You remember Econ 101, don’t you? It was that class you took freshman year of college where you sat in an auditorium filled with 500 of your classmates watching a dry professor drone on about widgets while viewing an unending series of graphs. If economics wasn’t your calling in life, you probably forgot most of the material.
However, if there is one universal lesson that you learned, it’s supply and demand. And this is why your travel budget is about to implode.
If you’re gearing up for retirement in the next two or three years, it could be incredibly ugly. And even if your ultimate retirement date is far in the future, this economic concept is going to affect your travel plans greatly for the next several years.
COVID-19 has dealt a serious blow to travel infrastructure. Cirium, a travel industry data and analytics company, reports global flight volume is down 54% year over year, and 30% of the worldwide airline fleet is in storage.
In a September American Hotel & Lodging Association survey, half of the hotel owners stated they were in danger of foreclosure. Popular travel destination and early-pandemic hotspot, New York City, is being especially hard hit. According to the Wall Street Journal, the state of New York could lose 250,000 rooms permanently, which equals about 20% of supply.
The cruise line industry has been decimated, and nearly all ships are docked.
Industry leader Carnival is reducing its fleet by 18 ships, equivalent to 12% of capacity. It’s uncertain how many of these ships will be purchased and returned to service by other cruise lines and how many will be scrapped. This supply is not coming back anytime soon, either. Carnival has already announced there will be no ship deliveries in 2024 and only one in 2025. After scrambling to keep companies afloat in 2020, it will not be easy for cruise line management teams to jump back into growth mode and order new ships anytime soon.
Restaurants are in better shape than many other leisure-related companies given their ability to operate at reduced occupancy and provide delivery, but their struggles are still severe. The National Restaurant Association expects approximately 1 in 6 restaurants in the U.S. to close in 2020. Everyone wants to open a restaurant, right? Will the old adage hold true with 2020 stresses a recent and painful memory?
This devastation extends to the entire travel industry, and it may continue to get worse as we suffer through a long winter with COVID cases spiking in many places around the world. The good news is several vaccines look promising, and the end might be nearing. But what will remain of the travel industry?
I love to travel, and I miss it tremendously. I find myself reading blogs and watching videos about travel to pass the time while waiting for a vaccine. By the middle of next year, I will be visually vibrating with anticipation. I’m certainly not alone.
A November survey by Destination Analysts states that 80% of U.S. travelers have tentative trip plans sometime over the next year. And this is before a winter, where the northern part of the country will be in virtual lockdown.
Combine COVID fatigue with an effective vaccine, and you’re going to see an explosion in revenge travel.
If the pandemic has taught us anything, it’s don’t put off doing the things you love. I think travelers are going to take this to heart in a big way. Not only will they be traveling, but exotic, bucket-list trips will likely move to the front of the line.
Cruise lines are already seeing signs of this pent-up demand. In September, Carnival announced that 2021 second-half bookings were at “…the higher end of the historical range…”.
The exact timing of a travel recovery is uncertain, but it will undoubtedly come when the pandemic is under control. Unfortunately, the COVID-fatigued group of travelers that are finally set free may be in for an unpleasant surprise.
Demand Up and Supply Down
You don’t have to dig out your Econ 101 textbook and a mechanical pencil to figure out what’s going to happen when a flood of travelers descends on a battered leisure industry operating at reduced-capacity. Prices will increase – dramatically.
Expect to pay more for nearly every component of your vacation. You’ll be competing with other travelers for every flight you book, cruise you schedule, and hotel reservation you make. The days of finding last-minute discounts will be over as soon as safer conditions prevail.
I don’t see this supply-demand dynamic reverting to normal for years. Sure, new restaurants can be opened in a relatively short amount of time, but will there be a long line of entrepreneurs willing to take the risk after witnessing the COVID carnage?
Airlines and cruise lines can not turn on a dime. Wikipedia lists over 30 airlines that have entered bankruptcy in 2020. Some of these companies will restructure, but others will cease operations. Airlines that continue to fly are putting planes into storage and may find it uneconomical to return the aircraft to service. Building new planes can take only a few weeks, but the industry backlog could grow rapidly with an increase in demand. Building a new ship can take years, and larger vessels cost over a billion dollars.
The crush of travelers released from COVID hell will run full speed into a reeling travel industry. Prices will spike. It may take some time for these companies to heal, and a rush to increase capacity is unlikely. The travel industry will enjoy robust pricing (deservedly so given their recent pain), and your vacations will cost more. There will come a time when entrepreneurs increase capacity to meet this high-margin demand, but gun-shy business owners may be slow to react.
It’s time to take a hard look at your travel budget. Does it still make sense? Will you be able to afford the elevated prices that could last two to three years? If you’re like me and refuse to give up your travel dreams, here’s what you need to do.
Save more money. It’s time to start funneling more money into your travel budget. If you’ve been fortunate enough to keep your job and are working from home, you’ve likely decreased spending on dining out, commuting, entertainment, etc. Earmark at least some of your savings for travel, and you’ll be prepared for higher prices.
Consider less-popular destinations. Resist the temptation to join the masses at tourist hotspots. Sure, you might want to show off your newly-gained immunity by mingling with large crowds, but your travel budget will suffer. Less-touristy destinations will allow your dollar to go further.
Book your travel far in advance. Many businesses are offering fully refundable options. Take advantage of these and book your trip early. Prices should be lower this winter, given an uncertain future. Even if you’re unsure of the timeline for a vaccine and a return to safe travel, feel free to book a vacation as long as you’re guaranteed a full refund if you need to cancel. Make sure to read the fine print so that you completely understand the cancellation policy.
Studies have shown that the simple act of planning a trip can lift your spirits. So, don’t let the current pandemic stop you from dreaming about your future travels. Be proactive. Consider less-trendy destinations and increase your savings to fortify your travel budget against a more expensive travel-future. If you prepare now, when things clear, your biggest decision will be where to go on vacation, not how to afford it.
Need some inspiration? Intrepid Travel has put together a wonderful list of 9 mind-blowing travel videos. Enjoy!
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David Tuzzolino, CFA, CFP®, is the Founder and CEO of PathBridge Financial, a firm that specializes in providing comprehensive financial planning and investment management services for clients that are nearing retirement and love to travel.