Bargain Travel

The summer vacation season is officially upon us. The question is: With high gas prices and fears about a recession, will people take a holiday trip this year?

Newsweek magazine recently reported that 60% of Americans are scrapping vacation plans because of high gas prices and the weak economy. But the Travel Industry Association conducted its own poll and found 60% of Americans will not change their travel plans, even with additional increases in the price of gas.

Standard & Poor's Equity Research thinks there are potential winners and losers related to summer travel plans. We believe some of the winners include hotels and airlines catering to foreign travelers (because the weak U.S. dollar makes their money go further on these shores), travel-oriented websites (because travelers are more likely to search for bargain-priced trips), and certain theme parks and resorts (because they are priced at about $1,200 per week for a family of four, the same amount many families will be receiving as a tax rebate).

"Even with high gas prices and an economic slowdown, there are several positives that could boost summer travel," says Mark Basham, an S&P equity analyst. “Employment is still up year-over-year, the tax rebates are coming at the right time for vacation season, and the weak dollar means more international inbound travel and less outbound travel, both positive for U.S. hotels and restaurants."

For hotels, Basham defines the summer travel season as Memorial Day to Labor Day, about 100 days. By his calculations, there will be about 1.65 billion hotel room nights available in the United States this year. About 455 million (27.5%) are for the nights between Memorial Day and Labor Day. This is up 2.2% from 445 million room nights during the 2007 summer travel season. Last summer, about 316 million (71%) of those nights were sold. This represents about one-third of room nights sold during the year.

"I expect about 3.7 million to 3.8 million additional nights to be sold to international tourists this summer, for a total of 38.75 million total room nights sold to international guests this summer," calculates Basham. "This is based on the U.S. Office of Travel & Tourism's forecast for 10% more international visitors to the United States this year."

A 5% reduction in room nights sold to domestic tourists this summer, combined with the international component, would result in 306 million nights sold this year, a 3.2% decline from 2007. This equates to occupancy of 67.3% vs. the approximate 71% occupancy rate last summer.

Flat demand from domestic tourists, plus international, would result in about 320 million room nights sold this summer, a 1.3% increase. Occupancy under this scenario would still decline, to 70.3% from the 71% seen over the 2007 summer period, a 1% reduction, estimates Basham.

Some less expensive hotels may actually see higher occupancy rates, Basham suggests, as Americans seek a bargain.

"Choice Hotels (CHH; 3 STARS, hold) is heavily into the low end of the mid-scale market and could benefit the most," he says. Marriott (MAR; 3 STARS), InterContinental (IHG; 3 STARS), and Wyndham (WYN; 3 STARS) are highly diversified by segment and geography, with economy and mid-scale brands, as well as upscale and luxury brands, says Basham.

Bargain-seeking travelers may also help Disney (DIS; 5 STARS, strong buy), according to Tuna Amobi, an S&P equity analyst. Management, he says, has indicated that advance bookings at the hotel/resorts (for both the June and September quarters) are outpacing last year. Amobi attributes this to Disney’s addition of several moderate to value-priced hotels to complement the premium-priced resorts (75% of available rooms in 1991 vs. 55% currently).

One resource prospective travelers may use to comparison-shop and find bargains is Internet travel sites, like Expedia (EXPE; 3 STARS) and (PCLN; 3 STARS).

Expedia and recently posted first-quarter results that were better than S&P Equity Research expected, aided largely by European operations, reflecting a healthy consumer travel market, considerable user adoption, and increases in activity, according to Scott Kessler, an S&P equity analyst.

In a recent survey conducted by ChangeWave Research, more people said they had used in the past three months than had said so in February. Priceline's recent quarterly results bear this out, in our view. Gross travel bookings surged 76% and even domestic growth was a robust 51%. management recently raised its 2008 profit outlook and indicated that it was benefiting not only from strong European growth, but also gaining share in the United States. also mentioned marketing efficiencies that were aiding results in Europe.

"While the global economic backdrop, waning consumer sentiment and spending, high oil prices, and airline company and route consolidations are clearly concerns, continues to gain market share and execute extremely well," says Kessler.

Prospective travelers are using and similar sites not only to find cheap lodging, but also cheap flights. All the U.S. airlines S&P Equity Research covers have been saying that bookings through the summer remain robust, and they expect revenue growth in the summer of 2008 vs. 2007.

This is partly due to fare increases enacted to try and cope with rising fuel, according to Jim Corridore, an S&P equity analyst. The airlines have implemented many fee increases, and new fees as well. Fares have not risen nearly enough to offset fuel price escalation, and as a result, passengers are facing fees to check a second bag, for desired seat assignments, for food on board, and increased fees for ticket changes, heavy bags, to speak to a phone customer service agent, and other services.

Corridore recommends Continental Airlines (CAL; 4 STARS, buy) and Southwest Airlines (LUV; 4 STARS).

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