Peak vacation season for U.S. consumers is about to kick off, and the summer looks bright for the travel industry.
“Nearly 60% of Americans plan to take a leisure trip over the next few months, per our recent AlphaWise survey,” says Michelle Weaver, Morgan Stanley's U.S. Thematic Strategist. “The trend is even more pronounced among people who make $150,000 or more, with 80% indicating that they have summer travel plans.”
These affluent travelers are not just booking their trips: They put vacationing as one their top priorities compared with other discretionary purchases, and nearly half of them said they intend to spend more this year. “As a result, companies that cater to upper income consumers are expected to outperform those serving other demographics,” says Weaver.
Morgan Stanley Research breaks down what this could mean for the key sectors of the travel industry, as well as investors looking for opportunities in summer fun.
Airlines Ready for Liftoff
The demand for air travel has defied pessimistic predictions and has been strong so far this year, despite ongoing market concerns for a recession and industry-specific issues such as labor and safety. Share prices have also remained robust on the back of resilient fundamentals.
Consumers’ sustained appetite for flying should benefit airlines geared toward travelers of all budgets, while the expected trend for more travel among wealthier adults should translate to a corresponding lift for airlines serving those customers.
“We feel particularly positive about the outlook for premium carriers, which cater to higher-income consumers who are more likely to fly regardless of how the economy is performing or what they pay for tickets,” says Ravi Shanker, Morgan Stanley's North American Freight Transportation and Airlines Analyst.
In fact, since the pandemic, premium air travel has been one of the fastest-growing and most resilient parts of the airline industry, with premium cabin revenue outperforming main cabin by 10 percentage points.
At the same time, all the major U.S. airlines, including some budget carriers that have been considering the addition of premium services, are looking for ways to differentiate themselves and make air travel more than just a basic commodity.
“As well as being good news for consumers, a more appealing flight experience should help the airlines boost yields and margins without having to expand too quickly to rein in costs,” says Shanker.
Smooth Sailing
The outlook for cruise companies seems to be mostly sunny, analysts say, although there could be some clouds on the horizon. The world’s three largest cruise operators draw a majority of their passengers from the U.S. and as these companies mainly offer vacation trips—unlike airlines or hotels, which also serve business travelers—the financial health of the U.S. consumer offers a good indicator for future revenue.
Six percent of survey respondents said they are planning a cruise, up slightly from before the COVID-19 pandemic, when about 5% of the U.S. population took a cruise vacation in 2019. Cruise passengers tend to be older and often take more than one vacation and while cruises cater to a range of household incomes, they generally skew toward higher-income travelers. Like airlines, therefore, cruise operators should benefit from affluent consumers’ desire for travel.
However, the industry has a long booking window of six to nine months on average, and booking volumes for this year have been tapering off. Indeed, one cruise operator recently announced that it is approaching the point where it will be taking more bookings for next year than for the rest of this one.
"The scope for significant revenue increases is likely to be small, and any increases are more likely to show up in onboard revenue, which is a much smaller component of revenue than ticket sales," says analyst Jamie Rollo.
"Also, yields are easing as the number of occupied rooms stabilizes and revenue growth slows, suggesting that the slowdown we are seeing elsewhere in gaming, lodging and leisure is beginning to affect the cruise industry, which typically experiences these changes later," he adds.
Viva Las Vegas
Survey respondents offered a positive perspective for hotels and casinos, in contrast to the generally cautious outlook among investors in the gaming and lodging sector. More than 50% said they plan to stay in chain hotels this summer, while more than 10% favored independent or unbranded hotels.
While demand has slowed and labor costs remain high, premium and luxury hotels and casinos are outperforming their cheaper counterparts. Revenue per available room at upscale hotels is up 1% year over year, compared with a decline of 4% at the lower end of the market.
Meanwhile, gaming revenue at the more-upscale casinos on the Las Vegas strip is up on the year, outpacing regional casinos. On the strip's casino floors, demand for pursuits such as baccarat is supplanting that for slot machines.
"Coming out of COVID, regional gaming revenue recovered first, then Las Vegas, then lodging. All segments have started to slow, but Vegas has seen the most pronounced continued strength and highest growth rate," says Stephen Grambling, head of U.S. gaming, lodging and leisure research.
For deeper insights and analysis, ask your Morgan Stanley Representative or Financial Advisor for the full report, “Summer Travel Preview: Cleared for Takeoff,” (May 15, 2024).
