low single digits on revenue. It’s been mostly on pricing. There just has not been a lot of growth in nights. And now, where our comps are now, even on a year-over-year basis, it’s actually last couple of months down slightly year-over-year. We have a few weeks left in the year and the hotel companies are also talking about a strong quality period. So, you could see December closing out with a little bit of an increase in growth.

But the overall picture, it’s actually been kind of remarkably stable. On the one hand that’s been good because there was concern about revenge travel and things kind of potentially falling off. That has not happened for sure. But on the other hand, as we get more into things going back to normal, you’re not having the kind of year-over-year growth that you would have been excited about in the US at least. On the other hand, if you look at the global numbers, they’re still good. I think it probably is a little bit better than it looks on the surface. If you consider the fact, and I know this is one of the topics you want to get into, if you consider the fact that there has been such a growth in outbound travel to international. But to get back to your main question there, yeah, very stable and probably expects some improvement around the holidays.

Helane Becker:

Okay, that’s interesting. I’ll tell you, my travel is back to pre-pandemic levels. I was out of the country every month this year on my preferred brand. By the end of the year, I will have stayed 89 room nights. And that’s my preferred brand and that doesn’t include other brands that I also stay in for conferences and stuff, so I don’t have to wander around. But I probably am very close to 100 room nights, which is pretty excessive.

Kevin Kopelman:

That’s impressive, Helane.

Helane Becker:

Yeah, I don’t know if it’s impressive as much as it’s excessive. But yeah, doing my best to help your guys out.

Kevin Kopelman:

Well, the CEOs of one of the hotel companies told us that he had been in a hotel over 200 nights this year.

Helane Becker:

I feel like that’s really depressing. I like my husband and I like being home, and I feel sad when I’m not. So, I try to be home on the weekends. But anyway. What about the Airbnbs and things like that? Is there a shift away from hotel nights? I personally don’t like non-hotels because I like the gym in the morning. Most of my status now gets me free breakfast, or gets me cocktails at night, not that I avail myself to that too much. But what about Airbnb and those, are they taking share away from hotels?

Kevin Kopelman:

They are still growing faster than hotels, absolutely. So, if you look at the recent numbers, vacation rental industry in the US, using the term broadly, nights in the third quarter, were probably up in the mid-single digits. Airbnb was above that. They outperformed the overall. So, they are growing faster than hotel nights for sure. It’s not super dramatic at the kind of levels that we remember from pre-pandemic when that industry may have been growing 15, 20% year over year or something like that. But they are in a time when the hotel nights, like last quarter, were up maybe 1% year-over-year. The vacation rental nights were up something like mid-single digits. So, that is actually continuing.

Helane Becker:

Yeah, and that’s really helpful. It’s kind of interesting on the airline side, where we had too much domestic capacity this year. And so, a lot of the domestic-focused airlines didn’t do well. The third quarter is normally a time when they would make a lot of money, and they really didn’t. And the other thing that we’ve seen a shift in, not so much away from low-fare, low-cost airlines, but the big airlines, the four big airlines, American, Delta, United, and Southwest to a lesser extent though, have big international components. Southwest has almost no international, less than 5%. But American, Delta are about 35 on their way to 40, United’s 50-50, and we saw this shift as things have opened up because the world opened unevenly away…

So, to your point about the hotel room nights in Europe and internationally, we’ve seen this shift in demand and we’ve also seen people paying up away from the cheapest tickets to a better experience, a little more leg room has been… Like premium economy, that’s what the airlines call it. That’s what we’ve seen. So, we’re expecting that to continue in 2024. But the nice thing about airlines versus hotels is my assets are movable. So, if a market is not doing as well, the airlines just pull a service out of the market and put it in a market that has the potential to do better versus a hotel. If you build one in a market that’s not doing well, you’re stuck until it performs better. So, we’re thinking that we’re going to see this continue to see this shift to international.

And also, I don’t know if you pay attention to, if you have to pay attention to passports issued, but we look at passports issued and they’re at record levels. So, that indicates to us that more people want to travel outside the country. Everybody, air quotes around everybody, I know went to Italy this summer except me, and that was a big demand market. So, I don’t know if you saw the same with hotel nights in that market particularly, but we certainly saw a lot of demand.

Kevin Kopelman:

Yeah, for sure. And that was the point I was starting to touch on earlier, but looking at the US market this year, very stable like we talked about, but you didn’t have that kind of next leg of growth. And the other way to think about it is we’ve looked at really long-term trends in the hotel industry and it’s obviously cyclical, so it’s hard to pick out a normal year or an average year because it’s growing faster than the economy when the economy’s growing recovery. And then, of course, it declines more in a recession than the overall economy. Last couple of big recessions, not including the pandemic, what happened during the pandemic, the US hotel industry revenue was down about 20% peak to trough, and then it took four to five years to fully recover on a revenue basis.

As we’re thinking about this year, the US hotel industry has been underperforming. So, the long-term average is that it’s growing a little bit faster than nominal GDP. And I mean you saw the Q3 GDP numbers, I mean Q4 is expected to be a little lower, but where the Q3 GDP numbers plus inflation, the hotel industry was not growing anywhere near that in the US in Q3. But on the other hand, the European numbers were way above that and that was because of this mix to international travel. So, as we’re thinking about next year, I think there’s actually a reason to be cautiously optimistic here on the US hotel lodging trends next year. Because even though there’s going to be, and I agree with you, there’s going to be continued growth in international travel outbound from the US, the growth rate is not going to be, on a year-over-year basis, what it was in 2022, when it was just incredibly high.

So, on a year-over-year growth basis, the US industry, if the overall travel demand holds, the US industry actually could get closer to that kind of long-term average where it’s been at or actually a little bit above nominal GDP. And that would look like an acceleration in the US. So, I think there’s reasons to be optimistic for that, but overall, to your point, you have to expect the international travel and the European market is actually going to still look pretty good.

Helane Becker:

Yeah, yeah. We’re thinking that. We’re just thinking the fares that they were charging last year were pretty unsustainable and we’re already seeing that, excuse me, come down for the winter months for sure. And some of the markets for summer, even this early, are lower than you would expect. In airline land, most summer travel is planned between mid-March and mid-May. That’s when the airlines really start to push up fares to see how they can maximize revenue on board the aircraft. That’s how they think about it. Maximize load factor and maximize revenue. And obviously, for the airlines, as we think about 2024, a lot of the inflationary cost pressures that impacted them in ’23 will start to abate. So, we had huge labor cost increases for an example in two areas. We hired more people. There are now more people employed in the airline industry than there were in 2019, and the average salaries are higher.

We saw 30 plus percent increases in wage rates. And the only group left, for most airlines, is flight attendants and they’ll get those big increases, but on a relative basis going up more than pilots on an absolute basis, it’s going up on a dollar amount less because they just earn a lot less than the pilots earn. So, those inflationary pressures are there. But the other pressure the industry has that we are concerned about for 2024, and I don’t know that you think about it this way, is we are short about 4,000 air traffic controllers. We should have about 14,000 to 15,000, and we have about 10,500.

Based on the rate of retirements and on hiring and how long it takes to train one, it will take six to 10 years to catch up. So, the airlines will be forced to continue to operate fewer seats than they want to. And we’re seeing this trend to bigger aircraft, more seats per departure and fewer departures per day. And the fewer departures, not sure how that will impact your companies, if at all, but certainly, because you’re just looking at number of people who are traveling to get to your hotel nights.

Kevin Kopelman:

Yeah. So, I mean the number of air traffic controllers, is it growing year-over-year? I mean, how much of a pressure is this?

Helane Becker:

So, the way to think about it is air traffic controllers have to retire at 56. They’re allowed to apply to work one extra year, so they can retire at 57. They’re supposed to work overtime occasionally, but they’re working overtime all the time. During the pandemic, the government did not train any air traffic controllers for 18 months. They’ve always trained 1,000 a year, and about 200 to 300 don’t make it out of the academy, and a like amount retire. So, you net about somewhere between 400 and 600 a year. In the current budget for the FAA, which Congress has to prove there is a budget for 1,400, but they were only able to hire around 1,300. And they would like to increase it again to 1800 for fiscal… Let’s see, we’re in fiscal ’24 now. So, for fiscal ’25 through fiscal ’30, they would like to hire at least 1,800 to 2,000.

They’re also looking at other places that rely on air traffic controllers like the military and offering bonus payments to get them to shift over to commercial. But the problem is it takes 18 months to go through the academy, assuming you make it all the way through, and then you get assigned as a controller to an area that’s not terribly busy. And before you can come to New York or Chicago, LA, San Francisco, to our busy towers, you have to have at least five or six years of experience, and then you have to move here. And a lot of controllers are rejecting that as a career opportunity because even though you do make more money, you don’t make enough to live a comfortable lifestyle in the New York area, you would have to commute. You have to live roughly within an hour to two of your tower because the union requires that you be in the tower to do your job.

So, when you think about the New York area and where you live, it’s very expensive to live here. And even though the salaries are in the top 5% of what all Americans earn, it’s still not a comfortable living relative to living in the mid-continent and having a different lifestyle, 15 minutes from your control tower, not having to work so many thousands of flights a day. And it’s really exhausting and a lot of them are retiring. So, what happened this summer, and again, it impacts me more than you, the FAA asked the four big airlines serving New York, American, Delta, United and JetBlue, if they would cut capacity by 10% through October of ’24. So, it’s two summers of reduced capacity, and we were already down about 10% from where we were four years ago.

So, think of all the growth you talked about, we’ve seen similar growth. And especially in New York where you have a lot of international coming in, and the airlines can’t put as many seats in the market as they would like. So, you get a combination of higher airfares to discourage demand, and you get higher costs because it obviously is costing more to handle fewer people. We call it doing less with more. And that’s frustrating to people, and most people think that they shouldn’t have to pay to get there anyway. They think the cost of their vacation doesn’t start until they get to where they’re going.

Kevin Kopelman:

Yeah. Well, this is clearly a headwind.

Helane Becker:

Well, for my guys, probably less so for yours.

Kevin Kopelman:

Yeah, I think from the lodging standpoint, people, they’re going to take their vacations. Sometimes they go on road trips. And we saw a huge increase in that during the pandemic, and I think it’s still above trend. So, they will find a way, and the more expensive the flights are, the more likely they are going to want to drive somewhere. At the end of the day, having reasonably-priced flights and available flights is important, and it is going to contribute to the growth in the industry, getting that fixed.

Helane Becker:

The other thing that tends to contribute to growth are things like the Taylor Swift concert, which contributed hugely to growth in the city. A friend of mine went to a U2 concert over the weekend in Las Vegas, and they flew in from out of town. He said the place was packed and a lot of people flew in from out of town. So, I don’t know how you think about that.

Kevin Kopelman:

Well, a lot of our companies have actually called out the Taylor Swift concerts actually.

Helane Becker:

Oh, they did?

Kevin Kopelman:

Yeah, Airbnb mentioned it and some of the hotel companies mentioned it. I think Marriott mentioned it on their analyst day. I think the rate’s double. It was something like double or triple on the weekends when Taylor Swift was in town.

Helane Becker:

I’m sure that’s true.

Kevin Kopelman:

It has to be one of the biggest tours of all time. It seems like these huge type of events just keep getting bigger and bigger. I wanted to ask you about seasonality in booking trends, because this was something that was really interesting. I mentioned a couple of times how stable the US hotel industry was quarter to quarter this year, at least taking into account normal seasonality. But in terms of the trips people are taking, it was pretty stable. Didn’t look that different from 2019. But the time that people are booking is changing. It’s moving towards earlier in the year, and that’s happened the last couple of years. So, Q1 has been huge, and this is a big focus with the online travel companies because they report bookings and it’s the big investor focus.

Q1 has just been just huge the last two years because the new year start, and people, I think particularly with flights being so expensive and with popular destinations, with hotels selling out early, people want to find a spot in the place they want to go. It’s wishful thinking, but they don’t want to pay exorbitant prices. And so, they’re moving earlier in the year. And I think the last couple of years, it’s led to probably a little bit of disappointment as years has progressed and what the numbers have looked like. That hasn’t always been fully related to how the stocks have traded through the year. You’re seeing this really big Q1 and then you spend most of the rest of the year being a little bit disappointed in what the growth numbers look like because it’s really just people booking earlier. And I don’t know if you’re seeing that in air at all, or the companies probably don’t talk about it as much.

Helane Becker:

Yeah. No, we have something called air traffic liability. It’s on the balance sheet. It’s a liability. And it indicates future travel, tickets sold this quarter for travel later in the year. And to your point, the first quarter’s always been a quarter where air traffic liability builds. And the third quarter is always one where it comes down, which intuitively should make sense because you plan your trip, I said between mid-March and mid-May for your summer vacation. So, you’re planning your trip, you’re paying for the air sometime in March or April, and that’s first or second quarter. So, it would go up for the third quarter and then come down during the third quarter, and then it starts to build again. We are seeing a difference in when people travel. So, historically, Tuesday, Wednesday and Thursday were the slowest days of the week, and they still are.

And we’re seeing more off-peak being down more than it has been historically. So, people are traveling more at the peaks. They’re traveling three-day weekends, they’re traveling school breaks, they’re traveling in the summer months, they’re traveling over holidays for sure. But then, during the rest of the year, what we call the shoulders, they’re traveling less. And that kind of makes sense. We went through this period where after the pandemic, or while we were still in it, because everything changed differently, things opened differently. Florida opened and most of the rest of the country was still closed, then others started opening. And you can’t go anywhere. You couldn’t go anywhere unless stuff was open, right? What were you going to do unless you were visiting friends and relatives?

So, from that perspective, we saw this shift in the way people travel, but as kids have gone back to school and as your boss wants you back in the office, I call it four is the new three. Initially, it was like one or two days, then it was two or three. Now, your boss wants you back four days a week. And if your kids are in school, it’s really hard to take them out of school every weekend to go to your summer vacation house or to go someplace not where you live. So, we’re definitely seeing these shifts occurring. And the other shift is business travel. Most business travel has come back. The trips that you hear airline company managements or other analysts talk about that haven’t come back are those one-day trips.

You might be able to take a 6:00 or 7:00 AM flight to your destination, but you can’t guarantee that the 7:00 PM flight you’re scheduled to be on to come home will actually go. And so, we see even airline people… We had some out of town airline people visiting us the other day and they were going from New York to Boston and they were training. And I said, “Why are you training?” And they said, “Because we’re concerned that we won’t be able to get there. That we won’t be able to guarantee an up and back kind of a day.” And so, those are the trips where you might only have one or two meetings and you can replace those meetings with a call, rather than with an in-person meeting. So, those trips haven’t come back and we don’t think they will. But as the economy overall grows, of course the absolute number will be back. Let’s see. We only have a minute or two left. Is there anything, Kevin, we didn’t talk about that we should talk about for our travel groups next year?

Kevin Kopelman:

Well, Helane, we might have to do a follow-up episode.

Helane Becker:

Okay. Always. It’s always nice to work with you, Kevin. I really enjoy the time we spend together when we’re in the office. I mean both of us with our travel schedule. We don’t overlap too much. But it’s always nice to see you and it’s always nice to work with you.

Kevin Kopelman:

Likewise, Helane.

Helane Becker:

And thanks for your time today.

Kevin Kopelman:

Thank you. Thanks for having me on. It’s a pleasure.

Speaker 1:

Thanks for joining us. Stay tuned for the next episode of TD Cowen Insights.

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