The news has been pretty bleak for the hospitality industry over the last few months. The war in Ukraine has led to skyrocketing energy prices and there’s a general sense that a recession is around the corner.
What’s strange is that it is coming at a time of bumper profits for many thanks to pent-up travel demand following two years of Covid-19 restrictions. ADRs in the industry have kept pace with inflation and there are reasons to think we might see a different type of economic slowdown to the ones that have come before. Don’t just take our word for it, the New York Times highlights just how confusing some of the competing signals are.
It might therefore be worth looking on the bright side and here are three reasons for optimism.
Low unemployment
Unemployment is at record low levels in many European economies, meaning that a lot of people still have paid time off. Of course this could change if there is a full-blown recession but at the moment the situation looks good. As analysts at Bernstein noted recently: “The primary driver of travel decline in previous consumer downturns had been rising unemployment, while consumers still have paid time off, they will still travel, albeit with some trading down,” they said.
It's a similar situation in the US and is one of the reasons who executives from the big hotel brands are not panicking… yet. Speaking last week at the Bank of America Securities 2022 Gaming & Lodging Conference, Marriott chief financial officer Leeny Oberg explained why the economy might actually be in not too bad shape:
“[W]hen we think about prior recessions, every recession is different, right? And they're all different; different reasons, different length of time. And when I think about the unemployment ticking up from 3.5 to 3.7 last week that we saw, these are still numbers that show that there are plenty of jobs for people who want to work. And the reality that we're a good ways away from something that I think would have a meaningful impact on how people feel about their security for future wages,” she said.
Savings bonanza
One of the most interesting knock-on effects of the Covid-19 pandemic was that it enabled consumers to save like never before. According to the IMF, households in the euro area saved nearly €1 trillion more in those two years than they would have done if the pandemic had never happened. There’re indications that this money is now being spent but there is likely to still be a sizeable amount still left over as we head into winter.
"Travel is primarily a luxury pursuit, with 70% of travel spend coming come from the top three income deciles, who are less affected by the energy price rises and have the bulk of the excess savings. There is also evidence that travel is being prioritised over other discretionary spend (eating out etc.) as it has been the most restricted activity through Covid and this has led to pent up demand,” Bernstein analysts said.
Gas storage solution
The war in Ukraine has led to an energy crisis across much of Europe. Bills for both households and businesses are rising with big hikes expected in the winter. There has been speculation about where this could lead with some pretty alarming worst-case-scenarios. But what if things were not as bad as previously thought. Analysts at Goldman Sachs said that European countries could withstand the impact of Russia cutting off gas supplies this winter as the situation had been “successfully solved”.
Prices could therefore more than halve this winter if the weather is not too harsh.