Leisure travel is major portion of revenue
Leisure travel, which is primarily for recreational purposes, accounted for ~70% of the total travel expenditure in 2013. It’s driven by general economic conditions, consumer confidence, and level disposable income. The US economy generated a tax revenue of $91.9 billion on the $621.4 billion spent on leisure travel in 2013. A total of 1.6 billion trips were for leisure purposes, and three out of four domestic trips were for leisure purposes. Top leisure activities included shopping, visiting friends and relatives, dining at fine restaurants, and going to beaches.
A major portion of the revenue for the top US airlines, including Delta Air Lines, Inc. (DAL), United Continental Holdings Inc. (UAL), American Airlines (AAL), Alaska Air Group, Inc. (ALK), JetBlue Airways Corporation (JBLU), and Southwest Airlines Co. (LUV), is derived from passengers traveling for leisure purposes. These passengers are highly sensitive to changes in airfares.
Transportation ETFs such as iShares Transportation Average ETF (IYT) and SPDR S&P Transportation ETF (XTN) have invested in shares of major US airlines.
Importance of business travel
Corporate profitability is an important driver of business travel, which accounted for the remaining 30% of travel expenditure. According to the U.S. Travel Association, tax revenue on $266.5 billion spent on business travel amounted to $42 billion. Business travel is essential to improve productivity through new sales, customer retention, and knowledge sharing, which will reflect positively on company performance. It’s estimated that for every dollar invested in business travel, companies generate an average of $9.5 in revenue and $2.9 in profit. In the next article, we’ll discuss the growth in business travel in the United States and the sensitivity of business travel budgets to changes in economic conditions.