Insight: Friday 3 April 2020: The Other Side- Part 2 – Demand for Leisure Travel

News:

Demand for both business and leisure travel has fallen in the wake of the Covid-19 crisis. On Wednesday we spoke about changes to business travel. Today, we will focus on leisure travel.

Leisure travel is directly correlated to economic activity, and with the virtual shutdown of major segments of the US economy through lockdowns, the economy is in the tank. Jobless claims jumped by more than 6 million in one week, illustrating the depth of this crisis and the extent of the economic damage. Even if we were to declare the economy open tomorrow and end the stay in place orders, the economic damage has been delivered.

Economic stimulus payments and unemployment compensation are typically not used for leisure travel, but necessities. A large portion of the working class that is either unemployed or under-employed at the current time will be unlikely to travel in the near future.

Analysis:

A structural change in leisure travel is likely with the cruise industry. While previous contagions on cruise ships have proven problematic, in this crisis, people are dying from the disease, which spreads quickly in a contained environment. As this story is written, there are still 6,000 passengers aboard cruise ships on the high seas, likely wondering whether they will be allowed to dock and whether quarantine is in store before they can go home.

I can’t imagine the cruise industry making a rapid comeback, and most of their passengers travel to and from the ships by airplane. While yields aren’t high, this baseload of passengers enables airlines to right-size their aircraft to demands in key markets. There are a lot of passengers in Fort Lauderdale who transfer from the airport to cruise ships.

Family vacations for 2020 are being postponed, as travel plans for spring trips have largely been canceled. With theme parks closed, all of the planned Disney vacations that should have taken place may not happen.

Airlines are allowing changes to itineraries, but are being sticky providing refunds. In some cases, that may not put passengers who are furloughed or lose their jobs in a good situation. Many small businesses, including restaurants, may close, and their former employees will be unlikely to travel.

The impact of the 2008 recession on airlines was significant and caused a blip in the charts as we examine overall traffic growth. This crisis will dwarf 2008, and recovery to 2019 levels is unlikely until 2023 according to aviation consultancy Avitas.

While we’re a bit more hopeful that the economy rebounds strongly, our estimates show a return to slow growth in 2021 and a return to near 2019 levels in mid-2022, depending on how long this crisis lasts.

Insight:

Will there be fundamental changes in the patterns for travel post the Covid-19 crisis? We believe two things will change, one permanently and one temporary. The permanent change will be a reluctance for many people to cruise, for fear of being trapped on a ship that experiences an illness (or pandemic). In recent years, this has become an occurrence that is too frequent. I don’t think I’ll ever want to join a cruise, and I’m willing to bet others now feel the same way – especially if there’s a chance to be quarantined at sea.

The temporary change will be reduced leisure travel spending until the economy can return to positive growth and lower unemployment. While that is possible, the current disruption to the economy will take at least a year to recover, well into 2021. As a result, travel demand is unlikely to reach 2019 levels until mid-2022 at the earliest.

Our projections indicate that 2020 will see a 42% decline in leisure travel year over year, assuming stay-at-home orders are lifted in June.  If these orders remain until September, that decline could be nearer 70%.  With the shelter in place orders lifted in 2021, traffic will resume, but at much lower levels due to the weakness in the economy.  Things will not come roaring back instantly, and those in financial turmoil will not travel.  We anticipate 2021 returning to 78% of 2019 levels for leisure travel.  By 2022, traffic levels should return further to 92%, with the 3rd and 4th quarters being nearer normal after a slower start to the year.