ISSUE #1 - DOMESTIC LEISURE TRAVEL
MARCH 26, 2003

This TIA Travel Outlook is the first in a planned series focusing on important market segments in U.S. travel and tourism in the context of war and a continuing soft economy. Additional outlooks will focus on business travel and inbound international travel to the U.S.

Leisure travel has been the relative "star" in the U.S. domestic travel constellation, although its luster has dulled in recent months. While domestic leisure travel increased 1.7 percent in 2002, growth was much subdued in the waning months of the year, and weakened even further this year in the weeks leading up to the start of the war. In the short-term, leisure travel is likely to be depressed even more by a combination of factors:

• The U.S.-led war in Iraq put consumers on edge prior to the onset of hostilities. Leading consumer confidence indexes have plummeted to their lowest levels since the fall of 1993. (1)
• On March 17, the Department of Homeland Security upped the terror threat from yellow (significant but nonspecific threat) where it had been since February 27, to orange (a high risk of terrorist attack). The last time the country was at orange, international advance air bookings dropped more than 20 percent. (2)
• The public's rating of the economy is now at a 10-year low. (3)
• In February, U.S. companies eliminated more than 300,000 jobs, the largest decline in jobs since the month following the 9/11/01 terrorist attacks, increasing the unemployment rate to 5.8 percent. (4)
• All of these factors have caused consumers to retrench.Consumer spending, which has been supported by super-low interest rates that have led to a strong demand for housing, cars and other durables, grew at a 1.5 percent rate during the fourth quarter of 2002, the slowest pace since the third quarter of 2001. Weakness in retail sales continued in January and February. (5)

In the short-term, expect the fear about war in Iraq and the rising threat of retaliatory terrorism here at home, coupled with the downward spiral in consumer confidence, to further delay recovery of the travel industry and to put a damper on spring travel. Also expect many of the emerging patterns in leisure travel to continue and perhaps even intensify:

• U.S. travelers are more reluctant to commit, postponing trip planning and fortifying the very late booking patterns seen in the last few years. The timing of this situation is important, as now is the time most Americans begin to make their summer vacation travel plans.
• Women remain far more personally concerned about the risk of terrorism than are men - significant in that women are the primary trip planners in most U.S. households. (3)
• The preference for domestic travel instead of travel abroad will intensify, as Americans' rising fear of being near hot spots or being stranded, combined with their concerns about the anti-Americanism being reported in many of our most popular international destinations, cause more Americans to shift to domestic destinations.
• While this could be a boost to some U.S. destinations, the numbers of travelers shifting to domestic destinations are likely to be too small to affect overall national performance since outbound international travel rarely exceeds 5 percent of total travel by Americans.
• Certain destinations such as those near to major population centers could benefit as closer-to-home destinations, accessible by highway, continue to gain in popularity. If gasoline prices remain high this spring, however, this market could be negatively affected as well.
• Most consumers anticipate an additional gasoline price increase and think that the increase will be temporary. If it is temporary, gasoline prices in and of themselves are unlikely to depress leisure travel. (3)
• Air travel - both business and leisure - is likely to continue to suffer. During the 1991 Gulf War, domestic air travel was depressed in terms of passenger volume for about a year, leading to four years of losses totaling $13.1 billion. This time around, domestic air travel has already been weak for almost two years and has yet to recover to pre-9/11 levels. Leisure air travel, while down in 2002, has been providing whatever "lift" we have seen, with losses only about half as great as for business air travel. (2)

• Air passenger revenues fell 26 percent below 2000 levels in 2002, and are now running at 1995 levels. If the war in Iraq lasts one quarter, forecasts are for a 15 percent decline in air traffic during that period, and total 2003 losses of $10.7 billion. (2)
• The U.S. lodging industry seems to be recovering a bit faster than the airline industry but has also weakened in recent months. U.S. hotel room demand actually increased 0.8 percent in 2002, but was still down 2.7 percent compared to 2000. This was driven by growth in leisure travel demand, while business lodging demand remained depressed. (6)
• Federal security alerts have had immediate short-term effects on lodging demand. Within one week of each of the seven federal security alerts between October 2001 and November 2002, U.S. hotel occupancies declined an average 3.5 percent. (7)
• Hotel bookings in the coming weeks of the war are expected to be down 5 percent from prewar projections. If the war is brief, hotel RevPar is likely to decrease 1.5 percent in the first half of 2003, followed by a return to growth in the second half. (7)
• Travelers will enjoy a "buyer's market" as travel suppliers continue to offer new bargains, as well as flexible and liberal refund policies as they have been doing in recent weeks to spark business and quell customers' anxiety. Nominal (not adjusted for inflation) airline ticket prices are now at their lowest since 1987. (2)
• Overall consumer spending, including travel, is likely to slow further in the near-term. While travel has grown very slightly in volume (due to the relative strength of leisure travel), travel spending has been down. (8)

If we are lucky, a quick resolution to the war in Iraq could result in at least some recovery in leisure travel by the all-important summer season.

• In the initial days of the war we experienced a resumption of the "CNN" effect, as people opted to stay home and watch the war coverage rather than venturing out. 63 percent of Americans say they are following news of the war very closely, slightly below the 70 percent who did so during the early days of the 1991 Gulf War. (3)
• But, 18 months of existence in a post-9/11 environment has likely made for hardier consumers, who have learned to weigh the risks and rewards, and who are anxious to get on with their lives.
• The prospects for summer leisure travel now seem dependent on the length of the war and what the longer-term aftermaths turn out to be. If the war is over in a month or two, summer leisure travel could potentially be saved.
• If the fighting ends quickly most economists expect the economy to gain significant momentum. Once the situation in Iraq is resolved, businesses will likely resume spending and hiring, which will boost consumer confidence and economic growth, as well as consumers' willingness to spend, including for travel.
• In the absence of terrorist attacks here at home, Americans are likely to be anxious to resume leisure travel as soon as possible and may even boost their travel significantly because of pent-up demand.
• Based on a survey conducted in late January, consumers' interest in travel continues its upward trend. And consumer perceptions of the affordability of travel, while down significantly from late 2001 and early 2002 when a flurry of discounts were announced in response to the aftermath of 9/11, are still quite positive. (9)
• The consensus is that oil prices will plummet rapidly following resolution of the war. Falling gas prices, coupled with Americans' ever-constant preference for auto travel that has only become more entrenched over the last few years, could help stimulate auto vacation travel this summer.
• Travel by air, even for leisure, however, is expected by airline analysts to continue to remain depressed for quite some time to come.

But if the war continues longer than expected, if it is not the success that many expect, if other geopolitical uncertainties remain, or if terrorism resumes once again within our own borders, the prospects of a full recovery in leisure travel, and of a healthy summer season, would dim significantly.

Footnotes:

1. Conference Board's Consumer Confidence Index
   University of Michigan's Index of Consumer Sentiment
2. Air Transport Association
3. Gallup Poll
4. Bureau of Labor Statistics
5. U.S. Department of Commerce
6. Smith Travel Research
7. PricewaterhousCoopers (PwC)
8. TIA Travel Expenditure Estimates
9. TIA Traveler Sentiment Index

Visit www.tia.org for the latest information on the state of U.S. travel and tourism and what the industry and consumers can expect in the weeks and months ahead.

Produced by the Travel Industry Association of America