Strong demand is putting upward pressure on air fares and hotel rates. (Image: Jim Glab)
Air fares worldwide are going down – but just a little. With fuel prices crashing, you’d think air fares would follow suit. And hotel prices just keep going up. What’s behind the relatively high and increasing levels of business travel costs? One word: demand.
Travel demand is booming, according to a pair of new reports – and that means airlines and hoteliers have little incentive to use price reductions as a way to stimulate business.
The International Air Transport Association – a trade group for the world’s airlines – said that global demand for air travel in 2015 jumped 6.5 percent over the previous year, a result that it said was the strongest since the world started pulling out of the Global Financial Crisis in 2010; that number was also well above the industry’s 10-year average growth rate of 5.5 percent.
IATA noted that after adjustments for the stronger U.S. dollar, worldwide air fares dropped by about 5 percent last year from 2014.
Business people know that when demand outpaces supply, it puts upward pressure on prices. And that’s just what happened in the airline industry: While demand was up 6.5 percent, the number of available seat-miles operated by the world’s airlines last year rose only 5.6 percent over 2014. As a result, the industry’s load factor (i.e., percentage of seats filled) rose to a record level of 80 percent globally and to 85 percent in the US.
Meanwhile, road warriors who aren’t planning to trim their travel schedule this year should probably budget a bit more for hotel stays: In its latest forecast on the U.S. lodging industry, PwC US – which tracks industry metrics — said the country’s strong economic fundamentals are pointing to continued heavy demand for hotel rooms.
According to PwC’s analysis, the percentage of occupied rooms at U.S. hotels is expected to hit 65.7 percent this year. That’s up only two-tenths of a point from 2015, but it represents the highest occupancy rate the industry has seen since 1981.
If demand is surging, what about supply? The number of hotel rooms in the country is expected to increase in 2016, but only by a meager 1.9 percent, PwC said. As a result, it is forecasting a 5.2 percent increase this year in average daily room rates. And that’s coming on top of a 4.4 percent increase in 2015 over the previous year.
“We expect peak occupancy levels in select markets should give hotel operators the confidence to meaningfully increase average rates, although the strength of the US Dollar may have an impact, particularly on gateway markets,” PwC said.
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