April US Travel Outlook

Research Review EXAMINING CURRENT INDUSTRY TRENDS Dear Travel Colleague: As we approach another summer travel season, there is guarded optimism that the worst is truly over and that we might actually see solid travel performance in the months ahead. However, as has become all too common, some caution flags line our path.

Economy Kicking into Gear?

It has been more than a year and a half since the recession officially ended, and the U.S. labor market is finally gaining traction and showing signs of strength. Despite higher fuel prices(averaging $3.69 a gallon nationally for regular unleaded on April 5th), continuing turmoil in the Middle East and the latest threepronged disaster in Japan, employers remain confident enough to continue to hire.

At 8.8 percent, the U.S. unemployment rate for March dropped to its lowest level in two years and was one percentage point below last November. According to the U.S. Department of Labor, 230,000 privatesector jobs were created in March. Since the recent low set in February 2010, private-sector employment has risen by 1.8 million. Job growth occurred in professional and business services, health care, leisure and hospitality, and mining. The leisure and hospitality industry added 37,000 jobs in March.

Despite this welcomed news, some sobering realities remain. The ranks of Americans who have been unemployed for 27 weeks or more remain painfully high, at more than six million. And the labor force has shrunk steadily; just 64.2 percent of adults are either in the workforce or looking for a job. That is the lowest labor participation rate in a quarter-century. In addition, year-on-yearaverage earnings were up only 1.7 percent for the second straight month, insufficient to keep pace with inflation.

Further, an unemployment rate of 8.8 percent is still uncomfortably high. And it will take many months of similar payroll gains to recoup the losses of the recent recession. Total payrolls have so far recovered less than 20 percent of the 8.7 million jobs lost. Clearly, there is much more recovery needed in U.S. employment before robust improvement is evident in travel. Oxford Economics and others expect to see additional gains in the labor market in the months ahead, allowing the unemployment rate to fall below 8 percent by the end of 2011.

On the positive side, in its third release, the Bureau of Economic Analysis reported a slight improvement in estimated real GDP growth for Q4 '10, revised up from the 2.8 percent reported in its second release to 3.1 percent. Private consumption made the largest contribution to growth, rising by 4.0 percent. Other promising signs that the recovery is building momentum includestrength in the stock market, which wrapped up the first quarter with a 6.4 percent gain in the Dow Jones industrial average. Also positive were recent reports from automakers that auto sales rose in March. And, we have also seen strong growth in the manufacturing sector.

But, as usual, there are other conflicting signs in the economic indicators. Housing demand remains weak, with new home sales falling 17 percent in February to a record low and existing home sales

declining 10 percent. And the steady increase in distressed home sales is putting downward pressure on prices, with both the Case-Shiller composite indexes and the Federal Housing Finance Agency index down again in January.

Consumer Confidence Falters Further exacerbating concerns, consumer confidence was down in March, with three major surveys all showing increasing pessimism about the future amidst concerns over rising inflation and gas prices, and the sustainability of recent economic and employment growth. TheConference Board Consumer Confidence Index®, which had increased in February to 72.0, declined in March to 63.4. The Present Situation Index improved, but the Expectations Index fell sharply as "consumers' inflation expectations rose significantly...and their income expectations soured, a combination that will likely impact spending decisions," according to Lynn Franco, director of The Conference Board Consumer Research Center.

The Thomas Reuters/University of Michigan Consumer Sentiment Index also retreated, falling nearly 13 percent, reversing the gains recorded in the prior four months. Despite their gloomy economic outlook, however, consumers intend to keep spending, with no decline in their buying attitudes towards a range of consumer durables, including motor vehicles. Gallup's Economic Confidence Index declined as well, to its worst weekly level of 2011, matching the comparable week a year ago.

Consumer spending continues to be restrained. Self-reported daily discretionary consumer spending averaged $61 per day in February, up slightly from January 2011 and February 2010, but still mired in the 2009-2010 "new normal" spending range and far below the February 2008 average. While higher prices at the pump result in increasing consumer spending on gas, middle- and lower-income consumers often pull back on their other spending as fuel prices rise, resulting in an overall decline in total spending, according to Gallup. It seems unlikely that consumer spending trends will improve much in the immediate term facing the current economic headwinds – not good news as we approach the summer travel season.

The Economic Recovery – Better for Some, Worse for Others While the "great recession" officially ended in June 2009, 58 percent of U.S. adults agree that, "Although the recession is technically over, I still don't feel like it is," according to the February 2011 U.S. Travel Association/Ypartnership travelhorizons™ survey. Americans remain cautious about jobs, the economy and what lies around the next corner, and perceptions of the recovery are mixed. The February survey reveals that 28 percent of U.S. adults "feel much more optimistic about the future" – a good sign until one finds an equal number feeling more pessimistic about the future now that the recession is over. These and similar sentiments differ by generation with younger Americans (Gen Y and Gen X) more optimistic than their older counterparts. Similarly, older Americans are feeling less confident than their younger counterparts in the "ability to deal with economic uncertainty" and are more so "budget minded." For more information abouttravelhorizons™, contact David Sheatsley.

Hopeful Signs in Leisure Travel Despite these conflicting indicators, there is guarded optimism about summer travel. Many surveys and analyses of travel-booking and credit card-spending data have revealed strength in Spring Break 2011 travel, as well as consumer plans to travel and spend more this year. American Express consumer data, for example, indicated an 8 percent year-over-year gain for spring travel. Florida came out as the top domestic spring destination in many surveys, including one by Orbitz that showed Orlando replacing Las Vegas in the No. 1 spot. An AOL Travel surveyalso showed Florida as the No. 1 choice and reported that 72 percent of respondents planned to spend the same or more this year on spring break travel. A somewhat lower but still significant 63 percent of agencies surveyed by Travel Leaders reported that this year's bookings are the same or more than 2010. But with the rise in travel costs, some are reporting that travelers are compensating by heading for less expensive destinations and sticking closer to home or nearby international destinations like Mexico. AAA is also seeing an uptick in the number of people making summer vacation plans. Although they had expected an increase in travel by car, this hadn't been the case, and an increase in air travel has occurred instead.

Destination Trends Destination performance remains mixed. Overnight visitors to Greater Miami and the Beaches grew by 5.6 percent to a record-breaking 12.6 million overnight visitors in 2010. Latin America continued to be the leading source of international visitors to Miami, while New York led the domestic increase. A record

$18.8 billion in visitor expenditures were generated in 2010, an increase of 10 percent over the previous year.

For the ninth year in a row, Orlando (18%) and Las Vegas (16%) remain the most popular summer destinations booked by ASTA travel agents, according to the 2011 Hot Spots for Summer survey.

Rounding out the top 10 after Orlando and Las Vegas were: Los Angeles (5%), San Francisco (4%), New York City (3%), Miami (3%), San Diego (2%), Washington, D.C. (2%), Honolulu (2%) and Seattle (2%).

Florida again topped the state destinations for the 2011 summer season, accounting for 27 percent of all responses, followed by California (17%), Nevada (16%), New York (10%) and Hawaii (9 percent).

New York City's tourism bureau, NYC & Company, recently announced a new program aimed atattracting Brazilians. Brazil is the sixth largest international feeder market to the city – as well as the largest in South America – and already supplies robust numbers of tourists to New York (423,000 in 2010). The U.S. is the No. 1 market for Brazil. Nearly 2 million Brazilians traveled to the U.S. last year, a 34 percent increase from 2009. Even more Brazilians would likely come to the U.S. if Brazil participated in the Visa Waiver Program that allows visitors from 36 countries to travel here without obtaining a nonimmigrant visitor visa. The U.S. Travel Association has asked the White House to include Brazil in the program. A new marketing program is also being developed to boost travel from the United Kingdom, which is the city's largest international market but has declined recently because of the weak economy there.

Supported by a strong convention month and improving economy, Las Vegas saw visitor volume increase 8.6 percent vs. last year while occupancy saw a 7.9 percent increase and ADR exceeded $107 (+7.5%) in January. With increased attendance at the Consumer Electronics Show (140,000 vs. 126,000 last year) plus a handful of larger tradeshows falling in January this year vs. February last year, convention attendance saw an increase of nearly 37 percent. In February, while increases continued, they dropped to a 1 percent gain in both visitor volume and occupancy and a 1.3 percent increase in ADR. Convention attendance,however, fell 11.5 percent from February 2010 levels, primarily because, as mentioned before, some of the larger shows occured in January instead of February this year. Year-todate, however, convention attendance in Las Vegas is up 11 percent through February – a hopeful sign. An estimated 38.3 million people are expected to visit the region this year, the highest total since the 2007 record.

In Hawaii, a rebound was underway – that is until the March 11 Japan earthquake and tsunami. The number of Hawaii visitors jumped 11.8 percent and visitors spending rose 18.7 percent in February, as compared to the year before, exceeding the amount travelers spent in Hawaii during February 2007 – the year visitor spending in the islands hit an all-time high. But now, Hawaii anticipates major declines in visitation from Japan (expected decreases of 25% in March, 45% in April, 35% in May and 30% in June) and has launched a statewide Aloha for Japan fundraising effort to help support the Japanese people in the wake of the disaster. The Hawaii Tourism Authority (HTA) plans to spend more than $3 million targeting travelers from other major markets to offset a shortfall in Japanese visitors. The agency plans to improve air access and maintain demand from China, Korea, Australia and New Zealand. It also intends to work with its partners in Japan to determine the best way to "help stabilize the Japanese market."

To view the monthly data for these and other current indicators, click here.

Business Travel – Chilled by Oil Price Spikes?

Short-term oil price spikes could chill the growth in business travel spending but would not cause a decline, according to the Global Business Travel Association Foundation (GBTA). At $125+ per barrel throughout 2011, 700,000 fewer business trips would likely be taken, reducing spending by $5.8 billion (1.5% of total business travel spending) between 2011 and 2013. At $200+ per barrel, these impacts would likely rise to a loss of 2.7 million trips and $9 billion in spending (2.5% of the total) In the meetings arena, 2010 turned out to be a better year than 2009. The 952 planners who responded to Convene's 20th Annual Meetings Market Survey were largely hopeful that they would experience even more of an upswing this year. Forty-two percent of respondents enjoyed higher attendee numbers in 2010 than 2009, and nearly half of them expected those numbers to stabilize or even improve in 2011. Nearly one-third expected more exhibitors to be staffing booths at their conventions this year. But they still remain vigilant about costs. In fact, 70 percent of respondents said that they have been asked to trim their F&B expenses.

So far this year, however, pricing power in the United States for hotel meeting planners has been weak,

reflecting plenty of availability and continuing weak demand. Marriott International reported weakerthan-expected group bookings during February – an interruption in the long-term hotel recovery – especially in the major markets of New York, Washington, D.C., Philadelphia and Atlanta. Total group commitments for 2011 in the U.S. are up 6.8 percent year-over-year, according to Rubicon's North American Hospitality Review released in late February. Group room rates recover more slowly than transient room rates because they're negotiated so far in advance. An analysis by STR of total U.S. transient versus group rate growth (based on a 12-month moving average) showed group average daily rate growth lags transient ADR growth anywhere from 18 to 25 months.

Airlines Can't Seem to Catch a Break!

Airlines have been beset with a bevy of new problems in 2011, starting with the severe winter storms that grounded traffic in much of the United States in early January; followed by turmoil in the Middle East that sent the price of oil above $100 a barrel; and most recently the crisis in Japan, one of many airlines' largest and most lucrative markets.

February's global air traffic growth slowed in line with expectations, according the International Air Transport Association (IATA). Passenger traffic grew 6.6 percent year-on-year, as compared to 7.9 percent in January. All regions reported positive growth with the Middle East and Latin America being the strongest performers.

The Air Transport Association (ATA) reports that U.S. airlines' passenger revenue rose 13 percent in February compared to the year-ago period, marking the 14th consecutive month of year-over-year revenue gains. International markets "remained especially strong" as passenger revenue grew 17 percent, led by a 27 percent increase in Pacific revenue. Domestic revenue grew 11.5 percent, largely driven by a 10.5 percent rise in yield. On the traffic side, domestic enplanements were up 3.6 percent in February while international enplanements rose 3.7 percent (with Pacific traffic up 7.6%).

Air fares took a hike in 2010 (+7%), according to the latest Business Travel Monitor from American Express Business Travel, leaving fares just 6 percent shy of all-time highs in 2008. And airlines have tried to raise their fares 14 times this year, and eight times, the increase stuck.

While higher airfares are grabbing attention, airlines have also quietly been raising their fees for checked bags. Consumers paid more than $9.2 billion in fees to U.S. airlines in 2010 for checked baggage and other services. Research by the Consumer Travel Alliance (CTA), a non-profit organization promoting consumer interests on travel policy issues, suggests that these fares are hidden from many travelers. On average, passengers paid a total of $36.80 in fees for every roundtrip ticket, according to CTA. Airlines' increased fees for checked baggage has led to anincrease in carry-on baggage, which means longer lines and more items to screen at security checkpoints. The Transportation Security Administration estimated there were 59 million more carry-ons in 2010 than the year before, and this has touched off a debate about just how much it costs to screen all the added bags, who should pick up the tab and whether airport security is being stretched too thin. U.S. Travel has concluded that the security screeners cannot keep up with the deluge and contends that the repercussions range from the serious – diminished security – to the unpleasant – longer lines at the checkpoint.

The biggest risk airlines face today is the continuing rise in oil prices, up 28 percent since the beginning of the year. Jet fuel prices are up 32 percent this year. Overall, the airlines have responded more rapidly to the fast-changing environment so far this year than the last time oil prices spiked. They have increased their fares faster and planned their cuts in capacity more judiciously. Major carriers Air Canada, American, Delta and United-Continental have all revised their capacity forecasts to combat oil prices hovering in the $100 per barrel range. Frontier Airlines and leisure carrier Allegiant have also opted to prune capacity to stave off an increasingly dim outlook for fuel costs. But, CRT Capital believes U.S. carriers will remain profitable in 2011 despite rising fuel costs, although it has nearly halved its profitability forecast to $3.3 billion – compared with a $4.1 billion profit in 2010. It now expects only 2 percent overall capacity growth for U.S. carriers, including a 1 percent cut in domestic capacity.

NextGen One Step Closer In other air-related developments, the U.S. House of Representatives approved the Federal Aviation Administration (FAA) Reauthorization and Reform Act of 2011 last week. The bill, if approved by the Senate and signed by President Obama, would reduce delays and airport congestion by accelerating airport modernization efforts through implementing the NextGen air traffic control system, converting the nation's air traffic control from a ground-based system to one that uses GPS. The measure will now have to be reconciled with the Senate version of the bill. U.S. Travel applauded the news.

It's clear this is needed. A new report by PhoCusWright shows that less than half of U.S. air travelers feel positive about their airline experiences, while a quarter of U.S. fliers feel negative. Consumers feel worse about their airline experiences now versus a few years ago, coinciding with the same period that airlines have added baggage fees and other charges. "Fliers are essentially giving airlines a grade of C+, which is barely above satisfactory," said Carroll Rheem, PhoCusWright director of research. "But even more concerning for airlines is that their most valuable customers – business travelers and those with higher annual household incomes – are even less happy than the average."

Hotel – Looking Forward to 2012 The U.S. hotel industry continued to show strengthening performance in February. According toPegasus, consumers are not only traveling, but they are also willing to spend more. The corporate market is also booking more groups and meetings business. February global GDS hotel bookings, representing primarily the corporate market, grew a substantial 23.5 percent, driving revenue up nearly 37 percent over 2010.

Forward-looking data show this segment displaying average monthly growth of more than 20 percent through July, with accompanying rate, length of stay and booking lead time increases. Global reservations through the mostly leisure alternative distribution systems (ADS), or online channels, declined from January's levels. However, bookings growth still remained above February 2010 (+1.1%) as the average daily rate (ADR) set a new growth record for North America (+2.9%), rising for the rest of the world to an almost 5 percent increase over last year. While the full impact of the Japan earthquake has yet to be determined, forward-looking data for February's report displays a continued leisure travel recovery. Bookings made thus far through online channels suggest growth rates strong enough to regain lost momentum during the upcoming spring and summer travel periods.

In the U.S., Smith Travel Research (STR) reported these results for hotel performance in February: demand (+6.2 %), occupancy (+5.2 percent), average daily rate (ADR) (+ 2.5%), and revenue per available room (RevPAR) (+7.9%). Dallas, which hosted Super Bowl XLV in February, experienced the largest increases in ADR (+22.7%) and RevPAR (+35.8%). Three markets, excluding Dallas, reported double-digit ADR increases: San Francisco/San Mateo, California (+15.3%), Los Angeles-Long Beach, California (+14.4%) and Oahu Island, Hawaii (+11.6%). Four markets, other than Dallas, achieved RevPAR increases of more than 20 percent: Los Angeles-Long Beach (+26.1%), San Francisco/San Mateo (+25.2%), Orlando (+21.0%) and Oahu Island (+20.1%).

But some of the lodging industry's leading analysts aren't convinced that the recovery has firmly taken hold.

"We came out of the Americas Lodging Investment Summit in January and said we were ready to rock and roll, but our data hasn't shown that yet," said Jan Freitag, vice president of global business development for STR speaking at the 23rd annual Hunter Hotel Investment Conference in early March.

While the 8 percent demand growth recorded in 2010 was the strongest ever recorded, occupancy remains below 60 percent. RevPAR is still down nearly 14 percent from 2007. Given the strong demand growth, the lack of a real upturn in ADR is surprising; it took 41 months to get it back after 2001 when the drop was $3.70. This time the drop is $9.46.

"It's probably going to take us two years or so to get back to 2007 rates," Freitag said. On the positive side, "We're selling more transient rooms than in 2009 and in 2008. That's excellent, except we're doing this at a huge, huge discount."

STR's current forecast includes: supply (+0.7%); demand (+2.5%); occupancy (+1.8%); ADR (+4.2%); and RevPAR (+6.1%).

According to Mark Woodworth, president of Colliers PKF Hospitality Research, the next good year for the hotel industry will be 2012 because a number of Top 50 markets will return to nominal RevPAR numbers. Woodworth cited optimism for RevPAR in several markets this year, including Seattle; Oakland, California; San Diego; Portland, Oregon; and Minneapolis. Meanwhile, he expects RevPAR declines in Indianapolis and Washington, D.C. In its March 2011 edition of Hotel HorizonsŽ, PKF Hospitality Research (PKF-HR) upped its forecast – U.S. hotels are now expected to achieve a 4 percent increase in demand, a 3.8 percent gain in ADR and a 7.1 percent increase in rooms revenue (RevPAR) in 2011. Woodworth noted that some segments are rebounding more quickly than others. The luxury and upper-upscale segments are forecast to achieve RevPAR increases of 9.6 percent and 7.1 percent, respectively. Among the chain-scale segments with the lowest rates, RevPAR is projected to increase by 6.4 percent for economy hotels and just 5.3 percent at midscale with food and beverage properties.

Speaking also at the Hunter Hotel Investment Conference, Tim Hart, president and CEO ofRubicon was most optimistic, concluding that business on the books for group blocks and transient business tells a uniformly positive story. Committed occupancy is up 6 percent; new business is being added faster (+9%) than in 2010; occupancy will continue to improve, but at a moderate pace; and ADR growth is accelerating because of stronger demand and an improved business mix. Rubicon projects total occupancy will grow 6 to 8 percent during 2011 and ADR will increase 5 percent for the year.

International Visitation Sets New Record in 2010 According to the U.S. Department of Commerce, 60 million international visitors traveled to the United States in 2010, a 9 percent increase over 2009. In 2010, the top inbound markets continued to be Canada and Mexico, both of which were up in arrivals, along with all the top inbound overseas markets except the UK (-1%). Nine of the top 15 countries posted record visitation to the United States: Canada, France, Brazil, South Korea, Australia, Italy, the People's Republic of China, India and Colombia. For more detail, click here.

So, those are the highlights from the past month and a look at the current U.S. travel outlook. See you in May. Sincerely,

Suzanne Cook, Ph.D. Senior Advisor, U.S. Travel Association