Travel Is Going To Be Really Inexpensive, And Then More Expensive For Awhile

There have been a lot of bad takes about the cost of travel skyrocketing, because people demand social distancing, that takes seats out of airline cabins so airlines have to charge more – plus all of this cleaning airlines and hotels are doing is extensive.

If government required airlines not to sell middle seats, that would take inventory out of the market and drive up price but there’s no sign of that happening. Ultimately the price of travel is determined by supply and demand.

We’ve seen American Airlines and Southwest bringing capacity back online to domestic markets faster than competitors. American will operate 55% of their domestic schedule in July. Rumor is that United may bring back more capacity in response. Regardless each of the major U.S. airlines have hundreds of planes parked, representing shadow capacity. There’s simply going to be more seats (supply) than demand for some time and that will hold down price.

It isn’t such a simple story though, that prices stay low until the travel industry fully recovers.

  • Airlines are shedding staff. They’re encouraging early retirements and as soon as CARES Act prohibitions on layoffs lift October 1 we’ll see more people leaving.

  • Airlines are deferring and cancelling capital projects, and taking on massive debt, in order to stay afloat during the downturn.

Once travel demand begins to recover they’ll need to repair their balance sheets. They won’t have the staff on immediate standby reserve to come back. Many employees that are furloughed will wind up moving on to other jobs. And airlines won’t be in a strong position to invest to scale up quickly, beyond bringing planes back out of storage.

We may actually see airfares yo-yo a bit over the next 18 months, as travel demand recovers, bringing more planes out of storage and driving down fares – but if demand continues to recover, it may do so faster than airlines are able to invest in returning capacity to the market driving up fares a bit.

Moreover there’s likely to be greater variance in what happens to fares than we’re used to, because airlines build their schedules guessing what demand patterns are going to look like and those may be more volatile than we’re used to – airline revenue management tools are more likely to “guess wrong” than in the past because they’re dealing with new situations they haven’t encountered before.

Hotels are a different story. While hotels can leave entire floors closed to save on cleaning and heating and air conditioning costs during periods of low demand, it’s harder to mothball capacity. Some hotels will choose to maintain price and sacrifice occupancy by overall hotels will compete for business – and do whatever they need to in order to get that business. That may even mean a shift in power back towards online travel agencies if they have the eyeballs.

The only time I ever saw Aman Resorts significantly discounting was during the Great Recession. What’s happening now is even more significant to the industry than that was. We just need to wait for international borders to re-open before we see the best deals that’ll be coming for resorts that rely on international travelers.

Overall we should see low prices and good deals, but patterns will be a bit lumpy as supply won’t expand exactly in concert with demand’s return.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

More articles by Gary Leff »

Comments

  1. I expect you will be right, at least concerning hotels. I recently read that during the 2009 recession the hotels that cut prices the most had the hardest time raising prices when demand returned, because the corporate clients resisted the increases. Therefor a lot of hotels are being counseled to take the hit and keep prices high.

    Lumpy is right. I expect some hotels will be forced to cut prices and raise occupancy, just to meet the mortgage. Others will refuse to do so and sit empty. I am sitting in a Staybridge right now, and this hotel’s management is simply calling the neighboring hotels everyday to ask their rates, then adjusting the Staybridge’s rate accordingly.

  2. Actually, in a competitive market with transparent pricing, price is determined by marginal cost, which is what we’re seeing now in $114 economy airfares from the US to South America. We are so used to oligopoly pricing in airline tickets, though, that we don’t even think in terms of marginal cost.

Leave a Reply

Your email address will not be published.