Inflation has left bargain-driven late bookings relatively weak, argues Steve Endacott
Rampant UK inflation at 9.4% will severely hit the disposable income of families and lower income groups, which are still recovering from reduced income during Covid-19.
The Covid-19 pandemic saw average household savings rise sharply due to a reduction in discretionary spending on luxuries such as holidays, with debt levels remaining static.
However, this was not the case for lower-income families who ran down savings, creating a market where the ‘haves’ have more disposable income than ever and ‘have nots’ simply can’t afford to travel.
The travel industry has seen the impact of this in Summer 22, with the ‘haves’ spending on holidays increasing by 15% as they choose more expensive hotels and longer duration holidays.
However, the bargain-driven late-booking market has been relatively weak given its higher dependence on the ‘have nots’, who only book when they know they have enough money to buy the holiday and credit card capacity to cover holiday spending money.
Summer 2023 is likely to get even more difficult, with inflation likely to remain high and, unless interest rates are increased forcing up mortgage costs, sterling will remain weak, pushing up holiday prices.
With aviation fuel prices also surging and only Ryanair hedged at low rates for 2023, airlines must push up flight prices or face reduced profits.
Combine this with increased hotel operating costs and it’s likely that holiday prices will have to increase by 10%-15% just to stand still.
This price increase may be paid by the ‘haves’ whose pent-up holiday demand should drive decent early bookings in January 2023 as holiday booking patterns return to normal.
However, without the large number of deferred holidays that boosted early load factors for Summer 2022, the year-on-year comparisons will look poor against artificially high 2022 comparators.
The true pain will again be felt in the lates market.
Low-cost airline yield programmes are based on low early prices, with flight prices increasing in increments as load factors improve and late bookers facing higher prices to encourage early booking.
What happens when airlines cannot shift these late seats at high prices?
Jet2 has always dumped unwanted seats into heavily discounted but opaque package holidays as an alternative way of managing yield. Now easyJet is following this lead which could be bad news for online travel agents (OTAs).
Historically, OTAs’ growth has been driven by access to all airline seats on a price parity basis. But as the low-cost carriers’ in-house tour operations grow, OTAs face competitors with access to cheaper flight seats.
Ironically, Ryanair and its low-priced seats are the key weapon in the OTAs’ defence if their shareholders allow them to take the commercial risk of selling such a hostile partner.
The combination of weakened demand in the lates market, as economic pressure removes millions of late-booking ‘have nots’ from the market, and a temptation for low-cost carriers to dump seats as packages could create a high volume but low-priced lates market.
This could provide a bonanza for independent agents and homeworkers, whilst undermining the ability of OTAs to compete, potentially reshaping holiday distribution yet again.
There are few constants in the UK outbound holiday market. It’s clear easyJet Holidays is set for rapid growth as it plays catch up with the much larger Jet2 Holidays. How this growth impacts the holiday sales of trade partners will be fascinating to watch.