There is a time in every macro-economic cycle when demand for gasoline and the cost of it increases. Inevitably the question is raised about the impact of those rising gas prices on room demand. Intuitively it stands to reason that when gas is more expensive, leisure travelers using their cars will curtail their spending and the lodging industry should feel the brunt of this change in spending habits. In addition, the prevailing wisdom is that rising fuel costs will make air travel more costly and business travelers may refrain from making trips altogether.
In prior years we have not observed a relationship between higher gas prices and lower room demand. In early 2011, with the rising gas consumption by the Chinese and Indian economies and turmoil in the Middle East, gas prices are on the rise again—and so the question about the impact on U.S. room demand comes to the forefront. The U.S. government through its Energy Information Administration (www.eia.gov) makes weekly gas prices available online and STR tracks weekly room demand numbers through its STAR program.
The accompanying chart shows the cost of a gallon of gas in the U.S. from early 2006 through February 2011. Gas prices have fluctuated between $1.67 in December 2008 and $4.41 in June 2008. In addition, we charted the average daily number of rooms sold, which fluctuated between 3.4 million rooms in July 2010 and 1.7 million rooms in December of 2006. July traditionally is the month with the highest room demand number and December is the lowest—trends that have held true for the past few years.
The interpretation of the two data lines seems to indicate that the relationship between room demand and gas prices is tenuous at best. The only time when the charts are aligned was during the summer of 2008 and the fall of 2008, which is counter-intuitive because one would expect that higher gas prices should lead to lower room demand numbers.
Indeed, during the period of high gas prices, room demand was seasonally high as well. And in turn, when gas demand decreased and prices dropped during the period now called the Great Recession, so did room demand. In other words, other macroeconomic forces are at play to influence travel behavior and the price at the pump.
A similar comment was made by Joe Greff, an equity analyst with J.P. Morgan, when he undertook a regression analysis of the price of crude oil and lodging demand and found that “we note relatively low correlation coefficients and predictive values” of his model. Gas prices historically peaked when lodging demand was strongest, i.e. in the summer. It stands to reason that U.S. consumers are aware of price hikes during the main travel seasons and have adjusted their budgets accordingly. This would imply that rising gas prices are taken into consideration when planning a summer vacation and so have little or no impact on travel patterns. Business travelers might simply absorb rising airfares as a cost of doing business and also not change their travel plans, given that the incremental air fare increases are only a fraction of the total travel cost.
It is worth noting that gas prices have been on a steady upward climb since December 2008 ($1.67) and increased by $1.36 through December 2010 (to $3.03)—a jump of more than 80 percent. It will be interesting to monitor the summer travel season and see what, if any, impact those increases have on demand. If history is a guide the impact will be hardly noticeable.
