A luxury travel bubble is swelling
WHEN you go on vacation, do you ever treat yourself to an upgraded airline seat? Or book the (admittedly cheapest) room at a five-star hotel? Maybe splurge on a spa day or celebratory Michelin-starred meal? If any of this sounds familiar, you may be what the travel industry calls an 'aspirational' luxury traveller. And much to the industry's potential dismay, you're also inflating an economic bubble that may be about to burst.
According to McKinsey, the aspirational set, defined as those with between US$100,000 and US$1 million in net worth, now accounts for 35 per cent of the global luxury travel market. In 2023, they spent US$84 billion on high-end vacations, a figure expected to grow to US$107 billion by 2028.
That purchasing power has helped turn luxury travel from a glamorous niche into a major profit centre, sparking a race among airlines, hotels, cruise lines, tour companies and the rest to cater to and capture this market segment. But what happens when economic uncertainty suddenly brings aspirations back down to earth?
Consider the reasons why so many people with money – but not true US$10,000-a-night-suite money – started spending so much on fancy getaways.
One is the boom that kicked off with post-Covid 'revenge travel' and was going strong until recently. Even as prices climbed, Americans have increased their travel spending every year since the 2020 bust, according to the US Travel Association.
There's also a demographic element: Millennials, the generation that popularised the idea of investing on experiences over things, are entering their peak spending years.
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Perhaps less considered is a cultural shift that's normalised the idea that all travel should be luxurious. You see it in pop culture (who wouldn't check into the White Lotus, body count or no?), but nowhere is the luxury obsession more pronounced than on social media. The travel industry has discovered the marketing power of influencers, gifting them private jet outings and luxe villas that they then flaunt all over our timelines, sending an unmissable message that anyone bunking at a 'meh' chain hotel or stuck in the back half of the plane is a loser. It's gotten to the point that there was even a movement on TikTok to 'normalise' flying coach.
As the luxury category has swelled to encompass both the uber-rich and aspirational splurgers, travel companies have been quick to invest. Post-pandemic, the pipeline of new luxury and upscale lodging has been expanding at a faster rate than that of more affordable hotels. At the very top of that range, the number of hotels charging an average daily rate of US$1,000 or more has more than trebled since 2019.
Even Airbnb is looking to go upscale – in May it debuted a new service that lets users book a personal trainer, masseuse or chef for in-rental pampering.
Meanwhile, US airlines, including United and Delta, have been increasing the share of planes given over to 'premium' seating. Some have also introduced a class of service that falls between business and economy plus (that is, extra-legroom coach seats).
The cheapie airlines, too, have had their heads turned by the appeal of luxury options: Southwest has adopted extra legroom seats, while JetBlue and Frontier are planning to add first class.
But wider seats, posher rooms and even the odd hot-stone massage may not be enough to woo travellers spooked by a potential downturn and America's increasing hostility to the rest of the world.
To hear the industry tell it, the fall-off in the sector's latest earnings is little to worry about. In March, Delta cut its profit and revenue forecast but later reported that 'we are not yet seeing any cracks in premium'. For its part, United said it would trim domestic routes due to weak demand – even as it noted that new premium cabin bookings were up over last year.
It's not crazy to think the ultra-rich may keep booking even if, as many are expecting, the economy slows, inflation returns and the stock market falls into a funk. (Though the recent cratering of luxury retail suggests that's not a sure thing.)
Unlike the multimillionaire crowd, though, aspirational luxury travellers aren't in a position to ignore the status of their bank and 401(k) accounts. Many of them might understandably choose to trade down to (for shame!) economy-class seats or the kind of hotel that offers a free breakfast buffet.
The industry has never been particularly good about thinking beyond the moment. When Covid hit, the airlines hacked schedules to the bone – only to be caught off guard when demand came roaring back, and then to find themselves cutting prices last year when they couldn't fill all the new flights. Meanwhile, the development process for hotels can take years; by the time a new property opens its doors, the environment that inspired its construction is long gone (the glut of supply that came online during the 2008 recession is probably the most painful such example).
This would be a smart time for travel companies to take a look back at that chequered history and reconsider just how big they want to bet on luxury carrying them through what could be a bumpy couple of years. For vacationers, a slowing economy could be a reminder that, while creature comforts are wonderful, at its heart, travel is more about people and places than perks. And the companies that find ways to deliver value and keep those experiences accessible are likely to be the ones that come out ahead. BLOOMBERG
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