space traveling warriors tier list : Canadians are scratching the travel itch again, but can the industry keep up?

  • Travel is back, with Canadian flight and hotel spending already above pre-pandemic levels.
  • Hit hard by the pandemic, the sector is on a post-crisis boost as high-income Canadians funnel big savings into vacations.
  • Demand is strong enough to fuel inflationary pressures, even as they eat into household incomes.
  • Current weaknesses, including business travel and COVID restrictions in parts of Asia, are likely to be future sources of growth.
  • The bottom line: The biggest concern for Canadian travel companies may well be supply: amid a historic labor crisis, the industry is still down 177,000 workers.

Canada’s travel industry is making a comeback

Hotels are open, restaurants are buzzing, and after two years of being in the pandemic, Canadians are traveling again. Fueling this renewed wanderlust are higher household incomes, much higher-than-usual savings, pent-up travel demand, and fewer pandemic travel restrictions and health concerns.

Passenger traffic at Canadian airports is still 30% below pre-pandemic (2019) levels in May. But our own tracking of debit and credit card transactions points to an increase in travel bookings, with flight and hotel purchases (which often predate actual travel activity) growing above pre-pandemic levels in mid-March.

Recovery soared through rising inflation and interest rates

Even as Canadians pack their bags and the economic impact of the pandemic lessens, inflation is also rising. Central banks both in Canada and abroad are now raising interest rates in an effort to cool demand and limit price growth. This is eating away at household purchasing power, but leisure and travel spending is expected to outpace this, at least in the short term.

Canadians have the savings muscle to do it. Families have amassed a massive $300 billion in savings during the pandemic, as health concerns and pandemic lockdowns have constrained spending on leisure and hospitality services. Put in context, this is three times what Canadians spent annually on tourism before the pandemic. And those savings were disproportionately concentrated among higher-income households who typically spend more on discretionary purchases, including travel. In pre-pandemic years, households in the top income quintile accounted for more than a third of total spending on hospitality services. On the other hand, low-income households will feel the squeeze of interest rates and higher inflation costs relatively quickly.

A shortage of workers can limit growth, pushing up prices

With travel demand growing, a more pressing question is whether supply will be able to keep up. The shortage of labor is acute in all sectors. This includes travel-related industries, where employment was still 177,000 below pre-pandemic levels in March. Companies are trying to recoup those losses. In April, there were 80% more job openings in hospitality and tourism than before the crisis in Canada. And with the unemployment rate at its lowest level (5.2%) on record since at least 1976, there simply isn’t a large pool of unemployed workers to hire anymore. A considerable share of workers in ‘higher contact’ sectors that were the most restricted during pandemic lockdowns have moved to other less contact (and often better paid) sectors.

Meanwhile, supply shortages and rising costs of inputs, transport and labor are pushing up prices. In late 2021, pandemic-related disruptions to vehicle supplies caused car rental prices to rise as much as 60% above the previous year. Strong demand for workers will also accelerate wage growth. The impact of these factors has yet to appear in Canadian labor market data. But in the United States, wages in the leisure and hospitality sector rose 11% last year. Prices for travel services have yet to fully recover, but have been growing at a faster pace recently – led by a rebound in airline tickets.

Some corners of the trip will be weak a little longer

International travel has been slower to recover – and there will be limits to recovery as long as the pandemic is still significantly disrupting overseas activity, particularly in parts of Asia where strict entry and quarantine requirements remain. Air travel from Asia in April was up just 32% compared to 2019, far below the 59% in North America and 66% in Europe.

Business travel is another point where recovery may take longer. Before the pandemic, about 10% of travel by Canadian residents was business-related. Some of those trips may never return, with the pandemic making the use of virtual meetings and events much more acceptable. International travel taken for business purposes in the fourth quarter of 2021 was just over half of the levels of the same quarter of 2019.

That’s not to say these travel areas will remain weak forever. With the spread of COVID-19 and health-related concerns waning further, more countries will open up, allowing travelers with ample purchasing power to enter and deploy their savings.

fan of claire is an economist at RBC. She focuses on macroeconomic trends and is responsible for projecting key indicators of GDP, labor markets and inflation for Canada and the US.

Naomi Powell is responsible for editing and writing pieces for RBC Economics and Thought Leadership. Prior to joining RBC, she worked as a business journalist in Canada and Europe, most recently reporting on international trade and economics for the Financial Post.

This article is intended as general information only and should not be construed as legal, financial or other professional advice. A professional advisor should be consulted about your specific situation. The information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and should not be considered a complete analysis of the matters discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No third party endorsement or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.

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