We’re heading towards the end of the summer here in the UK and we thought it would be a good time to take the temperature of the holiday market with a four-part series exploring how our travel patterns are changing - and what this might mean for hotel investors. You can catch up on the story so far here.
Consumers across Europe may be suffering from the impact of rising costs, increasing job insecurity and inflationary pressures and yet one thing appears to be sacrosanct this summer – their holiday bookings.
Even though travel is certainly not cheap, with high airfares and few bargains to be had on accommodation room rates, the cost of living crisis is yet to have changed the travel plans for many holidaymakers, who appear to be prioritising taking a break.
For example, according to data analyst specialist Cirium, the key Spanish holiday market is now largely back to where it was pre-pandemic in terms of capacity. For the July-to-September quarter, total scheduled flights from Spanish airports are down just 1 per cent from the same quarter in 2019.
This despite a recent Financial Times analysis of data from Cirium which showed that air fares have risen at more than twice the rate of inflation, as carriers cash in on the soaring demand for travel.
However, STR Senior Director Thomas Emanuel says that despite expensive airfares, hotel demand is “pretty much in line” with last summer.“We are not seeing too much of an impact quite yet from the cost of living. Although we're not talking so much about revenge travel anymore, people's holidays are one of the last things to go. So we're still seeing bookings keeping up nicely with last summer. And of course, last summer, everybody was raving about how great it was,” he says.
In the UK, arguably the European market is feeling the pinch the hardest across the continent, consumers are still looking forward to holidays abroad as spend at airlines continues to show positive growth, up 33.5 per cent in May compared to the same time last year, according to the latest Barclays UK Consumer Spend Report.
Spend at hotels, resorts and accommodation also grew positively by 5.4 per cent, a significant uplift compared with the negative year-on-year growth of -4.9 per cent seen in May 2022. Savills director of commercial research Marie Hickey also feels that with many people still sitting on excess savings from the pandemic, most are loathe to cut back on their summer getaways. That may not shield spend next year, but for now people are sticking with their holiday plans.
“Perhaps that [cost of living squeeze] will start to be a factor for summer 2024 but for the moment people are continuing to spend on their summer holidays,” she says.
Hotel room rate performance has also been able to maintain its growth and she feels that it is unlikely that there will be a dip, even if the economic headwinds do start to make an impact.
“This year occupancy levels and ADRs are high and the key Mediterranean markets are enjoying strong demand. Of course not everyone has been impacted equally by the economy, so for example the important German consumer market has remained quite robust,” she says. “Comparables are still looking strong, but again next year they will be against the robust performance of this year. We may not see the same rate of growth in 2024 but the ADRs being achieved are the new norm. Revpar probably still has a little room for growth.”
The only disparity that she forecasts could emerge is between weaker and stronger hotel product.
“If we do see some diversion next summer it’s likely to be the poorer hotels that suffer, especially those in the mid-price range. Value offers are well understood by consumers, meanwhile, luxury continues to perform very well,” she adds. “However, weaker or older hotels in the middle market may see find conditions more difficult next summer. Overall though, while growth may slow in 2024 or even flat-line, we’re not seeing any signs of a dip.”
Hoteliers remain confident
“Although the intensifying cost-of-living crisis forced some consumers to watch what they spent throughout 2022, the holiday market continued to benefit from consumers’ desire to get away post-lockdown, the savings that were built up over lockdown, and people making use of the huge level of refunds and credit notes that travel companies issued,” says Jennie Bryans, travel and leisure analyst, Mintel Reports UK.
“In 2023, holidaymakers’ desire to make up for missed opportunities is being tested heavily, not just by the rising cost-of-living but also by the significant increase in the cost of overseas holidays and airline tickets,” she adds.
“Despite this, we expect the value of the overseas holiday market to fully recover to pre-pandemic levels in 2023. Whilst some consumers have had to cut back on the volume of trips they usually take, most people are still prioritising their main holiday, with many going all out to ensure they have a special experience.”
Not surprisingly, business sentiment among European hoteliers and holiday rental operators remains strong, with almost half (46 per cent) anticipating that 2023 will be the year of highest revenue yet.
The second European Accommodation Barometer from Booking.com and Statista, published in June, showed that ADRs and occupancy levels had increased for 51 per cent and 60 per cent respectively. However, almost half of respondents (47 per cent) expressed concerns around overall economic conditions.
“It’s hugely encouraging to see the optimism driving European hotel and holiday rental operators ahead of the busy summer season,” says Ben Schoeter, director of public affairs, Booking.com. “At the same time, there remain an array of challenges that will make that path anything but smooth.”
Business cities slower to recover
Where travel recovery has been slower has been the business sector, and travel based around business taken longer to recover. Even this summer, consumers are generally heading for traditional holiday spots and some cities with more of a business bias have been lagging.
One such example is Germany, although there are signs of a bounce back in corporate performance as occupancy levels on midweek nights – a typical indicator of business travel levels – have moved upwards.
“That does indicate that business travel is starting to return. I think certainly the conferences are very much back and we're starting to see some peaks German cities that are reliant on fairs. From a city perspective, anyway, midweek demand is starting to return, which we use as a proxy for corporate demand.”
City hotels also suffered from the drop off in short breaks and city breaks, but Mintel’s Bryans says these are expected to take off again once consumer confidence fully recovers.
“These types of trips have fallen victim to the rising cost-of-living, but demand will inevitably recover as consumers have the means to fulfil their travel ambitions once again,” she says.
Overall, Emanuel believes that the picture for summer 2023 remains positive. Comparative figures will become increasingly challenging as growth is compared with stronger numbers, but the underlying trends show people are loathe to miss vacations.“Year on year, it's not going to look as fantastic as it did, because we're not coming off that really low recovery base,” he says. “But in terms of where we are versus 2019, the summer looks good.”