Americans Cut Back on Spending but Splurge on Travel

Americans splurge on travel, despite high inflation and interest rates affecting their spending habits. This economic environment has prompted noticeable cutbacks in everyday expenses like groceries and electronics, with many also delaying significant purchases such as new homes amidst financial uncertainty.

Record-Breaking Travel Season

Despite these financial concerns, Americans are eager to indulge in travel. This summer is shaping up to be another record-breaking season. AAA projects around 70 million people will travel more than 50 miles from their homes this year. Meanwhile, the Transportation Security Administration anticipates screening over 32 million people from June 27 to July 8—a 5.4% increase from 2023’s record highs.

Americans show resilient travel spirit despite economic worries, poised for record-breaking summer adventures, WSJ Subscription Offers said.

Surge in Leisure Travel

At the Mauna Lani, a luxurious resort on the Big Island, Ian Milley, the director of revenue management, reported a remarkable surge of approximately 50% in leisure travelers year-over-year. Many guests are now opting for extended stays, reflecting a growing trend towards longer bookings at the resort.

International Vacation Intentions

People are also venturing further afield. Intentions to vacation internationally are at an all-time high, according to data from the Conference Board and Mastercard Economics Institute. Ava Hyland, a 19-year-old college student from Woodstown, N.J., visited Cancún, Mexico, for the first time last weekend. After months of planning, she and her family spent four days at an all-inclusive resort with a group of family friends. “I’d never really been on a giant vacation of this magnitude in my life,” Hyland said in a call with Barron’s.

Factors Driving the Travel Boom

The soaring demand for travel may be surprising given recent data suggesting consumers are becoming increasingly price-sensitive and reducing spending on nearly everything else. Experts cite several reasons for the travel boom.

Robust Labor Market and Spending Shifts

The labor market has been relatively robust, allowing households to feel comfortable with discretionary spending. Many Americans are choosing to splurge more on experiences rather than big-ticket items, wrote Claire Li, an analyst at Moody’s Ratings. This year, the travel season benefits from a series of high-profile events, including the Paris Olympics and the UEFA European Football Championship, wrote Wedbush analyst Scott Devitt. Paris hotel occupancy levels are nearing 80% for the dates around the summer Olympics, up from about 60% in April, he noted.

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Continued Growth in Service Spending

These consumption trends won’t change soon, Li wrote. She expects consumption growth over the next few quarters will continue to be driven by spending on services rather than goods, even if total expenditures slow down.

Lower Airfare and Travel Costs

Lower airfare has also encouraged people to travel. After two years of increases, plane-ticket prices are trending downward. In May, airfare was 5.9% lower than a year ago, according to the latest consumer price index report. Heavy competition among airlines has helped “keep average airfares reasonable,” said Joe Rohlena, senior director at Fitch Ratings.

And it isn’t just airfare—overall travel costs are cheaper, too. Car and truck rentals declined 8.8% from last year, and hotel prices were down 1.7%, per the consumer price index. The deceleration is a welcome respite after the surge in prices over the past two years and may be encouraging previously reluctant travelers.

Strategic Travel Planning

While there is a strong desire to travel, consumers are becoming more strategic about how, when, and where they go, Mastercard said. Investors should be equally judicious when considering how to capitalize on the trend.

Investing in Travel Trends

The U.S. Global Jets ETF JETS saw a 13% increase from the year’s beginning to mid-May. Recently, it has declined by approximately 8% amid concerns about seasonal economic trends. Investors are cautious about consumer spending sustainability for the remainder of the year. Analysts like Wedbush’s Devitt observe that while fall demand may soften, a drastic decline isn’t imminent. Recent data and travel industry insights indicate certain sectors may continue to perform well despite broader economic shifts.

International and Luxury Travel Growth

International travel is set for recovery with Chinese tourists returning and affluent consumers spending more on vacations. A New York Fed survey reveals half of households earning over $100,000 intend to boost vacation expenses in the next four months. Delta Air Lines, focused on corporate and premium segments, is expected to benefit, as per Deutsche Bank’s Michael Linenberg. Conversely, airlines like Frontier Group and Spirit Airlines, oriented towards domestic travel, may face challenges, rated Hold by Linenberg.

Luxury travel, a rapidly expanding sector, shows resilience and potential for sustained growth. Viking Holdings’ stock surged 18% post IPO due to optimism about affluent travelers. Analysts predict further gains. Cruises, enjoying popularity, appeal to budget-conscious consumers seeking value, as highlighted by Barron’s earlier this summer. Royal Caribbean was notably endorsed as a stock pick in this context.

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