Cautious optimism for 2008 amid US recession fears

TravelMole guest comment by Euromonitor International travel and tourism account manager in the US, Michelle Grant

Following growing defaults in the US based sub-prime mortgage markets over the summer, the US Federal Reserve lowered the federal funds rate by half a percentage point in late September to ensure that credit continued to be available.

However, concerns still persist that troubles in the housing market will spillover into an economic recession in the US, often an indication that the travel industry is set for a recession of its own.

Consumer spending accounts for 70% of GDP and a slow down in consumer spending would likely push the economy into a recession.

While consumer spending has held stable in 2007, it remains to be seen if consumers will stay resilient to the continuing decline in housing prices and rise in mortgage defaults.

Also a factor, American financial institutions have been tightening lending standards on credit products for riskier consumers but on a national level, interest rates have held steady even for credit cards.

However, it is uncertain if consumers will continue to spend confidently and on credit.

As a consequence, travel industry suppliers and experts are looking to 2008 with cautious optimism that prices will continue to grow albeit at a slower pace.

Suppliers see strong demand in 2007 but 2008 remains questionable

In their 3^rd quarter reports, airlines continued to see strong bookings despite fare increases and the industry is predicting that demand for the remainder of the year will remain strong. Fares will continue to grow in 2008 as airlines cut capacity and increase prices to compensate for the rising cost of fuel.

However, if economic conditions worsen, demand could retreat as leisure travellers stay close to home and corporations cut back on their business travel.

Hotels also were able to increase prices without seeing a dramatic decline in demand in 2007. However, occupancy rates are expected to end the year slightly down from their 2006 finish.

As a result of the slight decline in occupancy rates and the uncertain impact of the housing market crisis, industry experts have revised their outlook for 2008 downward, predicting that demand would grow at slower pace due to economic uncertainty. While prices are still expected to increase, it will be a slower pace than in the past two years.

Possible winners in an economic downturn

The most visited US cities by international visitors, such as New York City, Orlando, Miami and Las Vegas, are expected to benefit from more international visitors taking advantage of the weak dollar.

As a result, airlines, hotels and car rental are expected to see an increase in international demand in those cities.

Additionally, low cost airlines and midscale hotel brands are likely to benefit from corporate travel managers booking less expensive flights and rooms to counterbalance price increases.

Online travel agencies could benefit from greater access to inventory at lower prices, which would boost their gross bookings.

Although financial markets around the world have felt the impact of the US housing crisis, economic growth seems to be holding up despite a possible slow down in the US.

Demand for travel in other countries is expected to remain unaffected, which could prove to be a bright spot for American companies who have diversified their presence internationally.