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April 03, 2008

What Do Inflating Travel Costs Mean?

Merrill Lynch has put out the latest edition of its quarterly report on pricing trends in travel industries. I summarized this report last quarter because it think it offers insights into both inflation trends and the health of the economy. The inflation link is self-explanatory. On economic health, my theory is that pricing in travel industries and economic growth are positively correlated. Hotels, airfares, and car rentals have many commodity-like characteristics and have a significant element of discretionary spending to them. IT seems unlikely that pricing for these products and services could be rising if demand were weakening. Maybe for a quarter or two, but not for long. As a reminder, last quarter's report showed above average inflation in all of these travel categories.

According to Merrill's latest report, inflation in travel remains above average. Merrill reports business hotel rates up 3.% for upper upscale properties, according to Smith Travel Research. Consumers fare even worse with resort room rates up 4.9%, also according to Smith Travel Research.

Getting to your hotel is also getting more expensive. Merrill reports that Abrams Consulting Group shows double digit gains in 1Q, partially driven by easy comps. Before picking up the car, not only do you have to endure the crappy experience of commercial flight but you have to do so at a 5.3% price increase according to the Air Transport Association.

And if you want a break from the business traveler's grind and decide to take a cruise, you will be paying 5-15% above year ago levels.

Obviously, these price increases indicate that inflation is alive and well in a significant industry group. Maybe more interesting is that it seems unlikely that these prices increases would be sticking if there were any slackening in demand for travel services. Since travel is viewed as a discretionary business and consumer expense these might some of the statistics that folks like Bob Marcin point to when they say that, so far at least, the economy has not sunk into any meaningful recession condition.

Posted by Steve Birenberg at April 3, 2008 02:30 PM in Lodging