Why are airfare and hotel rooms so expensive right now?
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When it comes to high airfare and hotel room rates during this “sold-out summer“, it feels like it’s difficult to catch a break … and for good reason.
After two years of industry devastation brought on by the COVID-19 pandemic, travel is back. Not only has leisure travel picked up, but lucrative business travel is also finally getting a taste of a comeback.
In other words, travelers are so eager to leave home that they’re buying flights and booking hotel rooms even at very high prices.
Airlines and hotel companies are not seeing significant resistance to these high costs — welcome news as they work to shore up their balance sheets and retire debt after two tough years. But with the increased demand comes the need to adjust expectations when making travel plans, as prices for flights and hotel rooms are expected to remain high for the foreseeable future.
Want an airfare deal? ‘You have to be flexible’
Airfares are surging. However, consumers have yet to be dissuaded from booking.
During the Delta Air Lines first-quarter earnings call last month, Delta President Glen Hauenstein acknowledged the higher fares, noting that the airline is having no trouble selling them.
But it’s not the drastic shift in prices that the airline finds most challenging to adjust to; it’s the need to add enough capacity to meet the surging demand.
“We haven’t seen a lot of resistance to the price points that we have in market, and our goal is to have reasonable price points in market up to day of departure,” Hauenstein said, adding that the company believes its customers are willing to pay more for a higher level of service compared to its competitors.
New inflation numbers released by the federal government in April show that airfares increased by 10.7% on a seasonally adjusted basis from February to March. The uptick in prices correlates with the significant rise in fuel costs.
March data from the Airlines Reporting Corporation — the clearinghouse for airline tickets purchased through travel agencies — supports the government’s findings.
According to that information, the average price of a round-trip ticket in the U.S. in March 2022 was $540. That represents a 41% increase from March 2021. It’s also an 11% increase over pre-pandemic levels.
Knowing there’s plenty of pent-up demand, as Americans look past the COVID-19 pandemic and finally take long-postponed vacations and work trips, airlines are passing on the higher cost of fuel to passengers who are eager to travel.
“If you’re looking for lower fares, you have to be flexible in terms of which days you’d be willing to fly,” Hauenstein said.
Some low-cost carriers, such as Frontier Airlines, are passing on higher costs to their passengers in the form of price increases on ancillary items like checked and carry-on baggage and seat selection. As a result, the average Frontier customer paid just shy of $70 in ancillary charges in the first quarter — 21% more than passengers spent in the first quarter of 2019.
While there are so far scant signs of families being priced out of vacations due to the high cost of travel, it could eventually happen, said Robert W. Mann, an aviation consultant and a former airline executive.
“If it’s a price-seeking customer, especially those who travel with families, $10 or $20 each way is, by the time they do the math — it’s a lot of money,” Mann told TPG in an interview. “If this were the middle of the winter, the typical choice would be, well, do I pay $4.80 for heating fuel or do I take whatever price they offer me to go to Orlando?”
The ‘best ever’ summer (for hotel owners)
Much like with airfare, hotel room rates are soaring for leisure travel, which was the most reliable segment of demand for the hotel industry throughout the pandemic.
But revived demand for group travel — which can be anything from weddings to team-building get-togethers — as well as a recovering business travel sector, means average daily rates will likely climb even higher.
Rising hotel rates fueled U.S. inflation in recent months, as prices for a hotel room in March were 29% higher than a year prior.
Both luxury hotels and properties in resort destinations saw the highest rate increases from 2019 levels in early April, with luxury hotel rates 29% higher than three years ago. Resort destinations are commanding rates 34% higher, according to data from STR, an analytics company that focuses on the global hospitality industry.
Wyndham Hotels & Resorts could actually serve as an inflation barometer of sorts for the travel sector, as it offers a mix of affordable brands like Days Inn and La Quinta that typically appeal to more budget-minded travelers.
If rates or gas prices go too high, travelers may begin to turn away from making reservations, but so far it appears this segment of travel demand isn’t shying away from taking a vacation.
Average daily rates at Wyndham Hotels & Resorts were up 8% in the first three months of this year compared to the same time in 2019, according to the company’s first-quarter earnings report.
Rates nudged up to a 13% increase toward the end of April, and weekend rates were 18% higher than 2019 levels. Weekend rates at La Quinta are sometimes running as much as 25% higher than 2019 levels, Wyndham CEO Geoff Ballotti said on an investor call last month.
“I think the trend is that our franchisees are feeling that the summer of ’22 could replace the summer of 2021 as the best ever,” he added.
Paris-based hotel company Accor — owner of brands like Fairmont and SLS as well as more affordable options like Ibis — lagged behind the industry recovery because so much of its portfolio is in Europe, which relies more on international travel to fill up hotel rooms. But the company’s ability to charge higher rates accelerated its recovery during the last year.
Average room rates at Accor are higher than 2019 levels, the company’s Deputy CEO Jean-Jacques Morin said on an investor call last month. He chalks up the pricing power to strong demand for luxury and lifestyle hotels, inflation and guests booking rooms further out than they did earlier in the pandemic (the latter of which gives a hotel company better insight into potential high-demand periods).
Accor highlighted the U.S. and Brazil as some of the non-European markets where the company was able to boost room rates amid the ongoing pandemic recovery.
“Resort hotels … are full and charging whatever they want. The consumer coming out of the slowdown aren’t price sensitive. It’s a very unusual recovery, and people can charge whatever they want,” Barry Sternlicht, former CEO of Starwood Hotels & Resorts and founder and CEO of investment group Starwood Capital, said on CNBC in early April. “Luxury goods, whether it’s wine or exclusive travel … There is definitely pent-up demand, and I’m actually astonished at the pace and rates hotels are able to charge right now.”
Leisure-oriented cities like Miami (up 43%), New Orleans (up 43%), Phoenix (up 38%) and Tampa (up 27%) saw the highest hotel rate increases over pre-pandemic levels. The travel industry generally rallied around the idea of the upcoming travel season being one of unprecedented demand, especially for domestic travel within the U.S.
High inflation within the hotel industry looks like a barbell, with the biggest increases being felt at the luxury and budget ends of the scale.
Inflation may usher in the best summer ever for hotel owners, but the pain will definitely be felt in travelers’ wallets at all price points and travel types.
If you’re hoping to score a deal on travel in the coming months, know that it’ll require some extra effort on your part, as there is no end in sight for high-cost travel this summer.
Following two terrible years, airlines and hotel companies badly need to make up for lost time — and they’re finally able to, with consumers going along. People have so far shown that they are willing to pay a lot to satisfy their appetite to check in to a hotel, get out on the open road or fly the friendly skies, with no desire to push pause on their plans anytime soon.
So, if you’re hoping to travel this summer, book now before you’re priced out or truly can no longer find availability.
Good luck — you’ll need it.
Featured photo by JUSTIN TALLIS/AFP/Getty Images.
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