Canadians are scratching the travel itch again, but can the industry keep up? | Tech US News

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  • Travel is back, with spending on Canadian flights and hotels already above pre-pandemic levels.
  • Hit hard by the pandemic, the industry is getting a post-crisis boost as high-income Canadians funnel big savings into vacations.
  • Demand is strong enough to overcome inflationary pressures, even as they affect household incomes.
  • Current weaknesses, including business travel restrictions and COVID in parts of Asia, will be future sources of growth.
  • The starting point: the biggest concern for Canada’s travel companies may well be supply: in the midst of a historic labor crisis, the sector is still shedding 177,000 workers.

Canada’s travel industry is making a comeback

Hotels are open, restaurants are buzzing and after a two-year layoff due to the pandemic, Canadians are traveling again. Driving this renewed desire to travel are higher household incomes, much larger than normal savings, pent-up travel demand and fewer travel restrictions due to pandemics and health concerns.

Passenger traffic at Canadian airports continues to run 30% below pre-pandemic (2019) levels in May. But our own tracking of debit and credit card transactions points to an uptick in travel bookings, as flight and hotel purchases (which tend to precede actual travel activity) return to pre-pandemic levels by mid of March

Recovery spurred through rising inflation and interest rates

Even as Canadians pack their bags and the economic impact of the pandemic diminishes, inflation is also on the rise. Central banks both in Canada and abroad are raising interest rates in an effort to cool demand and limit price growth. That is eroding household purchasing power, but spending on leisure and travel is expected to boost it, at least in the short term.

Canadians have the savings muscle to do it. Households amassed a massive $300 billion in savings during the pandemic as health concerns and pandemic lockdowns restricted spending on leisure and hospitality services. For context, that’s triple what Canadians spent annually on tourism before the pandemic. And those savings have been disproportionately concentrated among higher-income households that typically spend more on discretionary purchases, including travel. In the years before the pandemic, households in the top one-fifth income quintile accounted for more than a third of total spending on hospitality services. Conversely, lower income households will feel the pressure of higher interest rates and inflationary costs relatively quickly.

Labor shortages can limit growth, driving up prices

With demand for travel increasing, a more pressing question is whether supply will be able to keep up. Labor shortages are acute in all sectors. That includes travel-related industries where employment was still 177,000 below pre-pandemic levels as of March. Companies are trying to recoup those losses. In April, there were 80% more job offers in hospitality and tourism than before the crisis in Canada. And with the unemployment rate at its lowest level (5.2%) recorded since at least 1976, there simply aren’t a lot of unemployed workers to hire anymore. A sizable portion of workers in the “higher contact” industries that were most restricted during the pandemic lockdowns have shifted to other lower contact (and often higher paying) industries.

Meanwhile, supply shortages and rising input, transport and labor costs are driving up prices. By the end of 2021, disruptions in the supply of vehicles related to the pandemic caused car rental prices to increase by up to 60% over the previous year. Strong demand for workers will also accelerate wage growth. The impact of these factors has not yet surfaced in Canadian labor market data. But in the United States, wages in the leisure and hospitality sector have increased by 11% in the past year. Prices for travel services have not yet fully recovered, but have recently grown at a faster pace, led by the recovery in air fares.

Some corners of the journey will remain weak for a little longer

International travel has been slower to recover, and there will be limits to the recovery as long as the pandemic continues to significantly disrupt activity abroad, particularly in parts of Asia where strict entry and quarantine requirements remain in place. Air travel from Asia in April was just 32% up on 2019, far less than North America’s 59% and Europe’s 66%.

Business travel is another place where recovery can take longer. Before the pandemic, about 10% of trips made by Canadian residents were business-related. Some of these trips may never return, with the pandemic making the use of virtual meetings and events much more acceptable. International travel for business purposes in the fourth quarter of 2021 was slightly more than half the levels of the same quarter of 2019.

That’s not to say these travel areas will remain weak forever. With the spread of COVID-19 and health concerns further easing, more countries will open up, allowing travelers with ample spending power to enter and deploy their savings.


Claire Fan is an economist at RBC. She focuses on macroeconomic trends and is responsible for projecting key indicators on GDP, labor markets and inflation for both Canada and the US.

Naomi Powell is responsible for editing and writing pieces for RBC Economics and Thought Leadership. Before joining RBC, he worked as a business journalist in Canada and Europe, and most recently reported on international trade and economics for the Financial Post.


Disclaimer

This article is for general information only and should not be relied upon as legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. The information presented is believed to be true and up-to-date, but is not guaranteed to be accurate and should not be considered a complete analysis of the topics covered. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. Royal Bank of Canada or any of its affiliates does not make or imply any endorsement of third parties or their advice, opinions, information, products or services.

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