Higher Hotel And Car Supply Chain Pressuring Package Travel Options

Supply chain is a term that used to be used only by those in business or logistics. Today, we hear this daily as to why baby formula is not available, or why containers are stacked up in a port. At Dario’s Italian restaurant in Boston’s Logan airport, on a recent visit they had no cream delivered so could not make some of the items on the menu. The waiter said “you know, the supply chain problem.” Airlines have used supply chain excuses to explain late delivery of aircraft or why they can’t meet a pre-anticipated level of capacity. In many things we buy, we realize our dependency on supply chains when things are not available as we’d expect.

Airline travelers are facing supply chain problems in other areas, too. Package tours, meaning vacations bought that include a flight, hotel, maybe a car, and experiences, have been affected because not all opportunities have been available or the prices have been especially high. While leisure travel in general was strong in the summer and has stayed strong into the fall, this category of leisure travel is challenged and represents a small risk to a full airline demand recovery.

Important Segment Of Leisure Travel

People travel for leisure for many reasons. Package Tours make up a small segment of all leisure travel, but this segment is more important to certain destinations. About 30% of travelers say that they want to pack a lot experiences into their vacation. For these people, a package tour can be the way to fill the days. In 2019, my family took a two-week vacation to Vietnam. We worked with a local travel agency who arranged our internal flights, all hotels, and made us aware of many different activities. We likely could have arranged this all ourselves had we taken time to explore and search, but buying the tour was worth it for us and we had a great and memorable time.

Especially internationally, package tours can be way to see things and get access that would be difficult or more expensive another way. When hotels are not available or certain activities are not available due to supply chain shortages, this could change the desire to visit a place. While the amount of travel or number of travelers may not change, these supply chain challenges could affect international leisure destinations the most and correspondingly the airlines that fly these routes.

Staffing Issues Affecting Hotels And Resorts

One of the biggest issues affecting package rates is the sharp increase in hotel and resort rates. One industry executive stated that while the employee shortages were more acute last year, many properties have kept the higher rates put in place at this time even as some of the pressures have waned. Like airlines, price elasticity affects hotels and resorts, meaning that higher rates reduce the demand. While the “revenge travel” idea may mute this somewhat, eventually higher rates will dampen demand.

Consumers often decide a trip based on the total price. Higher prices for air fares and hotel rates means one of two things: some locations will suffer absolute volume, and others will get visits but for shorter stays. For both airlines and hotels, one advantage of a package price is that the amount paid for the air fare and the hotel is opaque to the buyer. This allows the airline or the hotel to offer promotional rates to fill otherwise unused capacity, but in a way that doesn’t invite a competitive match or dilute the non-packaged “rack rates.’’

Car Rentals Still Challenged

Car rental companies returned many vehicles just after the pandemic hit, and still are facing shortages in vehicles in many locations. Just as new cars are facing supply problems, due to chips or other supply chain issues, this has meant that rental companies often don’t have enough vehicles to meet demand. On a recent trip to Florida, we were told that on check-in that no cars would be available for two to three hours. When we walked out to the car area were able to take a Ford F150 that had just been returned, even though we had rented a mid-size.

Another industry executive referred to car rental rates as staying “incredibly inflated.” This, like the flight and hotel issue, adds more uncertainty to the package opportunity that likely will be more highlighted at busy holiday times. It also means that ride share, like Uber or Lyft, will likely to be used more often for some trips. Like the hotels are doing, it is likely that car rental companies will test keeping their higher rates even as they bring car inventories back to demand-satisfying levels.

Housing Prices Can Affect This Travel

One often under-appreciated aspect of package vacations is the relationship with housing prices and valuations. For some demographics, home equity loans are the primary way these vacations are funded. When housing values are high and interest rates are low, there is more equity to tap in a loan to take this kind of family trip. With interest rates shooting up and housing values stalling, this limits the ability to take such a loan or raise the rates to a point uncomfortable for many potential buyers.

This doesn’t affect all buyers of these products, but affects some of it. The industry has seen this in other environments, like in the housing crisis of 2008-2011. During this time, some of the most price-sensitive travel just vanished as people’s source of funding evaporated.

Contributes To Revenue Uncertainty

In the recent Delta Airline’s earnings release, CEO Ed Bastian spoke bullishly about the demand environment. He focused on the normal drop off from summer to fall not happening, and pointed out that there are no signs demand is weakening. Most of his comments were about business travel and higher-priced leisure travel. While higher-priced leisure may be an industry strength over the next year, there are still many pressures holding back a full volume return of corporate business travel.

Airline industry revenues may be leveraged more on business and higher-end travel, but the high fixed costs of the industry means that airlines often need to fill in gaps with price-sensitive leisure travelers. When hotel, rental car and other prices for vacationers rise, it adds to the the uncertainty of the revenue environment. While many trends are positive, as Delta pointed out, this strength is not top to bottom and this creates some uncertainty in total revenues. Different airline business models may be more at risk than others for some of these trends.