Deloitte Releases 2018 Travel and Hospitality Industry Outlook

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January 31, 2018

Deloitte Releases 2018 Travel and Hospitality Industry Outlook

Travel and tourism now account for more than one-tenth of global GDP. What trends can help hospitality and travel companies harness even more growth?

Key US travel industry growth drivers for 2018

Travel and tourism is one of the world's fastest-growing sectors, with bookings hitting close to $1.6 trillion in 2017. A strengthening global economy lies at the heart of industry growth. Each year, the global traveler pool is flooded with millions of new consumers from both emerging and developed markets, many with rising disposable incomes and a newfound ability to experience the world.

Below are just some of the forces poised to drive revenue for hotels, airlines, restaurants, and other players in the travel ecosystem.

Healthy consumer spending: Amid low inflation and low unemployment, the US economy seems poised to sustain 2 to 2.5 percent growth through 2018. Consumers are at the heart of that growth. Incomes are rising, along with home values and stocks. That points to more income and more confidence to spend it.
Intense airline competition: Downward pricing pressures are at play thanks to a mix of low fuel prices, international competition, and low-cost entrants. That may be tough news for airline industry margins, but low fares drive spending throughout the travel sector.
Healthy corporate travel demand: Strong economies drive business activity. Business travel is projected to grow by more than 6 percent.
From products to experiences: Travel is outpacing the demand for goods. Spending on recreation, travel, and eating out is up, while spending on many durable goods and staples like clothing is down.

Hospitality: Hurdles on the track to growth

While strong post-recession gains appear to be cooling off, the hotel sector is projected to sustain strong 5-6 percent growth throughout 2018, setting up the industry to hit a record-breaking $170 billion in gross bookings.13 Healthy business and leisure demand is helping the industry achieve strong fundamentals, including peaking average daily rates (ADR) (+2.4 percent 2017 YTD October) and revenue per available room (RevPAR) (+3.0 percent 2017 YTD October). Hovering around 66 percent, occupancy seems to have hit a peak.

Some industry analysts, however, consider the prolonged strength of the hotel sector to be a cause for concern. Historically, hotel performance has proven to be cyclic, with long runs of growth often followed by intense downturns. With the last down cycle occurring in 2010, some speculate soft market conditions to be imminent, particularly because cycles generally occur every 10 years. However, despite pockets of uncertainty, those bullish on future hotel performance seem to outnumber industry detractors.

While positive signals continue to emanate from the broader hotel industry, some local markets may continue to face significant hurdles in 2018. In New York and Chicago, for example, hotels are struggling to drive up room rates in a market flooded with new supply. In fact, since 2008, the number of hotels in New York City has grown 55 percent to 634 properties and 115,000 rooms.15 Already competing with a rise in private accommodation rentals, hoteliers aiming to keep their properties full must offer attractive rates. These local market conditions are weakening growth, and in order to cope with the oversupply issue, some hoteliers are resorting to cutbacks around service, maintenance, and even lobbying with city officials for property tax reform.

Airlines: Investing in the future of flight

In 2018, airlines have the opportunity to take progressive steps toward defining the next generation of air travel. Airlines are leaving behind a decade where losses surpassed roughly $50 billion.16 Now, bolstered by low fuel prices, tighter capacity, new merchandizing strategies, and industry consolidation, the six biggest US carriers are turning things around, posting a consecutive run of annual profits. US carriers should seize the opportunity of the upswing, and that begins with investment in critical infrastructure and technology that has been sorely lacking given recent industry pressures.

Many airlines are taking steps in the right direction. On the infrastructure side, large US carriers are announcing significant airport investments and fleet expansions that are critical to capitalize on rising travel demand. Carriers are also upgrading fleets with sorely needed amenities to meet rising flyer expectations, including new seats, satellite Wi-Fi service, larger overhead bins, and power for devices. A competitive aircraft leasing market will likely continue to grant carriers easier access to attractive aircraft financing, enabling fleet growth and expansion in 2018.

Air traffic reform will likely continue to be a key infrastructure debate throughout the year, with enormous implications for the industry. Proponents to privatize air traffic control argue that budget uncertainty in Washington limits the FAA's ability to keep pace with technology upgrades such as satellite-based navigation and digital communications that can drastically improve route optimization in an increasingly crowded sky. A pocket of detractors, however, is pushing back, arguing that privatization would allow a corporate monopoly of the nation's skies, heavily influenced by the major airlines.

As always, success isn't guaranteed in 2018. Each of the travel segments have unique hurdles to overcome, but driving innovation and exploring new possibilities around the travel experience are some of the challenges that transcend the sectors.

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