Why a Little Inflation Could Be Good for the Travel Sector – Skift

When the U.S. consumer price index for April rose 4.2 percent year over year, a chorus of experts expressed concern that rising inflation could crush the green shoots of growth in the economy. But as far as the travel sector goes, a little inflation could be a good thing.

“It’s critical to look beyond the headline inflation number which aggregates the price changes of many different goods and services to understand what is truly driving the index,” said Seth Borko, Senior Research Analyst at Skift Research. “Looking under the hood, we find sources of both ‘good’ and ‘bad’ inflation.”

The biggest driver of U.S. inflation in April was price hikes for used cars. The second core driver was the travel sector, broadly speaking. Airfares rose 10.2 percent from April 2020, the largest one-month jump since October 2011. “Lodging away from home” similarly rose 7.6 percent in costs, month over month.

But when you take a longer view, it’s hard to see this recent inflation as anything but good for the travel industry. Compared to the pre-pandemic month of April 2019, airline prices are still down 17 percent, and travel lodging costs are still down 7.5 percent.

“The recent rebound in travel inflation is ‘good’ inflation that indicates that demand is returning and travel companies may soon be able to rebuild pricing power,” Borko said.

A couple of travel executives echoed the point.

Alaska – Norwegian Bliss – The Waterfront
Family walking on The Waterfront Source: NCL

“Inflation means prices go up, and it’s good to see that we, too, are seeing the positive side of inflation, which is pricing power,” said Frank Del Rio, president and CEO of Norwegian Cruise Line in an earnings call this month.

“We’ve raised prices since the beginning of the second quarter,” Del Rio said. “I’m just amazed at how much pricing power we actually have, given the difficulties that we all know about and the relatively low marketing spend that we’ve put out in the last one-and-a-half quarters or so.”

“So when you hear about inflation, we’re very pleased with that,” Del Rio said.

Watching Labor Costs

Inflation of goods that go into delivering travel services – running the gamut from energy and labor to lumber and furniture – poses a risk to travel businesses. A rise in these input costs could hurt already thin margins.

Labor is one major cost that executives are eyeing.

One factor in favor of cruise lines is where they typically source their labor. In Norwegian Cruise Lines’ case, more than 95 percent of its crew are non-American nationals. So it does not see pressure on the labor wage side.

But many hospitality companies do face wage pressures. Amazon grew dramatically during the pandemic, adding hundreds of thousands of jobs that often rely on similar skills to hotel positions. Yet Amazon is offering these jobs with better overall compensation packages than most hotel companies struggling to rebound can match.

Analysts at Bank of America estimate that every 1 percent increase in labor costs could drag on margins by approximately 0.20 percent to 0.40 percent for the real estate investment trusts that own hotels. Labor makes up 56 percent of the expenses at full-service and 48 percent of the costs at limited-service properties, the analysts said.

“With demand still up and openings taking longer to fill, we could see higher margins persist into the summer albeit with lower service and amenity levels than travelers expect,” said research analysts Shaun Kelley and Dany Asad in a May 24 report.

In other words, staffing shortages could result in sustained margin growth at the expense of slower or more limited customer service for guests and overworked employees.

“The brutal truth is that hotels aren’t a great asset in an inflationary environment,” wrote Richard Clarke, senior analyst for global hotels and leisure at Bernstein Research, in a May 25 report.

But some asset-light hotel companies may benefit because, Clarke says, “anything that squeezes industry profitability can make a branded network a more appealing partner” and thus help chains add desirable properties at a lower cost.

Clouds to Watch

Energy prices are another cost that executives are watching.

Southwest Airlines, for example, noted a longer-term trend in rising energy prices during an earnings call in April.

“While fuel price was still below year-ago levels, energy prices have been creeping up over the past few quarters,” said Tammy Romo, executive vice president and chief financial officer.

But the airline’s executives weren’t broadly worried yet. Southwest, like many carriers, has a fuel-price hedging program that its executives believe will help it avoid sudden spikes in costs.

Some of the recent energy price hikes were partly due to one-off causes, too. April’s temporary disruption in the Colonial Pipeline, a supplier of refined fuel products, led to jet fuel prices to jump by a double-digit percentage in a week in April, said S&P Global.

That said, the spike in energy costs is a worldwide phenomenon. In Britain, energy price effects almost entirely drove a rise in consumer-price inflation to 1.5 percent in April from 0.7 percent in March, said Capital Economics.

Some technology costs are also rising faster than expected.

Travel companies behind in their digital transformations may need to spend more on hiring technologists at a time when the labor market for specialists in niche areas like data scientists is hot. Hiring platform HackerRank, which works with companies like Airbnb, Booking.com, and Ryanair, shows travel and hospitality companies conducted 45 percent more remote interviews for tech roles in the first quarter of 2021 than in the fourth quarter of 2020.

Another source of rising costs is the need for greater investment in cybersecurity and cyber insurance. The risks of attacks have increased at many companies because of a recent spike in ransomware attacks. The attacks appear to be partly boosted by the rising availability of bitcoin as a ransom mechanism.

Not Being Complacent

To be sure, no one wants runaway inflation. When consumer staples become more costly, it leaves people with less discretionary money to spend on vacations, Borko noted.

Here’s another problem: Once consumer prices spiral upward, authorities can struggle to tame the trend. Argentina is a dramatic illustration of this phenomenon. The country has seen its 12-month rolling inflation hit 42.6 percent year-over-year. That has been a headwind for some travel brands, such as Argentina-based online travel agency Despegar, but it’s also been a recurring problem, off-and-on, for the country for many years.

But overall, a travel recovery might even help tame overall inflation, according to one contrarian analysis.

Some of today’s inflationary pressures have been driven by consumers buying more durable goods than usual because they weren’t able to enjoy travel and other in-person activities as usual.

Once travel resumes, the demand for many of these durable goods may fall back to usual patterns. That reset will, in turn, lessen overall inflation rates, according to Jason Thomas, managing director and head of global research at The Carlyle Group, in a recent essay.

Overall, nuance is critical when thinking about inflation. Travel executives will continue to eye some potential rising costs of doing business when the government releases the May 2021 inflation data for the U.S. around June 10. But the signs seem promising so far. Subscribers can also look to Skift Research’s Travel Recovery Tracker, Skift Health Score for public companies, and the Recovery Index

“For the time being, while caution is warranted, we see the return of travel demand and pricing power in April’s consumer price index as more of a good thing than anything else,” Borko said.

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