Skift Global Travel Economy Outlook 2019

by Rebecca Stone and Seth Borko + Skift Team - Dec 2018

Skift Research Take

As we wrap up 2018, our latest Skift Research report dives into what went well this year and what we can expect heading into 2019. Looking ahead, we expect another strong year of economic growth, with a few different puts and takes, which should translate well for the travel industry.

Report Overview

All in all, 2018 has turned out to be a very healthy year of growth in both advanced economies and emerging and developing markets. International arrivals are likely to reach an all-time high of around 1.4 billion. Consumer demand has been solid, and U.S. corporates saw one of the strongest years in profit growth since the last recession.

Looking ahead to 2019, we expect another strong year of economic growth which should bode well for travel. Advanced economies should remain stable, and emerging and developing markets are still seeing incredibly strong growth, albeit with some at decelerating rates. Nevertheless, recent stock market volatility and political uncertainty could weigh on consumer and corporate confidence. And U.S. trade tariffs, rising U.S. interest rates, a stronger U.S. dollar, rising budget deficits globally, and increasing protectionism could all pose headwinds in 2019.

Given that we are 10 years into this economic expansion, it’s possible some may begin to ask, “Have we reached the top?” In our view, recessions are not caused by age of the economic cycle alone and, therefore, so long as key indicators remain positive and a negative shock to the global economic system doesn’t occur, we should be in for another solid year of economic growth and travel.

What You'll Learn From This Report

  • Global economic growth forecasts
  • U.S. consumer and corporate economic and travel expectations
  • International economic growth expectations for key regions and countries
  • A discussion of U.S. and global policy uncertainty
  • Expectations for international arrivals, tourism’s contribution to economic growth expectations, and business travel spend
  • Sales, earnings, and key metrics growth estimates for the hotel, airline, cruise, and online distribution industries
  • Key items of focus that could positively and negatively impact growth in 2019
  • Sizing data for the tourism and travel industry today

Executive Summary

All in all, 2018 has turned out to be a very healthy year of growth. Economic growth in advanced economies has been better than expected, and growth in emerging-market and developing economies continues to be very strong. International arrivals are likely to reach an all-time high of around 1.4 billion. Consumer demand for hotels, airlines, and cruises was solid, as U.S. consumers benefited from low unemployment and improving wages, and international consumers increasingly looked to travel for discretionary purchases as their incomes increased. U.S. corporates saw one of the strongest years in profit growth since the last recession.

Looking ahead to 2019, we expect another strong year of economic growth, with a few different puts and takes, which should translate well for travel. Advanced economies should remain stable, and international markets are still seeing incredibly strong growth, albeit with some at decelerating rates. Public hotel brand companies are expecting “steady-as-she-goes” growth in 2019, and cruise lines are noting strong 2019 bookings on occupancy and rate. Airlines should benefit from passenger volume growth and increased ancillary sales, though low-cost competition and oil prices are, as ever, wild cards. The secular shift to e-commerce worldwide should remain a tailwind to online booking sites. The leading global online travel agencies are likely to further pursue full-service platform strategies as the law of large numbers dictates that room night growth rates will slow.

Nevertheless, there are a few key items that could cause headwinds in 2019. While consumer sentiment is at an all-time high, our survey work suggests consumers are becoming more cautious on discretionary spend (45% expect to spend less on travel in 2019). Though stock prices are not directly linked to travel’s economic performance, if December’s high levels of market volatility persist, it could potentially erode consumer confidence or hit spending by way of reducing consumers’ perceived wealth. By a similar measure, an uncertain political environment has the potential to dampen consumer and business confidence. U.S. trade tariffs could lead to reduced international trade and higher input prices — which must be either passed along to the consumer or absorbed through margin — both of which would hurt economic growth. Rising interest rates in the U.S., a stronger dollar, maturing business cycles in developed markets, rising budget deficits in developed and emerging markets, and increasing protectionism could all lead to slower growth.

Given that we are 10 years into this economic expansion, it’s possible some may begin to ask, “Have we reached the top?” In our view, recessions are not caused by the age of the economic cycle alone and so as long as key indicators remain positive and a negative shock to the global economic system doesn’t occur, we should be in for another solid year of growth. Middle classes around the world continue to develop, people increasingly want to travel to learn about new cultures, and businesses continue to want to expand through international collaboration and investment. All of this bodes well for travel, an industry that can help all other industries globally.

Other key areas of focus for us in 2019: Technological investment, how well travel companies are using technology to improve their back-office operations while enhancing overall guest experiences; Sustainable tourism, how destinations are using travel to help their economies grow; and Emerging markets, how consumers and corporates are looking to new markets as places to which they should travel or expand operations or investment.

The first part of this report provides an overview of 2018 from an economic perspective and what that correspondingly meant for travel. In the second half of the report, we detail our economic expectations for the U.S. and globally. Then, we provide our global travel outlook which details expectations for growth in tourism, international arrivals, and business travel as well as our updates on key sectors within travel including hotels, airlines, online travel agencies, and cruise.


Year-in-Review 2018: “Room for Optimism” Gave Way to a Year of Solid Growth

Overall, and in line with  our optimistic views last year, 2018 has turned out to be a relatively strong year. Economic growth in advanced economies has been better than expected, and growth in emerging markets and developing economies continues to be very strong. When it comes to travel, 2018 was another solid year, with international arrivals expected to reach an all-time high at a strong growth rate.

Global Economic Markets 2018

Global GDP growth for 2018 is expected to be in line with 2017 at around 3.7%. Essentially, solid growth in the U.S. somewhat offsets weaknesses in Europe and the United Kingdom, resulting in a slight acceleration in GDP growth in advanced economies. GDP growth for emerging and developing economies is expected to be similar to that of last year, as China’s growth decelerates (but still remains very strong) and India and the ASEAN-5 (Indonesia, Malaysia, the Philippines, Singapore, and Thailand) see strong growth.

Exhibit 1: Global GDP growth is expected to be in line with 2017 this year

Source: IMF, World Economic Outlook, October 2018

 

Exhibit 2: Advanced economies accelerated slightly in 2018, while emerging-market and developing economies continued to be strong

Source: IMF, World Economic Outlook, October 2018

When comparing current expectations versus 2018 expectations as of IMF’s World Economic Outlook in October 2017, advanced economies are likely to outperform previous expectations whereas emerging-market and developing economies’ expectations decelerated 20 basis points.

Essentially, growth in the U.S. has been stronger than previous expectations, as, in 2017, there was significant policy uncertainty surrounding the presidential election, but through 2018, growth was strong due to procyclical fiscal expansion. The Euro area and the UK underperformed due to weak export growth, higher energy prices, political uncertainty, and weather-related events (in the UK). Looking at emerging markets, China’s growth expectations are slightly better than the previous report, but still subdued as a result of regulatory tightening. India expectations are strong, Latin America, through improving, still faces tighter financial conditions, geopolitical tensions, and other challenges such as the drought in Argentina and labor issues in Brazil. Overall, emerging markets and developing economies decelerated versus previous expectations.

Exhibit 3: Advanced economies came in better than expected, while emerging-market and developing economies were slightly lower, though still very strong

Source: IMF, World Economic Outlook, October 2018 and October 2017

 

Global Travel Markets

Given travel currently makes up approximately 10.4% of global world GDP and is growing, the industry is critically important to global growth. While the annual growth rate in travel and tourism’s total contribution to world GDP was accelerating through 2016, the growth rate is expected to decelerate in 2018 like it did in 2017, though it is still at a strong rate of 4%.

Exhibit 4: Travel and tourism will contribute 10.4% to world GDP

Source: WTTC

 

Exhibit 5: Growth in travel and tourism’s contribution to GDP is set to be 4%

Source: WTTC

In addition, travel and tourism’s total contribution to employment (both directly and indirectly), which is currently around 9.9% of total jobs, is expected to grow 3% in 2018. This is an acceleration versus 2017, demonstrating the industry’s growing significance in job creation.

Exhibit 6: Travel and tourism’s contribution to employment is growing

Source: WTTC

According to the UNWTO, 2017 international tourist arrivals came in solidly at 1,326 million, up 7% year over year and representing a 6.1% compounded annual growth rate (CAGR) over the past 67 years. Regionally, the strongest growth was in Europe and Africa which came in above the world average at 8.4% and 8.6% annual growth in international arrivals, respectively. International arrival growth rates for Asia and the Pacific, the Americas, and the Middle East were 5.6%, 4.8%, and 4.6%, respectively.

Year to date (through September 2018), 2018 internationals are at around 1.1 billion, up 5% versus the first nine months of 2017. Asia and the Pacific had the strongest growth with a 7% increase, whereas the Americas were the weakest at a 3% increase.

Given the first nine months of the year generally account for three-quarters of total international arrivals for the year, we assume 2018 international arrivals will come in around 1.4 billion.

Exhibit 7: International arrivals are up 5% year to date and will likely reach 1.4 billion this year

Source: UNWTO World Tourism Barometer

Tourism receipts also continue to grow, increasing 7.6% in 2017 to reach $1,340 billion. In comparison, receipts ,were $2 billion in 1950. The growth of tourism receipts has outpaced that of growth in international arrivals, demonstrating that when people travel more, they are spending more.

While the UNWTO hasn’t reported year-to-date tourism receipts that would give us a look into how 2018 could turn out as a whole, the organization indicated that regional growth in receipts has been strong. The strongest growth in 2018 based on preliminary data has been out of Asian and European destinations, such as the China (+21%), Macao (+20%), and Japan (+19%), United Kingdom (+12%), Australia (+11%), France (8%), and Italy (+6%). The United States, Spain, and Germany were up 3%.

Exhibit 8: International tourism receipts have been strong, particularly in Asian and European destinations

Source: UNWTO


Global Economic Outlook 2019

In this section, we detail economic expectations globally. We first provide expectations for the United States, breaking it down for the U.S. consumer and then for corporates. Then, we give an economic outlook for international markets.

When it comes to 2019, expectations are calling for essentially stable growth, in line with 2017 and 2018 at around 3.7%. Growth prospects for emerging-market and developing economies are generally solid, with strength in India and energy export countries like those in the Middle East. Nevertheless, this is offset by weaker expectations for the U.S., China, Japan, the Euro area, and the U.K., primarily on announced trade measures and weaker economic activity.

Exhibit 9: Global GDP growth in 2019 will likely be in line with 2018

Source: IMF, World Economic Outlook, October 2018


Economic Outlook 2019: The United States in Focus

After solid growth in 2018, expectations for 2019 GDP growth in the U.S. are lower due to introduced trade measures, including tariffs imposed on solar panels, washing machines, steel, aluminum, and on $200 billion of U.S. imports from China, as well as a lower overall global outlook.

Exhibit 10: Economic growth in the U.S. will likely decelerate in 2019

Source: IMF, World Economic Outlook, October 2018

 

U.S. in Focus: Consumer

The U.S. consumer’s financial picture continued to improve throughout the year and most are in a strong position to spend on travel in 2019.

Underpinning consumer spending is the U.S. labor market which continued to tighten and is approaching record-low levels of unemployment. The most recent jobs report as of publication, which provided data for November 2018, shows that only 3.7% of the U.S. labor force was unemployed, the lowest level since December 1969.

Exhibit 11: U.S. labor market tightening to historical levels

Source: U.S. Bureau of Labor Statistics, Skift Research. Data as of November 2018. Shaded red bar indicates U.S. recession.

Wage growth has been modest, hovering around 2% year-on-year gains for most of this current economic expansion. This subpar pace of wage growth remained unchanged, even as the unemployment rate fell from 10% to sub-5%. Wages are notoriously difficult to measure, but looking across several gauges, employee earnings seem to have gained noticeably over the last year. This suggests to us that negotiating leverage has slowly shifted more toward workers.

We expect that salary increases will continue throughout 2019 and translate into higher consumer spending on travel and other discretionary leisure products and services.

Exhibit 12: Tight unemployment slowly translating into wage growth

Source: U.S. Bureau of Labor Statistics, Skift Research. Data as of October 2018. Shaded red bar indicates U.S. recession.

Household balance sheets continued to de-lever throughout 2018, giving the consumer more breathing room to spend on discretionary purchases. In aggregate, absolute levels of consumer debt — mortgages, credit cards, and other liabilities — now represent 91% of annual disposable income, down from highs of 124% in 2008.

Debt services payments have fallen even faster, a function of both reductions in nominal debt levels outstanding and the lowest interest rate environment in living memory. Consumers are only spending 10% of disposable income on debt service at present, well off of the 13% peak, and the lowest such rate in over 20 years.

The improvement in household balance sheets frees up cash for spending and has important positive implications for leisure travel. That said, trends in interest rates have reversed and are now entering an upward cycle. We expect that the consumer credit situation will remain benign throughout 2019, but caution that we may be passing the bottom of this trend and that debt service payment levels could begin to rise. This would pose a threat to consumer travel spending.

Exhibit 13: Household balance sheets have recovered, aided by low interest rate environment

Source: Bureau of Economic Analysis, Skift Research. Data as of April 2018. Shaded red bar indicates U.S. recession.

In line with the positive economic conditions, personal consumption expenditures (PCE, a widely followed measurement of individual consumer purchases) continue to increase at a 2–3% yearly rate. While healthy, we note that the PCE remains below peaks that it reached in previous expansions, indicating that there may be room for further spending growth if the recovery continues.

Exhibit 14: Recent consumer spending trends positive, but range-bound. Further economic strength should lead to re-acceleration

Source: Bureau of Economic Analysis, Skift Research. Data as of September 2018. Shaded red bar indicates U.S. recession.
We can also measure personal consumption on travel-related expenses directly. These series, which track U.S. consumer spending on hotels and airlines, are more volatile than the top-level measure. The data suggests that travel outperformed other consumer categories in the first half decade after the recession. Consumer expenditures on hotels and airlines weakened in late-2017 through early-2018, but seem to be on pace to recover into 2019, if overall consumer trends remain healthy.
Exhibit 15: Travel-related personal consumption expenditures

Source: Bureau of Economic Analysis, Skift Research. Data as of September 2018. Shared red bar indicates U.S. recession.

Looking forward into 2019, we expect that the U.S. consumer will remain strong and continue to spend on travel.

The University of Michigan conducts one of the longest continuous surveys of consumer sentiment that is a powerful leading indicator of economic performance, in our view. Optimistic consumers are more likely to spend, which gives businesses reason to hire, causing wage growth and creating a virtuous cycle within the economy.

The Michigan survey puts consumer sentiment at nearly the highest level so far during this economic expansion. In fact, consumers are currently expressing optimism that ranks among the highest since the 1960s. This attitude is highly likely to fuel further travel expenditures, in our view.

Exhibit 16: Consumers optimism ranks among the highest level of any modern decade, likely to fuel expenditures

Source: University of Michigan Survey of Consumers., Skift Research Data as of October 2018. Shaded red bar indicates U.S. recession.

For the second year in a row, we polled a U.S. audience online to understand their travel spending plans for next year. The results suggest many consumers are becoming more cautious on discretionary spend, with 45% expecting to spend less on leisure travel next year.

Exhibit 17: Consumers cautious about over-committing to travel spending in the coming year

Source: Skift Research, U.S. online audience N = 1,208 in 2018, n=1,207 in 2017. Data as of December 2017 and 2018.

This seems out of place with other data points that suggest improving consumer financial positions and high confidence. It also contradicts for instance, cruise line management commentary for strong advance bookings. How do we square this circle? It would seem that many consumers are biased toward self reporting less or similar spend, rather than more spend. Consider that in 2017 as well, a minority of consumers, just 21%, reported plans to spend more, yet the business data showed travel industry revenue gains in 2018. In that context — with the same share of customers indicating more travel spend next year as in the prior survey — we could well be in for another steady-as-she-goes year in 2019

We believe that many consumers, perhaps still scarred by the experience of the financial crisis, are taking a wait-and-see approach to their travel plans. Given the recent uncertainty in both U.S. markets and politics, many Americans are expressing a desire to remain cautious about their discretionary budgets. We suspect that if these tailwinds fade, and if broad consumer confidence (the Michigan survey has a much higher sample size than our travel-specific report) remains positive, that travel spending can grow again in 2019.

We do not believe that a cautious consumer is fundamentally bad. In fact, the cause of many recessions is often a misplaced sense of “irrational exuberance” that leads to an unsustainable rise in spending and debt levels. We see little indications of such a bubble forming. That said, we do fear that this high level of caution could turn into an outright recession, if the the American consumer is buffeted by too many outside negative shocks, be it political, trade related, or from some as yet unknown source.

U.S. in Focus: Corporates

U.S. corporations are likely to look back on 2018 as one of the strongest years of the current economic expansion. Corporate confidence is high as profits continued to accelerate off of the lows observed in 2015.

In the second quarter of 2018, the most recently available date, corporate pre-tax profits grew 10% over the prior year. Taking into account windfall tax gains from the recent Republican tax cuts boosted after-tax profit growth to 19%.

Exhibit 18: U.S. corporate profits growing at the fastest rate in many years

Source: Bureau of Economic Analysis, Federal Reserve Skift Research. Data as of July 2018 (latest available). Shaded red bars indicate U.S. Recessions

This strong profit environment is fueling investments in fixed assets, such as property, plants, and machinery, which are up 8% from the prior year. These costly, long-term investments speak to an optimistic future outlook from the management teams that are green lighting these projects.

By a similar token, industrial production continues its multi-quarter growth trend as factories are spun up to meet anticipated future demand.

Exhibit 19: Forward indicators of U.S. business health continue to improve

Source: Bureau of Economic Analysis, Federal Reserve, Skift Research. Data as of July 2018 (latest available). Shaded red bars indicate U.S. Recession

However, not every corporate indicator that we looked at is flashing green. The U.S. Federal Reserve has continued its steady path of rate hikes this year driving up both short- and long-term rates.

This higher cost of capital will inevitably hamper corporates’ ability to expand and reduce consumer spend, in turn cooling the economic expansion.

Exhibit 20: Corporate borrowing rates on the rise, driven by Fed hiking cycle

Source: Federal Reserve. Data as of December 2018

The rising rate environment is certainly a risk we are watching closely, but it remains a yellow light in our view. We believe that current rates are not yet flashing red because many corporations have already locked in low, long-term financing at attractive levels.

For instance, there is no upcoming wall of bond maturities that would worry us across the 500 largest publicly traded U.S. business (the S&P 500, which we use as a proxy for the broader corporate sector). Just 15% of total debt outstanding is due within the next decade.

On a weighted average basis, the average S&P 500 bond coupon is a modest 3.6%, and even as rates rise, we expect to see little immediate repricing of corporate liabilities given that 75% of these bonds are fixed for life.

Exhibit 21: Corporate debt levels, an oft-cited risk as rates rise, seem unlikely to be an immediate threat in 2019

Source: Capital IQ, Skift Research, Data as of December 2018.

Even as we push past the 10-year anniversary of the global financial crisis, we continue to give U.S. corporates a clean bill of health on a fundamental level. Profits are strong, investments are growing, and debt levels seem manageable. The main risks that could derail this picture, in our view, do not come from within, but rather could come external shocks — be it trade policy, political uncertainty (in the U.S. and Europe), or slowing non-U.S. growth.


Economic Outlook 2019: International Markets in Focus

Although expectations are for decelerating growth in 2019 for advanced economies, ongoing strength in emerging-market and developing economies offsets this, resulting in overall global growth, which is essentially in line with expectations for 2018.

Exhibit 22: We expect global economic growth to be essentially in line with 2018.

Source: IMF, World Economic Outlook, October 2018

Expectations for the Euro area continue to be soft from weak exports and economic performance. The UK remains challenged on Brexit implications and uncertainty. Japan expectations are lower due to a country-wide economic contraction and a pessimistic outlook from specific sectors such as automakers and capital goods. Ongoing reduced growth out of China continues, with the added negative of U.S. trade tariffs. India, on the other hand, is expected to face strong demand growth as the country continues to develop.

Exhibit 23: Key countries and regions may see deceleration in 2019; India remains strong

Source: IMF, World Economic Outlook, October 2018

Last year, we reported that economic uncertainty had been increasing in the U.S., but decreasing on a global basis. Interestingly, this trend has reversed somewhat this year, with economic uncertainty increasing globally, but tempering in the U.S. This suggests less optimistic sentiment may be tapering worldwide, and while we expect ongoing solid growth worldwide, this may suggest a deceleration in the growth rates we have seen post-recession.

Exhibit 24: Global economic policy has increased recently, while the U.S. has tempered

Source: Economic Policy Uncertainty Index
Note: An increasing trendline implies more uncertainty. A decreasing trendline implies less uncertainty.

(Note: The Economic Policy Uncertainty Index was created by professors at Stanford, Northwestern, and the University of Chicago. The U.S. index is constructed using newspaper coverage of policy-related economic uncertainty, the number of federal tax code provisions set to expire in future years, and disagreement among economic forecasters for CPI and federal/state/local purchases expectations as a proxy for uncertainty. The global index is constructed primarily using newspaper coverage of policy-related economic uncertainty for 20 countries: Australia, Brazil, Canada, Chile, China, France, Germany, Greece, India, Ireland, Italy, Japan, Mexico, the Netherlands, Russia, South Korea, Spain, Sweden, the United Kingdom, and the United States.)

The U.S. dollar has been strengthening against a basket of several foreign currencies. Weaker foreign currencies might discourage international travel to markets such as the U.S. as foreign travelers would have to spend more to purchase the same amount of goods. Conversely, a stronger U.S. dollar should encourage Americans to travel more internationally where they can get more for their money.

Exhibit 25: The U.S. dollar has been strengthening against a basket of foreign currencies.

Source: Yahoo! Finance

(The U.S. Dollar Index measures the value of the U.S. dollar against a basket of foreign currencies including the euro, the Japanese yen, the pound sterling, the Canadian dollar, the Swedish krona, and the Swiss franc. A decline in the index implies a weakening of the U.S. dollar.)


Global Travel Outlook 2019

In this section, we go over our forecasts for travel and tourism’s contribution to GDP and international arrivals. We also provide expectations for global business travel spend as well as key sectors within travel including hotels, airlines, distribution companies, and cruise.

We expect solid economic growth in 2019 should bode well for travel. We forecast international arrivals to reach a new all-time high and for travel and tourism to continue to contribute positively to the global GDP. While the GBTA (Global Business Travel Association) is forecasting a deceleration in growth in business travel activity spend, public hotel brand companies are expecting “steady-as-she-goes” growth in 2019, and cruise lines are noting strong 2019 bookings on occupancy and rate. Airlines should benefit from passenger volume growth and increased ancillary sales, though low-cost competition and oil prices are, as ever, wild cards. The secular shift to e-commerce worldwide should remain a tailwind to online booking sites. The leading global online travel agencies are likely to further pursue full-service platform strategies as the law of large numbers dictates that room night growth rates slow.

Travel’s Contribution to GDP and International Arrivals

We forecast travel and tourism will make up 10.4% of global GDP in 2019. This is slightly more than our expectations for 2018 (10.44% versus 10.43%, respectively) and is based on a GDP growth rate of 3.7% in 2019 (per the IMF) and a 3.8% growth rate in the travel and tourism industry’s contribution to GDP (per the WTTC’s forecast of an average 3.8% per annum growth rate from 2018 to 2028F).

Exhibit 26: Travel and tourism’s contribution to global GDP should continue to increase slightly in 2019

Source: WTTC, Skift Research estimates

International arrivals year to date for the first nine months of 2018 came in at 1.1 billion. Typically the first nine months of the year account for three-quarters of the total arrivals in one year. As a result, this implies around 1.4 billion international arrivals for 2018, around 9% growth, which is very strong.

Previously, the UNWTO set international arrival targets for 2020 and 2030 in their Tourism Towards 2030 report that estimated arrivals at 1.36 billion and 1.8 billion, respectively. Because we expect 2018 to come in at 1.4 billion, the UNWTO’s forecast of 1.4 billion for 2020 appears too low. As a result, we have adjusted our forecasts using reasonable growth rates in the 5%-range to estimate 2019 international arrivals will be somewhere around 1.5 billion, and then 2020 will be at 1.6 billion. We have maintained the UNWTO’s forecast of 1.8 billion for 2030E.

Exhibit 27: We forecast international arrivals to reach 1.5 billion in 2019

Source: UNWTO, Skift Research estimates

 

Global Business Travel

Business travel is a critical part of the travel industry. While it makes up approximately one-third of direct travel spend in the U.S. and contributed approximately 23% to global GDP in 2017, it can sometimes make up a larger percentage of profits for individual companies or sectors. For example, it is estimated that business travelers make up approximately 12% of passengers for airlines, but are typically twice as profitable as leisure travelers. This is because business travelers are typically less price sensitive than leisure travelers as they are likely to bear the cost of travel in order to attend a given meeting or convention.

According to GBTA, global business travel activity grew 5.8% in 2017 to reach $1.33 trillion in spend. For 2018, growth in business travel spend is expected to be 7.1%, the highest since immediately after the recession in 2010 and 2011. This is driven by ongoing improvement in economies around the world, via monetary and fiscal stimulus.

Nevertheless, the association brought down its expectations for 2019 and beyond as stimulus may lead to slower economic growth beyond 2018 and increases in trade tariffs will likely reduce economic activity, and, therefore, global business travel spend. Studies have shown that 60% of the variation in business travel spend can be explained by trade volumes. GBTA also cites rising interest rates in the U.S., maturing business cycles in developed markets, rising budget deficits in developed and emerging markets, and increasing protectionism as factors that will also likely reduce economic growth and business travel spend as a result. The GBTA’s growth forecast for 2019 was revised down to 4.9% from 7% previously.

At growth rates of 7.1% in 2018 and 4.9% in 2019, this would imply $1.4 trillion and $1.5 trillion, respectively, in global business travel activity.

Exhibit 28: Global business travel spend may decelerate in 2019

Source: GBTA

 

Key Sectors in Focus: Hotels

Global Hotel Trends

Given hotel performance is generally tied to GDP growth, the solid economic activity we saw in 2018 translated into strong performance for hotels. The industry demonstrated strong fundamentals in 2018, with the U.S. benefiting from corporate tax reform and international markets seeing ongoing solid economic development.

In the U.S., revenue per available room (RevPAR) is expected to come in around 3% (versus our 2.3% expectation last year) for 2018. Jones Lang LaSalle reported that $29.7 billion in hotel transactions have occurred in 2018 year-to-date, representing a year-over-year growth rate of over 25%, driven by private equity groups and real estate investment trusts (REITs) taking advantage of positive U.S. fundamentals.

European demand continued to improve off of events of terrorism in 2015 and 2016, and China showed solid increases off of a growing middle class.

We forecast global hotel inventory will reach around 17.2 million rooms worldwide this year, up around 2% versus 2017 year end, or up 1.5% versus STR’s last reported figure of 17 million in February 2018. We estimate global hotel revenues will reach $530 billion, representing a 5% growth rate over 2017 at $507 billion.

Turning to 2019, we expect ongoing solid fundamentals, with various puts and takes resulting in essentially similar overall growth rates. We forecast global hotel inventory will reach 17.5 million rooms, representing just under 2% growth, which is essentially in line with previous years. We expect global hotel revenues will reach around $550 billion, representing 4% growth over 2018.

International market growth will continue to outpace that of the U.S., but at a lower rate. Egypt, France, and Turkey continue to be strong, the UAE is facing supply issues, and China is expected to continue to show strong growth rates, albeit at a lower pace. Europe, despite a deceleration in economic growth, should benefit from limited new hotel supply resulting in pricing power.

The U.S. should also benefit from lower supply growth (given higher construction rates and interest rates), but may soften a bit on fewer economic benefits as seen in 2018 and slower inbound travel. We forecast 2.6% RevPAR growth, a deceleration versus 2018, but still moderate growth.

Exhibit 29: Global hotel revenue could surpass $550 billion in 2019

Source: Wyndham Hotels company filings, STR, Hotel News Now, Skift Research estimates

 

Exhibit 30: We forecast global hotel inventory to reach 17.5 million in 2019

Source: Wyndham Hotels company filings, STR, Hotel News Now, Skift Research estimates

 

Exhibit 31: U.S. RevPAR growth will likely decelerate in 2019

Source: PwC, STR, Hotel News Now, CBRE

 

Public Hotel Brand Company Performance

Year to date, public hotel brand companies have been outperforming the U.S. market in terms of RevPAR growth. On average, comparable system-wide RevPAR for the seven brand companies we included in our analysis has grown 3.4% year to date. This is likely due to international outperformance relative to the U.S. AccorHotels, for instance, which has a much larger market share in Europe and Asia Pacific, has seen 5.4% growth year to date. Choice Hotels, however, which has a much greater exposure to North America, has seen growth of 1.4%.

Exhibit 32: Year-to-date RevPAR growth for public hotel brand companies has, on average, outpaced that of the U.S.

Source: Company filings

Looking ahead to 2019, the management teams of the public hotel companies are optimistic. During the Q3 2018 earnings call, Hilton CEO Chris Nassetta noted, “Looking ahead to 2019, positive macro indicators suggest continued strength in lodging demand. This, together with decelerating supply growth in the U.S., should lead to fundamentals remaining positive with regional GDP growth forecasts indicating continued strength in international markets … As a result, we feel good about things heading into 2019.”

Marriott CEO Arne Sorenson gave slightly more balanced thoughts during the Q3 2018 call: “We have looked carefully at the preliminary things that we’ve got coming in and using the tools that we have. And what we see is something that we think looks a fair bit like 2018,” he said. “For 2019, estimates for U.S. GDP growth point to a slightly slower pace of growth than in 2018 … which benefited from the tax cut earlier in the year. U.S. lodging supply growth is expected to moderate slightly next year, largely due to shortages of skilled subcontractors, higher construction costs and higher interest rates despite the continued favorable economic climate. … Given all this, we expect RevPAR [growth] in North America … which reflects our continued steady-as-she-goes view of lodging demand.” The company also noted that Asia Pacific should see more modest economic growth and highlighted that it expects other international markets will see flat to mid-single digit growth rates.

The two companies also provided RevPAR growth expectations for 2019 in their Q3 2018 earnings release. Marriott is expecting an acceleration in RevPAR growth in 2019. This is primarily due to an unwinding of a tough comparison in 2018 for North America results, which saw a 2017 benefit due to hurricanes resulting in higher demand for hotels. The company reported that there was a 110 basis point (1.1%) headwind in 2018 for North American results due to the hurricanes. However, the company is assuming a deceleration in international markets’ RevPAR growth, though the expectation is still strong at an average growth rate of 4%. Hilton is assuming a 2019 deceleration in RevPAR growth, which we expect is demonstrating some conservatism before we get a better outlook on the year.

Exhibit 33: Major hotel brand companies are expecting a deceleration in RevPAR growth in 2019, excluding Marriott’s easy comparison in North America in 2019

Source: Company filings

In light of their optimistic outlooks, the companies are also still focused on developing out their pipelines, with no signs of halting development or conversions. On average, pipelines as a percentage of the companies’ existing portfolios increased to 30.3% as of Q3 2018 results versus 29.2% at the end of 2017.

Exhibit 34: Pipelines as a percentage of existing portfolios are, on average, increasing

Source: Company filings

Consensus estimates for public hotel brand companies is very positive into 2019. Equity analysts are forecasting 9% growth in 2019E revenue and 11% growth in 2019 EBITDA, implying the companies are going to be able to improve profitability even on strong sales growth. These growth forecasts are much higher than what is currently expected for 2018, suggesting analysts are more positive on hotel fundamentals, despite currently volatile equity markets implying some 2019 uncertainty.

Exhibit 35: Equity analysts are still expecting 2019 to be a strong growth year for hotels

Source: Capital IQ Consensus Estimates as of 12/12/18
Note: Hotels include Marriott, Hilton, Choice, Hyatt, Wyndham, IHG, and Accor.

Regardless of what is to come in 2019, we think the public hotel brand companies are well-positioned considering most of them have restructured their businesses to own less real estate. Asset-light business models are known to be more stable during recessions because franchise and management contracts are generally constructed to be percentage of revenue. Regardless of the hotel’s performance, the owner still has to pay management and franchise fees, and the brand companies can offset declines by continuing to grow their portfolios (increasing the number of contracts they have).

Key Sectors in Focus: Airlines

2018 was a strong year for airlines as the globally synchronized expansion in economic output continued to drive sales. The International Air Transport Association (IATA) expects that we will end the full year of 2018 with $564 billion of passenger revenue at commercial airlines worldwide, a 6% increase over 2017. The IATA outlook anticipates a further 7% growth rate next year, bringing 2019 passenger revenue to $606 billion.

Exhibit 36: Global airline revenues should continue to rise, driven by higher passenger volumes

Source: IATA FY 2019 Forecast as of December 2018

Much of this revenue gain will come from volume increases given an expected increase in revenue passenger kilometers of 6.0% in 2019 (a revenue passenger kilometer, or RPK, represents one paying customer transported one kilometer and is a common measure of airline volumes) with the remaining sales growth due to ticket pricing.

Encouragingly, despite a competitive market environment and growing passenger traffic, airlines have been cautious when adding new route capacity. Capacity discipline helps profitability through both load factor growth and by driving a more favorable ticket pricing environment. Load factors have increased in all major air markets, including Asia Pacific, Europe, and North America.

Exhibit 37: Airlines are expected to exercise capacity discipline in 2019

Source: IATA FY 2019 Forecast, Skift Research. Data as of December 2018.

 

Exhibit 38: Only two, smaller regions have seen a decrease in passenger load factors year to date

Source: IATA as of October 2018

While top lines remain robust, airline costs are creeping up across the board. The most obvious culprit is fuel prices, which rose for most of the year.

Crude oil has been highly volatile this year, opening the year at $60 a barrel and climbing to $75/bbl in october, before falling to $53/bbl where it is currently. The dip in oil prices may help airlines next year, but it is too little too late for 2018, which is on track to average $66/bbl for the year, a 29% increase over 2017 and the sharpest annual average rise in a decade.

Exhibit 39: Recent drop in oil prices a reprieve after increases in 2017 and 2018

Source: Capital IQ, Skift Research as of December 10, 2018.

The traditional response to oil price volatility is to hedge planned fuel consumption. Looking forward into 2019, airlines have taken a split approach to their hedging activities with many in Europe and South America locking in prices for the year ahead. North American carriers have, for the most, remained unhedged.

While hedges no doubt insulated airlines this year, the flip side of that equation is that those same carriers may not benefit as quickly from the recent decline of oil prices. On the other hand, United, Delta, and American gamble on remaining unhedged seems poised to pay off into the new year.

Exhibit 40: Many European carriers are fuel hedged while U.S. ones are not; such bets can be a double-edged sword

Source: IATA Based on airline reports and industry commentary. Data as of December 2018.

Overall, fuel prices have risen to 24% of total expenses at global carriers, up from 21% last year, but still well below the ~30% range that had been the norm for most of the past decade. But it’s not just fuel prices that are starting to weigh on many carriers, non-fuel operating costs are beginning to rise as well.

A large part of these expense increases come from rising wages compounded by a looming pilot shortage. Boeing estimates that the world will need 637,000 more pilots in the two decades leading to 2036, and in March of this year, regional carrier Great Lakes Airlines shut down citing the challenge of hiring pilots. Meanwhile in Europe, employee unions at several carriers are eyeing bigger contracts.

Exhibit 41: Both fuel and non-fuel costs are creeping higher

Source: IATA FY 2019 Forecast as of December 2018

The net result of strong revenue dynamics and slowly rising costs is that operating profits in absolute dollar terms remain healthy and well above the anemic levels of prior years, but margins are under pressure. Globally, airline industry operating margins are set to decline 70 basis points in 2018. At the same time operating profit of $56 billion is more than double the $25 billion earned five years ago in 2013.

Exhibit 42: Global airline profitability streak likely to continue

Source: IATA FY 2019 Forecast as of December 2018

Shifting to a regional focus, the U.S. remains arguably the healthiest airline market in the world. Capacity rationalization, a focus on ancillary fares, and a healthy economy have all boosted growth in U.S. revenue per available seat mile, a closely watched measure of unit revenue, out of the red and to the highest level in more than half a decade.

This boost in unit revenues, paired with cost restructuring has helped U.S. air carriers gain, and crucially maintain, record levels of profitability, currently 8% on a trailing 12-month basis.

Exhibit 43: U.S. airline unit revenues show dramatic improvements…

Source: Department of Transportation, Skift Research. Data as of March 2018. RASM calculated on a trailing 12-month basis. Shaded red bar indicates U.S. recession.

 

Exhibit 44: …In turn supporting profit margins

Source: Department of Transportation, Skift Research. Data as of March 2018. Net Income Margin calculated on a trailing 12-month basis. Shaded red bar indicates U.S. recession.

The excitement among U.S. airlines is palpable, with American Airlines CEO Doug Parker going so far as to suggest that the industry may never report annual loses again. We may not go so far as Parker, but we are optimistic about what 2019 holds for U.S. airlines as well.

For the major U.S. airlines, revenue is expected to grow 6.2% to $191 billion in 2019, according to analyst consensus from market intelligence firm S&P Capital IQ. Assuming that the current economic growth continues to hold into the out years, U.S. airlines are positioned to deliver a somewhat slower, but still meaningful, 5.6% growth rate into 2020.

Operating margin (also called EBIT, or earnings before interest and taxes) is expected to improve modestly by 80 basis points to 11.0% in 2019 as conditions remain favorable.

Exhibit 45: Analysts expect U.S. airlines to see further growth and healthy margins in 2019

Source: Consensus estimates from Capital IQ. Data as of December 2018.

 

Key Sectors in Focus: Distribution

The shift to online travel bookings from offline is a long-term trend that we expect to continue into 2019. The U.S. travel industry has been a pioneer in the shift to e-commerce with 46% of agency bookings done online, nearly seven times the rate of online adoption in the broader U.S. service economy.

Exhibit 46: Travel distribution is significantly more reliant on e-commerce than most other services offered in the U.S.

Source: U.S Census Bureau, Skift Research. Data as of 2017.

Consider that in 2003, Expedia Group and Booking Holdings (then Priceline Group) processed a collective $11 billion in gross bookings. In 2018, we estimate that collective gross bookings at these two leading sites will have increased to $192 billion, an impressive 21% compound annual growth rate.

Exhibit 47: Online travel agencies have been powered by secular trends towards e-commerce

Source: Company filings, Capital IQ, Skift Research. Data as of December 2018. Shaded red bar indicates U.S. recession.

Admittedly, some of these increases were fueled by M&A, such as the 2015 acquisition of Orbitz by Expedia. And it should be noted that growth rates have decelerated in recent years, although they still remain robust.

The deceleration is most clear in room nights booked on the two large booking sites which is slowing from high-double digit growth rates to those in the low teens or high single digits. This growth is still above rates in the underlying U.S. hospitality market though. Expedia and Booking Holdings are seeking to re-accelerate growth by offering a greater range of product and by further expanding internationally. We expect both companies will continue to pursue these business strategies into 2019 and beyond.

Exhibit 48: Room nights robust but slowing, causing booking sites to explore new products and services

Source: Company Filings, Skift Research, Data as of December 2018

Net of the online travel agencies’ commissions across their many product offerings, revenue is expected to grow 11% to $28.5 billion in 2019 at Booking Holdings and Expedia, according to analyst consensus from S&P Capital IQ. Analysts expect that this growth rate can continue into 2020, though we have less certainty the further out we look.

Exhibit 49: Online booking sites likely to remain one of the fastest growing businesses in travel

Source: Capital IQ, Skift Research. Data as of December 2018.

 

Key Sectors in Focus: Cruise

Global Cruise Trends

The cruise industry is a critically important part of leisure travel. The industry captures around $40 billion in revenue annually by transporting roughly 27 million passengers in over half a million berths to different destinations around the world.

While demand has been growing (total passengers have grown, on average, more than 5% over the past five years), challenges creeped up during 2018. The strengthening U.S. dollar is making it more expensive for international passengers to travel, and there are pricing pressures in the Caribbean due to overcapacity and hurricane-related impacts. In addition, China continues to be a challenging market due to differences in demand. As new entrants to the cruise industry, Chinese consumers typically prefer shorter trips and spend less money onboard. However, this might change as their travel habits evolve.

On the supply side, growth continues to be strong, as governments of shipbuilding dockyards offer tax incentives and often back the debt associated with the cost of the building the ship (lowering the overall upfront cost and interest payments that cruise lines have to pay to build a new ship).

As a result, all eyes are focused on whether demand can keep up with supply growth, or will pricing continue to be an issue. That, combined with rising fuel costs, puts the cruise industry in somewhat murky waters.

Nevertheless, we’re forecasting 2018 will end with 563,000 total berths (in line with Cruise Industry News’ forecast), 27 million passengers, and $41 billion in revenue.

Turning to 2019, we expect consumer booking demand to remain strong as all signs point to an ongoing healthy consumer, and the cruise companies will continue to invest in new supply. Some Caribbean capacity should be absorbed next year, and we should see better booking comparisons coming off of the negative impacts of hurricanes last year. China will likely remain a challenge as the cruise companies continue to right-size that market. Nevertheless, it is a small percentage of major companies’ overall deployments and shouldn’t be a major impact on bottom-line performance. We expect the U.S. dollar will likely continue to strengthen, which could be a negative offset on global performance.

As a result, we forecast berths could reach 601,000 by 2019. Our forecasts include ships ordered for delivery over the next two years and assumes 5,000 in deletions per year. For passengers, we expect total cruisers to reach 28.5 million by 2019, assuming an average five-year growth rate. Given passenger growth is slightly above supply growth in 2018 and lower than supply growth in 2019, we assume there will continue to be pricing power issues in the industry ahead.

Exhibit 50: We forecast cruise supply to surpass 600,000 berths by 2019

Source: Cruise Industry News, Skift Research

 

Exhibit 51: We forecast cruise passengers to reach 28.5 million in 2019

Source: Cruise Industry News, Cruise Lines Industry Association, Skift Research
Note: Sources vary on historical data, we take an average of Cruise Industry News and CLIA to estimate historical passenger numbers.

Nevertheless, we still expect industry revenue to grow and forecast total industry revenue could reach $43 billion in 2019.

Exhibit 52: We forecast cruise industry revenues to be around $43 billion in 2019

Source: Cruise Industry News, Cruise Lines Industry Association, Skift Research
Note: Sources vary on historical data, we take an average of Cruise Industry News and CLIA to estimate historical revenue.

 

Public Cruise Company Performance

Industry headwinds are showing up in financial performance for the three major public cruise line companies: Carnival Corporation, Royal Caribbean International, and Norwegian Cruise Line. All three management teams are expecting decelerating net yield growth in 2018.

Net yield is an industry metric that is calculated as total revenue minus commissions, transportation, and other expense and onboard and other expense divided by total capacity days, which are available berths multiplied by the number of cruise days for the period. (Berths imply two people per cabin, so two berths is one cabin, despite the fact that cabins can typically sleep three to four people). Though it isn’t a perfect proxy, the industry uses net yield growth as an indicator of pricing performance.

Exhibit 53: Management teams are assuming a deceleration in net yield growth this year due to industry headwinds

Source: Company filings

Nevertheless, the management teams of the three companies are all very positive looking into 2019. Royal Caribbean and Norwegian both noted that bookings for 2019 are ahead of last year in terms of occupancy and pricing. Carnival noted that, for the first half of 2019, cumulative advanced bookings are ahead of the prior year at prices that are in line, with the primary issue being lower prices in the Caribbean, where the company has 40% of its capacity.

Norwegian CEO Frank Del Rio gave some helpful 2019 commentary on the Q3 2018 earnings call: “The robust macroeconomic environment that is driving strong demand to our 3 brands shows no signs of weakening,” he stated. “I feel better today than I did this time last year … Our record book position is an indication of how consumers are feeling for the future. What they’re spending onboard today is a great read as to how they’re feeling today. But I’ll give you one more, one more indicator, and that is the performance of our onboard future cruise sales program. … That business is up 36% year-over-year … It’s another indicator that the consumer is alive and well today and feeling good about the future.”

Obviously, the management teams have an incentive to alleviate investor concerns around industry issues. Nevertheless, it appears 2019 is looking good from a consumer demand perspective, which should translate into solid industry growth, though there may be some idiosyncratic headwinds on a company-level basis.

When it comes to consensus expectations, analysts still expect 2018 to be a solid year, but estimates are moderated in 2019, with earnings per share growth only slightly above that of revenue growth.

Exhibit 54: Analysts are expecting a softer growth year for cruise in 2019

Source: Capital IQ Consensus Estimates as of 12/12/18
Note: Cruise companies include Carnival Corporation, Royal Caribbean International, and Norwegian Cruise Line.

 

Summary: Key Sectors in Focus

 

Exhibit 55: Summary table of global travel sector forecasts

Source: Skift Research, Capital IQ, STR, IATA, CLIA, Cruise Industry News. Data as of December 2018.

 

Exhibit 56: Consensus expectations for sales and earnings growth in 2019 at major publicly traded travel companies

Source: Skift Research, Capital IQ. Data as of December 2018.
Note: Earnings growth for hotels, airlines, and online travel sites is EBITDA, cruise is Earnings Per Share
Companies included are: Hotels: MAR, WH, HLT, H, IHG, CHH, AC; Airlines: DAL, LUV, UAL, AAL, ALK, JBLU, SAVE, SKYW, ALGT, HA, MESA; Online Travel: BKNG, EXPE, TRIP; Cruise: CCL, RCL, NCLH. 


Key Risks to Our Outlook

We highlight several key areas of focus that could provide upside or downside risk to our economic and travel outlook.

Recession Risk: Given we are 10 years into an economic expansion since the last recession, there is certainly the potential for a downturn in the near to mid term. Certain indicators have also demonstrated awareness of such a risk — equity markets have recently been volatile, and the U.S. Treasury yield curve just inverted for the first time in more than 10 years. Though recession obviously remains a risk, certain key indicators such as the Conference Board’s Leading Economic Index (“LEI”) and a lack of rising unemployment suggest that things should be fine at least through 2019. We have also laid out ways companies in the travel industry have recovered since the last recession and have better positioned themselves for the next downturn.

Increased Trade Tariffs: The U.S. has introduced trade measures, including tariffs imposed on solar panels, washing machines, steel, aluminum, and on $200 billion of U.S. imports from China. Ongoing tariff increases could drive increased protectionism and spark potential trade wars. This could result in reduced international collaboration and business activity, reducing overall global travel spend.

Other Risks: Potential terrorism, heightening political unrest, and other geopolitical risks could all pose major threats to global growth in 2019.


Further Reading

  1. Rebecca Stone, Skift Research, “Room for Optimism: 2018 Global Travel Market Outlook.” January 2017
  2. Global Business Travel Association, “GBTA Forecasts Seven Percent Growth in Global Business Travel Spend, Potentially Signifying End to Era of Uncertainty.” August 2018
  3. Molly Dyson, Buying Business Travel, “GBTA forecasts global business travel growth.” August 2018
  4. Regional Reports of the World Travel & Tourism Council.
  5. International Monetary Fund, “World Economic Outlook.” October 2018
  6. American Express Global Business Travel, “2019 Hotel Predictions by Region from American Express Global Business Travel.” August 2018
  7. Seth Borko, Skift Research, “10 Years Later: How the Travel Industry Came Back From the Financial Crisis.” September 2018
  8. Fred Imbert, CNBC, “Dow closes lower after swinging more than 500 points in another volatile session.” December 2018
  9. Brian Chappatta, Bloomberg, “The U.S. Yield Curve Just Inverted. That’s Huge.” December 2018
  10. Randy Brown, Forbes, “The Next Recession Could Happen Sooner Than We Think.” October 2018
  11. Simon Moore, Forbes, “Four Major Recession Indicators To Watch, And What They Signal Now.” August 2018
  12. Jamie Freed, Reuters, “Global airfares, hotel rates to rise in 2019: industry forecast.” July 2018
  13. U.N. World Tourism Organization, “2018 Poised to Advance Tourism’s Leadership among Top Global Economic Sectors.” November 2018
  14. U.N. World Tourism Organization, “UNWTO World Tourism Barometer.”
  15. Colleen Gallagher, Global Business Travel Association, “Buoyant Global Economy Means Higher Hotel and Air Prices in 2019.” July 2018
  16. Global Business Travel Association, “2019 Global Travel Forecast: Global Air, Hotel And Ground Pricing, And Trends Shaping The Future.” July 2018
  17. PwC Hospitality Directions, “Waning fiscal stimulus, and resultant deceleration in GDP growth, expected to keep a lid on RevPAR increases by the latter half of 2019.” November 2018
  18. BCD Travel, “BCD Travel 2019 Industry Forecast: Global Hotel Rates to Increase 1-3% and Air Fares by 1-2% in Most Markets; Strong Competition to Check Increased Demand for Regional Fares.” September 2018
  19. The Hotel Conversation, “JLL release their global Hotel Investment Outlook 2018 report.” Feb 2018
  20. HNN Newswire, “STR: US hotel forecast lifted for 2018 and 2019.” August 2018
  21. HNN Newswire, “STR, TE lower 2018 hotel growth projections.” November 2018
  22. Alicia Hoisington, Hotel Management, “U.S. hotel forecasts continue to look up.” August 2018
  23. CBRE Hotels, “Budgeting for 2019? Follows the supply and the economy.” August2018
  24. Carlson Wagonlit Travel, “2019 Global Travel Forecast.” November 2018
  25. Colleen Gallagher, Global Business Travel Association, “GBTA Forecasts Seven Percent Growth in Global Business Travel Spend, Potentially Signifying End to Era of Uncertainty.” August 2018