Supply chain is a term that used to be used only in business or logistics. Today we hear every day why there is no baby food or why containers are stacked in a port. At Dario’s Italian restaurant at Boston’s Logan Airport, cream was not delivered on a recent visit, so some of the items on the menu could not be prepared. The waiter said, “You know, the supply chain issue.” Airlines have used supply chain excuses to explain aircraft delays or why they cannot meet previously expected capacity levels. With many of the things we buy, we recognize our dependency on supply chains when things are not available as we would expect.
Air travelers also struggle with supply chain issues in other areas. Package holidays, ie purchased holidays that include a flight, hotel, possibly a car and experiences, were affected because not all options were available or prices were particularly high. While holiday travel has generally been strong during the summer and has remained strong into the fall, this holiday travel category is challenged and poses a small risk to a full recovery in airline demand.
Important segment of leisure travel
People travel for leisure for many reasons. Package holidays make up a small segment of all vacation travel, but this segment is more important for certain destinations. About 30% of travelers say they want to pack lots of experiences into their vacation. For these people, a package tour can be the way to fill the days. In 2019, my family went to Vietnam for a two-week vacation. We worked with a local travel agent who arranged our domestic flights and all hotels and pointed out many different activities to us. We probably could have arranged all of this ourselves if we had taken our time to explore and search, but for us it was worth buying the tour and we had a great and memorable time.
Internationally in particular, package holidays can be a way to see and access things that would otherwise be difficult or more expensive. When hotels or certain activities are unavailable due to supply chain bottlenecks, it can change the desire to visit a place. While travel volumes or the number of travelers may not change, these supply chain challenges could affect international holiday destinations the most, and consequently the airlines that fly these routes.
Staffing issues affecting hotels and resorts
One of the biggest problems with package pricing is the sharp increase in hotel and resort prices. An industry leader explained that while staff shortages were more acute last year, many properties maintained the higher rates introduced at the time, even as some of the pressures eased. As with airlines, price elasticity affects hotels and resorts, meaning higher rates reduce demand. While the “vengeance trip” idea may dampen this somewhat, higher rates will eventually dampen demand.
Consumers often decide on a trip based on the total price. Higher airline ticket prices and hotel rates mean one of two things: Some locations will suffer from absolute volume, and others will receive visits, but for shorter stays. For both airlines and hotels, one advantage of a package deal is that the amount paid for the airfare and hotel is opaque to the buyer. This allows the airline or hotel to offer promotional rates to fill otherwise unused capacity, but in a way that doesn’t invite competition or dilute unpackaged “rack” rates.
Car rental companies still challenged
Car rental companies returned many vehicles shortly after the outbreak of the pandemic and are still facing vehicle shortages in many places. Just as new cars face supply issues due to chips or other issues in the supply chain, this has meant that rental companies often do not have enough vehicles to meet demand. On a recent trip to Florida, upon checking in we were told that cars would not be available for two to three hours. When we went to the car section we were able to pick up a Ford F150 that had just been returned, although we rented a medium sized one.
Another industry leader called rental car prices “incredibly inflated”. This, along with the flight and hotel issue, adds more uncertainty to the package deal opportunity, which is likely to be more accentuated during busy holiday periods. It also means that ridesharing services like Uber or Lyft are likely to be used more frequently for some trips. As hotels are doing, it’s likely that car rental companies will test whether to maintain their higher rates even as they bring vehicle inventories back to demand-satisfying levels.
Property prices may affect this trip
One aspect of vacation packages that is often underestimated is its relationship to property prices and valuations. For some demographics, home equity loans are the primary way these vacations are funded. With high real estate values and low interest rates, there is more equity available to take out a loan for such a family trip. As interest rates soar and home prices falter, this limits the ability to take out such a loan or raise interest rates to a point that many potential buyers are uncomfortable with.
This does not affect all buyers of these products, but some of them. The industry has seen this in other settings, like the housing crisis of 2008-2011. During this time, some of the most price-sensitive trips simply disappeared as people’s source of funding dried up.
Contributes to revenue uncertainty
In Delta Airline’s recent earnings release, CEO Ed Bastian expressed optimism about the demand environment. He focused on ensuring that the normal summer-to-autumn dip is not happening, noting that there are no signs of demand abating. Most of his comments concerned business travel and higher-priced leisure travel. While higher-priced leisure travel could be an industry strength over the next year, there are still many constraints preventing a full return of business travel.
Airline industry revenues are more likely to be used for business travel and high-end travel, but the industry’s high fixed costs mean airlines often have to fill gaps with budget-conscious leisure travelers. As hotel, rental car and other prices for vacationers increase, it increases the uncertainty of the revenue environment. While many trends are positive, as Delta pointed out, this strength isn’t top-down and it’s causing some uncertainty in overall earnings. With some of these trends, different airline business models may be more at risk than others.