Leisure Sector Costs Decrease Year After Inflation Peaks

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Key Takeaways

  • Airfares drop by 19%, and car rentals by 12%, signaling reduced leisure expenses.
  • Despite reductions, affluent travellers sustain high-cost international trips, affecting airlines’ strategies.
  • Local trips increase; overall leisure demand remains strong, fueled by affluent households favouring international destinations.
  • Domestic options regain affordability; international travel demand persists, influencing airlines’ expansion.
  • The market demands adaptable strategies emphasizing sustainability, tech integration, and resilience.

A year after reaching a 40-year inflation peak, costs in the leisure sector are finally decreasing. However, wealthy travellers continue to fuel demand for high-priced international trips.

Substantial Decline in Airfares and Car Rentals

According to the new Consumer Price Index figures, airfares in June were down 19% from last year, while car rental rates declined by 12%, marking the fifth consecutive month of such decreases. The data also showed that while the cost of dining out continued to rise, the growth rate slowed from 8.8% in March to 7.7% in June.

According to an NBC News report, the Executive Director of the macroeconomic policy group Employ America, Skanda Amarnath, attributed this to consumers reaching the end of their “revenge spending” spree.

Different Spending Habits Among Consumers

While many consumers opt for shorter, cheaper trips closer to home this summer, the overall demand for travel remains high. A recent survey by Bankrate revealed that 63% of U.S. adults have traveled or planned to travel for leisure this year, an increase from last year’s 58%.

The report noted that despite some travel costs remaining high, wealthy vacationers continue to splurge on their leisure trips. Bankrate found that about 85% of households earning more than $100,000 a year reported leisure travel plans this year, and many of them are shifting their focus from domestic to international destinations.

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Skyrocketing Demand for International Trips

According to Destination Analysts, American travellers venturing abroad this year have an average household income of nearly $110,000, compared to less than $83,000 among U.S. travellers.

In response to this increased demand, United Airlines plans to expand its international network at twice the rate of its domestic network this year. Delta Air Lines expects record revenue and profitability on its international routes this summer.

However, the federal government’s inflation measures mainly reflect domestic consumption, which means that the spending spree by vacationers abroad won’t impact inflation readings at home.

More Affordable Options for Domestic Consumers

Meanwhile, those staying within the U.S. continue to have more affordable options for their leisure spending. Restaurant visits from lower-income households and alcohol sales at Darden Restaurants have declined compared to last year but remain above pre-pandemic levels, suggesting a return to normalcy.

Amusement parks have also seen a decrease in footfall, with traffic to Disney’s U.S. parks slowing down this summer, resulting in the shortest waiting times during the Independence Day weekend in nearly a decade.

Federal Reserve officials hope to maintain this balance with their campaign of interest rate increases, aiming to cool consumer spending, which accounts for about 70% of total U.S. economic activity, without leading to a “hard landing.”

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Leisure Industry Outlook for 2023

Looking ahead to 2023, the leisure industry faces opportunities and challenges as it recovers from the pandemic and adapts to changing consumer preferences and behaviors.

According to Barclays Corporate’s Hospitality and Leisure Outlook 2023 report, hospitality and leisure businesses must meet changing customer expectations to counter rising costs and seize growth opportunities. The report identifies four key trends that will shape the industry in 2023:

Sustainability 

Consumers are increasingly conscious of the environmental impact of their leisure choices and expect businesses to demonstrate their commitment to sustainability. Businesses that invest in green initiatives and communicate their environmental credentials could gain a competitive edge and access sustainable financing options.

Technology

Technology will continue to play a vital role in enhancing the leisure sector’s customer experience and operational efficiency. Businesses that leverage data analytics, artificial intelligence, automation, and digital platforms could improve customer loyalty, personalization, and profitability.

Diversification

As consumer preferences evolve and new segments emerge, businesses must diversify their offerings and target markets to capture new opportunities. For example, athleisure wear is expected to grow at a CAGR of 6.09% from 2023 to 2028, driven by changing lifestyles and fashion trends.

Resilience

The leisure industry has shown remarkable resilience during the pandemic but must maintain its agility and flexibility amid ongoing uncertainty and volatility. Businesses must monitor market trends, consumer sentiment, regulatory changes, and geopolitical risks and adjust their strategies accordingly.

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Deloitte’s 2023 Travel Industry Outlook also provides insights on how travel businesses can recalibrate their strategies for the year ahead by focusing on elevating and enhancing the basics—product, performance, and price. The report highlights four key priorities for travel businesses in 2023:

Product

Travel businesses should invest in improving their core products and services, such as safety, cleanliness, comfort, and convenience, to meet the expectations of discerning travellers. They should also explore new product innovations, such as hybrid events, subscription models, and wellness offerings, to differentiate themselves from competitors and create new revenue streams.

What We Think

The contrasting trends in leisure spending reflect a bifurcated consumer landscape: those favouring local, affordable options and affluent travellers driving international demand.

The industry’s resilience amid changing preferences is evident, presenting both challenges and opportunities. Strategies focusing on sustainability, technological integration, diversification, and resilience are crucial for businesses navigating this evolving landscape.

The year ahead will require agility and innovation to cater to divergent consumer preferences while adapting to post-pandemic norms and economic fluctuations.

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