Pent-up demand to drive travel recovery 'despite inflation and war risks'

An additional 1.5 billion people globally will fly this year with Europe contributing the biggest increase, Mastercard study predicts

A passenger aircraft takes off from London's Heathrow Airport. Bloomberg

Pent-up demand for air travel after two years of lockdowns will continue to buoy the industry's recovery as restrictions ease, despite headwinds from inflation and geopolitical risks, a study indicates.

An estimated 1.5 billion additional people globally are expected to fly in 2022, compared with last year, according to the MasterCard Economics Institute's third annual travel report. Of these, Europe will record the biggest increase with about 550 million additional travellers, while the Middle East is expected to have 115 million more this year.

Other indicators look promising for the aviation industry, which has been battered by the Covid-19 pandemic over the last two years.

Business travel bookings have exceeded 2019 levels for the first time since the pandemic started, a major milestone in the industry's recovery. Business travel, a critical profit segment for airlines, had lagged behind the recovery in leisure trips.

Long-haul leisure travel, which recorded the steepest declines during the pandemic, is making a “roaring comeback”, tracking just 7 per cent below pre-pandemic levels in April, a nearly 70-percentage-point gain from the start of the year.

Short- and medium-haul flight bookings have also outpaced 2019 levels, up 25 per cent and 27 per cent respectively, in April, after rising for the first time since the pandemic in February.

“As restrictions ease in many parts of the world, consumers are booking domestic and international travel faster than they can rip open a bag of in-flight pretzels,” the report said.

“While the recovery could still face delays, we have more reasons to be optimistic than pessimistic.”

The global aviation industry is recovering from the pandemic that dented demand for air travel, forcing airlines to ground aircraft and lay off workers. Now, the industry is facing the challenges of a shortage in staff to meet that demand, higher oil prices and spillover risks from the Russia-Ukraine war.

Tailwinds behind the industry's rebound include a surge in hiring recently after millions of people faced unemployment in 2020, the report said. This means more people who can buy plane tickets and have the budget for other discretionary spending. More employed people also means more potential to travel for business.

Roughly 21 per cent of consumers expect to spend their money on domestic travel and 12 per cent on international travel over the next three months, according to a MasterCard study which surveyed 2,250 consumers across 15 markets. The survey also found that 54 per cent of respondents looking forward to big “make-up” trips after two years of little or no travel.

People have also paid off debt and other liabilities at a record pace over the last two years, the MasterCard travel report said. Higher-income consumers — those more likely to be travelling for leisure — are in a solid financial position, driven by excess savings set aside during the pandemic and a rise in asset prices such as housing.

However, those on lower incomes benefited less from asset price increases, especially those living from one payday to the next. Higher prices for essentials, such as rent and fuel, cut into most people's spending on leisure travel, the report said.

Despite the rebound in travel bookings, there are considerable headwinds still facing the industry.

“High inflation is a meaningful headwind to the travel recovery and adds to stock market uncertainty,” the report said.

Incomes in most countries this year are expected to increase slower than consumer prices, MasterCard said.

“While incomes are expected to continue growing beyond 2022, the rising cost of goods and services puts a damper on people's purchasing power, especially for large-ticket goods and services and discretionary purchases like travel,” the global payments company said.

This trend is likely to persist for the rest of 2022 for most markets but is not expected to last as long in some advanced economies, compared to developing economies, it added.

Consumer spending on travel is sensitive to the energy and food price shocks rocking the global economy.

However, given massive levels of pent-up demand in a post-pandemic world, this time could be different, the report said.

“The impact is likely more nuanced and uneven. Specifically, more price-sensitive travellers may stick closer to home, while less price-sensitive travellers, who are more likely to have more excess savings, may be less concerned with higher prices and eager to travel,” MasterCard said.

Consumer spending is now shifting as travellers seek out experiences on holiday instead of material things such as souvenirs.

In April, international tourism spending at bars and nightclubs was 72 per cent above 2019 levels, while spending at restaurants was 31 per cent above, the report showed.

International tourists are also spending 35 per cent more on amusement parks, museums, concerts and other recreational activities.

By comparison, tourists' spending on apparel, department stores, cosmetics and other retail categories is down compared with 2019.

“Despite numerous risks in 2022, such as inflation impacting discretionary spending, another virulent mutation of the coronavirus, and heightened geopolitical risk, our findings show there is evidence for optimism,” the report said.

“Just as the travel rollback of 2020 was monumental in its regression, 2022 is slated to come full circle with another unthinkable travel transition: triumph.”