In the US and Europe, airports and airlines are struggling to attract new hires to meet rising demand. Rising inflation has added to industry woes in the region, with workers striking to demand higher wages. Meanwhile, airports from Schiphol to Heathrow have established caps on daily flights, to the fury of passengers and the dismay of airline companies who were looking to the summer to recoup some of the $168 billion they had lost in 2020 alone.

Some prepared better than others. Ryanair, which kept most of its workers during the pandemic, beat analysts’ expectations by posting a $173m net-income for the first quarter of the year (vs a $273m loss in 2021). Likewise, despite the many challenges in Asia, Singapore Airlines posted a record load factor of 87.8% this month.

With inflation on the rise and its potential impact on passenger demand, the question remains as to how fast efforts on the supply side should be pursued. Views remain divided, with macro economists pointing to a slowdown in demand while some industry observers believe travel will remain strong even under recessionary conditions. Some airlines are less sanguine, admitting they have “almost zero visibility” into the second half of the year.

The macro view points to a slowdown in discretionary spending: real income has been falling since 2021 due to rising prices while rising interest rates have cut consumer credit growth in the US (5.9% growth in May vs. 12.7% in March). Likewise, looking at credit/debit card usage data, spending on leisure services remains positive but is weakening, down to 15% in May from 35% in January and a 55% February-March peak. This, combined with April’s consumer price index at 8.3%, suggests that real household spending growth is negative. This is denting into demand for travel, with 30.1% of US consumers cancelling travel plans in May (vs. 23.2% in April).

There is some room for hope, however. As United Airlines’ CEO recently pointed out during an investor conference, the service sector has yet to come back to its historical contribution to GDP. He also noted that demand from two areas remained muted: business travel (which remains below normal levels and is expected to grow) and travel demand from Asia which has yet to go back to normal due to strong Covid restrictions. As for ticket prices, while airfares saw a drastic rise over the past year (+16.9% for internal flights in the US for instance), fares remain below pre-crisis levels in key markets like the US.

Most importantly, people still yearn to travel. According to a recent survey in key travel markets, while 74% of consumers are very concerned with inflation, questions related to June-August travel showed that 85% planned to travel despite rising costs, 36% planned to travel more in 2022 but inflation would mean 33% planning shorter trips and 34% planning trips closer to home. There is also a clear preference to reduce expenditure in non-essential areas such as clothing or dining to continue spending on travel. Indeed, for two in three US travelers, leisure travel is a high budget priority, with 25% and 20.7% of respondents reporting trips in September and October respectively.

Both sides of the argument thus have merit and clearly, to date, falling real income and inflation worries have not dampened travel demand. However, as the Federal Reserve continues to fight inflation there is reason to believe that the status quo will change. In the US, shrinking retirement accounts and falling home values may force some retirees back into the workforce, and most definitely cause them to rethink certain consumption choices. Similarly, millennials facing larger monthly bills, and especially higher mortgages as a result of debt taken on in recent years are also likely to reprioritize their spending. As such, unless real wages start to rise again, which appears unlikely in the near-term, consumption patterns and priorities are likely to change.

These will likely differ across income brackets. For the top 30% income bracket in the US where travel remains discretionary, the dollar being at parity with the Euro will buoy international travel. Within the same income bracket, European travelers are likely to visit where the Euro will go further – Africa or Asia. Travelers that can travel off-peak will do so to enjoy lower ticket prices, while travelers that must keep to school/work schedules will plan ahead in the hope to get lower ticket prices or travel less. Most will prefer staying regional and in Europe some are likely to travel to destinations they can get to by train. But who would blame them after months of airport chaos?

Revenge Travel vs. Inflation