Tuesday, February 14, 2017

International Travel Demand to the US Should Be an Enormous Concern

With so much uncertainty surrounding travel and visa policies for people coming to the US, demand has unsurprisingly started to drop. If I’m a US-based airline, this is one of the most concerning potential issues out there today.

Since Trump’s election, business sentiment has been broadly positive with hopes and dreams of loosened regulation, lowered taxes, unicorns, and rainbows without any harm being done elsewhere. That’s nice, but it’s also ignoring the elephant in the room. Trump made a pledge to tighten up on immigration, and open borders are tightly tied with travel demand. His early attempts to fulfill that promise have been sloppy and problematic, causing a tremendous amount of fear and uncertainty around the globe. If it continues that way, this could quickly wipe out any potential gains from business-friendly tax and regulatory policies.

We all know that when the White House hastily announced a ban on travel to the US from 7 predominantly-Muslim countries, chaos followed. It was unclear whether existing green card/visa holders were allowed back and whether this was temporary or not. It wasn’t long before the judiciary stepped in to block some of the most visible policy changes, but damage had already been done.

According to a study of travel agent booking data from ForwardKeys, bookings for travel to the US dropped sharply in the 8 days following the signing of the executive order.

Naturally, travel from those 7 countries tanked with new bookings down 80 percent. But more concerning is the impact that this has had on travelers from countries where there weren’t any changes to policy.

Globally (excluding China due to year-over-year issues with holiday timings) in the 8 days since the ban first went into place, inbound bookings to the US dropped 6.5 percent compared to the same period a year prior. Outside of the Middle East, hardest hit were bookings from Asia/Pacific ex-China (down 14 percent), Western Europe (down 13.6 percent), and Northern Europe (down 6.6 percent.) Here’s a graphic from the report that shows the various regions.

Another way to look at this is based on forward bookings. Right before the ban went into effect, global bookings to the US were up 3.4 percent for the following three months compared to the year before. Just 8 days later, bookings were up only 2.3 percent for the following three months.

Some of this slowdown could, of course, be attributed to the initial shock of the order. Maybe things will rebound, but it’s clear the Trump administration isn’t done tinkering here. There will be more restrictions coming on travel to the US, and that means the perception that the US is closed for business will spread. This could have a far-reaching and long-lasting impact on demand.

Won’t this hurt foreign carriers more than US carriers since US carriers are more likely to carry US passengers who aren’t impacted? First, I suppose it’s important to point out that US travelers may very well be impacted in the future. Some countries retaliate when this kind of thing happens. (Remember Argentina’s “reciprocity” fee?) But even forgetting about that, the US carriers will still feel the pain.

Remember, the US airlines have spent a great deal of time forging joint ventures with foreign airlines. If Air France/KLM/Alitalia/Virgin Australia/Aeromexico/Virgin Atlantic suffer, so does Delta. If British Airways/Iberia/Finnair/JAL/maybe LATAM/maybe Qantas suffer, so does American. And if Lufthansa Group/Air Canada/ANA/Air New Zealand suffer, so does United. Beyond that, Alaska/Virgin America and JetBlue are heavily dependent upon foreign airlines feeding people on to domestic flights. If those dry up, those airlines will certainly see demand drop.

Fortunately for airlines, their assets are airplanes, and airplanes can move. But there is already overcapacity in the Atlantic today. If demand starts to shrivel further globally, then there won’t be a lot of places to move those airplanes. Sure they could shift some flying back into the domestic market, but there’s only so much capacity domestic markets can absorb. And that means even Southwest, which has the least global exposure in the US, would start to hurt from excess capacity moving back home. In a worst case scenario, airlines could simply decided to start retiring older widebodies instead of flying them at a loss, if things get bad enough.

It is early to start predicting doomsday scenarios like that one, but there is just no clarity on what the administration is going to do next. What is clear is that Trump isn’t done trying to slow immigration, and that will hurt broader travel demand. If the orders continue to implemented like the last one, the pain will be even more pronounced.

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