Record Summer Travel Signals Economic Optimism: EcoPulse

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Photograph: Getty Images

Settling back into work after an end-of-summer trip? You’re not alone, which suggests many American consumers and business leaders feel more confident about the pace of the U.S. recovery.

With Labor Day marking the unofficial end to the travel season, the hotel industry is coming off its strongest three months of demand since at least 1987, said Jan Freitag, a senior vice president at STR Inc. From May through July, about 322 million room nights were sold, the most since the Hendersonville, Tennessee-based research company began tracking the figures. August data are scheduled for release Sept. 18, and preliminary information suggests another record month, he said.

“Summer travel has been very healthy,” boosting year-to-date demand, which is up more than 4 percent from the first seven months of 2013, Freitag said. This increase is driven by a confluence of increased bookings by business, group and leisure travelers from the U.S. and abroad, he said.

About 34.7 million Americans took trips of 50 miles or more from their homes during the recent holiday weekend, the most since 2008, according to a forecast from AAA, based in Heathrow, Florida. That’s a 1.3 percent increase from 2013 and follows projected gains of 1.9 percent for the Fourth of July and 1.5 percent for Memorial Day holiday weekends, data from the largest U.S. motoring organization show.

‘Very Positive’

AAA’s forecasts are “encouraging and pretty consistent” with other measures of discretionary spending that also have improved, including new automobile sales, said Russell Price, senior economist at Ameriprise Financial Inc. in Detroit. Americans’ increased willingness or ability to take vacations is “very positive,” supported by broader hiring gains, a higher level of comfort in their financial situations from stock gains and some degree of pent-up demand, he said.

One indication of the “healthy return of leisure travel” is reservations for Saturday nights, at almost 83 percent occupancy in July, Freitag said. “This speaks to very strong demand on weekends.”

Consumer travel makes up about 30 percent of total U.S. hotel bookings, and while there’s “still a little bit of the have and have not” among American consumers, economic growth in some countries outside the U.S. has been a “tremendous benefit” to the industry, said Bill Crow, an analyst in St. Petersburg, Florida, at Raymond James & Associates Inc. “It’s been a terrific summer from a lodging perspective,” which could provide an “upside surprise” when many publicly traded hoteliers report earnings next month.

Historical Best

While Crow will be watching “how September plays out,” the industry could see one of its best quarters for revenue per available room -- or revpar -- in history, he said. This bellwether rose 8.8 percent in July and is projected to increase 6.9 percent this year, followed by a 5.2 percent gain in 2015, according to STR forecasts.

Crow’s “top pick” is Marriott International Inc. (MAR), which is building new units worldwide with a franchised-management model that provides free cash flow to repurchase stock, he said. That’s helped send shares of the Bethesda, Maryland-based hotelier up 42 percent this year. Crow also maintains “outperform” recommendations on Starwood Hotels & Resorts Worldwide Inc. (HOT) and Hilton Worldwide Holdings Inc. (HLT) because of their ability to expand globally.

‘Hot’ Outlook

Coming off three very strong months, reservations for U.S. hotel rooms into 2015 indicate the industry’s outlook remains “hot,” said John Hach, senior vice president of global product management at TravelClick Inc. in New York. Bookings for the third and fourth quarters are accelerating, putting 2014 on track to be the strongest year since 2007, according to data the company collects from chains including Marriott and Hyatt Hotels Corp. (H), he said.

Recent gains have been buoyed in part by group travel -- including conventions, weddings and other blocks of four or more rooms -- which had been slow to rebound as the industry recovered from the recession, Hach said. That’s because many companies faced public scrutiny for throwing lavish corporate events and consumers cut back on personal travel, he added. Committed occupancy for this segment already is up 2 percent for the fourth quarter from a year ago, TravelClick data show.

Many publicly traded chains provided optimistic third-quarter forecasts for corporate meeting and convention revenue, which accounts for almost 40 percent of total U.S. bookings, Crow said. Amid a backdrop of more confident business leaders and consumers, hoteliers have been able to raise prices by about 4 percent this year, he noted.

Confident Consumers

Sentiment among chief executive officers averaged 6.12 in January-August, up from 5.77 in the comparable eight months of 2013, according to Chief Executive magazine’s confidence index, which is based on an e-mail survey. Sentiment among U.S. consumers climbed to a five-week high in the week ended Aug. 24, as measured by the Bloomberg Consumer Comfort Index.

The Federal Reserve noted the recent increase in travel activity in its Beige Book business survey released Sept. 3. The San Francisco district reported that strength in Las Vegas visitor volume was driven more by convention attendance than tourism, while the Richmond district said reservations for business and reunion events are “sources of strength.”

More generally, most districts are optimistic, with Boston, Richmond and San Francisco seeing “strong advance hotel bookings through the fall.”

Tempered Optimism

Even so, Hach tempers some of his optimism because unforeseen events, such as continuing conflicts worldwide, could “cause momentum to contract rather quickly.”

Increased leisure-hotel demand also is fueled primarily by middle- and upper-income Americans, who are disproportionately helped by the stock market’s positive wealth effect, Price said. The quality of new jobs being created is just starting to get better, so “we need to see additional improvements for low-income workers before we’re clicking on all gears.”

Hotel operators still may be “very happy” until at least 2016 because of a limited stock of new rooms in the U.S., rising demand and their ability to boost prices, Freitag said. July marked the 44th consecutive month that supply grew less than 1 percent, STR data show.

Tighter supply means hoteliers can be “more opportunistic and optimistic than in the past,” particularly amid gains in reserved and committed occupancy across all travel segments for the third and fourth quarters, Hach said. “The biggest surprise has been the strength and stability of the advance-reservation pace.”

Four years into the industry’s recovery, some markets -- including San Francisco and Miami -- are at record occupancy, as hotel demand outpaces gross domestic product growth, Crow said. As a result, he doesn’t “see a big issue” that suggests “a material slowdown from healthy levels this year or next.” Consumers have been “undaunted by geopolitical headlines or other economic challenges and have been undeterred in their desire to take vacations this year.”

To contact the reporters on this story: Anna-Louise Jackson in New York at ajackson36@bloomberg.net; Anthony Feld in New York at afeld2@bloomberg.net

To contact the editors responsible for this story: Anthony Feld at afeld2@bloomberg.net Melinda Grenier, Gail DeGeorge

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