US travel recovery looks steady despite global weakness

Wed Jul 18, 2012 3:15pm IST

A pigeon flies over New York March 3, 2009. REUTERS/Gleb Garanich

A pigeon flies over New York March 3, 2009.

Credit: Reuters/Gleb Garanich

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(Reuters) - Strong demand from business and leisure travelers will help U.S. hotels and airlines produce solid revenue and profit in the second and third quarters.

But aside from that bright spot, Europe's economic woes and possible slowing growth in China and India could make for a murkier travel outlook. Those factors, combined with investor nervousness over the result of the upcoming U.S. presidential election, are spurring worries that business and leisure consumers could curb their travel a bit farther down the road.

"The reality is growth has slowed a little bit," said Jon Cummins, chief operating officer of Philadelphia-based Amerimar Enterprises, which owns properties that cater to business travelers such as the luxury St. Ermin's Hotel in London and Sheraton Atlanta. "Yet we're still seeing modest improvements in the hotel metrics."

The two main components of the travel industry -- hotels and airlines -- are somewhat different animals. In general, the hotel industry has a more favorable outlook this year thanks in part to the limited supply of rooms. The airline industry is more volatile due to the price of jet fuel and other factors.

Some U.S. hotel chains have already reported results for the latest quarter, while airlines will begin reporting quarterly earnings later this week.

Hotels and airlines have been aided by a strong comeback in business travel and continued solid leisure demand since the 2008-09 downturn.

U.S. airlines merged, trimmed money-losing routes and added charges for luggage and food to restore profit after the recession. They also have shown discipline in recent years in cutting back flights to match demand and raised fares to recoup fuel-price increases.

On Tuesday, Host Hotels & Resorts (HST.N), a lodging real estate investment trust, raised its full-year forecast after higher room rates and strong group business lifted quarterly results.

"Based on our booking pace and expectations for fundamentals in the business, including continued low supply growth, we believe that the growth cycle on lodging will be sustained," Host Hotels Chief Executive Ed Walter told analysts.

To be sure, pockets of international weakness showed up last week in Marriott International's second-quarter results. The franchiser of Courtyard, Ritz-Carlton and Marriott hotels lowered its fee revenue forecast for 2012 on softness in Europe and other international markets .

Still, the revised Marriott forecast did not spur big worries that the U.S. recovery, which has been the key engine behind improving hotel metrics, was being derailed.

"There doesn't seem to be anything related to the U.S. economy that's weakening travel habits at this point, whether we're talking about leisure or business," said Will Marks, a San Francisco-based hotel analyst with JMP Securities LLC.

Marks said hotels are likely to keep reporting solid results as improved demand and limited construction of new U.S. properties allows them to push up room rates and gain pricing power. He said he will be looking for signs of international softness in results of Starwood Hotels (HOT.N), due out July 26. Starwood has greater exposure to international markets than Marriott.

Enrique Torres, a lodging analyst with Green Street Advisors real estate research firm in Newport Beach, California, said that barring major shocks to the U.S. economic system, the recovery in hotel operating metrics could go on for another two years.

"Assuming we continue along our current path of low GDP.L growth, we see the recovery lasting pretty robustly through 2014," said Torres, who added that improving hotel statistics have already driven up share prices to a point at which hotel stocks now look expensive compared with other real estate segments.

The spring and summer flying pickup should yield second-quarter profit for airlines. Analysts expect stronger operating profit at the major U.S. carriers on higher revenue, and a smaller loss from AMR Corp (AAMRQ.PK) unit American Airlines, which has been operating under U.S. bankruptcy protection since November.

Though falling oil prices in recent months will aid airlines, increases in unit revenue will likely wane beyond the U.S. Labor Day holiday in early September as flying slows from the warm-weather months, said Ray Neidl, an aerospace analyst with Maxim Group. U.S. crude prices are currently in the $89 a barrel range; they peaked at $110 in March.

"That's why it's so important for the airlines now to keep controlling costs and be prepared to do some reductions in capacity if necessary," Neidl said.

It is not just the European debt crisis and other international markets that are a source of worry. The stock market as a whole has been hit by uncertainty over whether U.S. Congress and the president will agree to extend tax cuts before year-end. Traders fear a failure to do so could send the United States back into recession. (Reporting by Karen Jacobs; editing by Matthew Lewis)

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