19 Jul 2022 5 min read

Grounded or ready for take-off? Prospects for leisure and travel as the cost of living soars

By Ilana Elbim , Matt Soffair

In this second blog of our series on the cost of living crisis, LGIM's Consumer Global Research and Engagement Group (GREG) members share their views on the outlook for the leisure and airline sectors against a backdrop of squeezed consumer incomes.

Grounded or ready for take-off - Prospects for leisure and travel a.jpg


Given the current inflationary environment , consumer finances are under such pressure that politicians and other policymakers must now confront a cost-of-living crisis.

After several years of living with COVID-19, a study of the UK population by University College London, earlier this year, found that consumers were now more worried about their finances than catching the virus[1].

While members of the consumer GREGs team have previously covered the impact of the crisis on essential spending; below are our thoughts on the UK’s leisure, hotel and airline sectors.


Leisure and hotels – checking in

 Pre-COVID, demand in both the leisure and hotel sectors benefited from supportive tailwinds, with spend on these areas growing faster than broader consumer expenditure, as seen in the chart below[2]:


Demand in UK leisure industries .png


In our view, this reflects a growing trend of consumers prioritising spend on ‘real life’ experiences over physical products. Experiences can’t be replicated, whereas goods are more exposed to competition and deflationary pressures.  

This strong historical growth in demand has supported leisure spend in previous periods of squeezed disposable income, most notably the global financial crisis (GFC) of 2007-2009.  

The chart below maps the change in consumer spending on different categories during the GFC against average spending growth per category between 2007 and 2019. The bars show annual spending between 2007 and 2009, the height of the GFC, and the yellow squares indicate average the average per category change in spend for the entire period:


Consumer spending by category 2007 - 2019.png


As we can see, leisure spend remained positive during the period despite a decline in overall spending levels, while other discretionary categories such as household goods and clothing saw larger declines.

The data suggest that consumers are less willing to sacrifice real-life experiences over non-essential products during times of lower disposable incomes. That’s not to say leisure is immune, but a look back demonstrates how non-discretionary purchases experience differing degrees of consumer resilience.

Early evidence from the current cost of living crisis suggests a similar trend in terms of spending behaviours.

Real-time data on consumer debit and credit card spend by category from the ONS show ongoing resilience in spend on ‘staple’ goods, strong growth in ‘social’ spending (8% up on pre-COVID levels in May 2022) but a notable dip in spending on ‘delayable’ items (e.g., clothing and furniture) over the course of 2022[3].

Data from the hotel sector aligns with this view, with CoStar data indicating that UK revenue per available room (RevPAR) was 5% ahead of 2019 levels in March 2022, mainly driven by increases in average daily room rates[4]. With international travel still not operating at full capacity, this suggests pent-up demand and accrued lockdown savings are supporting demand, allowing operators to raise prices in response to cost pressures.

We anticipate that demand for leisure and travel should remain resilient in the near term. However, if inflation proves to be more persistent over the medium to longer term, this could impact demand.

There are significant disparities in variable cost exposures within sub-sectors of leisure, but utilities and labour costs typically account for a significant portion of balance sheets, particularly in the restaurant sector. When combined with higher debt servicing costs and higher leverage levels post-pandemic, this is likely to put pressure on profits and slow the pace of the expected recovery in operating margins.

As a result, in this environment, we expect greater resilience from well-capitalised operators which may better withstand the consequences of higher inflation and be able to pass through some of the increased costs to the end consumer.


Airlines – clear skies (for now)

The airline industry is seeing high demand recovery as consumers demonstrate a strong willingness to travel. As a result, there’s some optimism in the short term, although uncertainties in the medium term.

Key messages from both traditional airlines and low-cost carriers over the last earnings season were similar: pent-up demand and lifting of travel restrictions will drive a strong summer performance with capacity at, or close to, pre-COVID levels, and with demand for short-haul leisure flights outperforming long-haul.

That said, the quick recovery we’re seeing is fragile and could be negatively impacted by staff shortages and strikes.

Chaotic scenes in major airports across Europe and the US aside, capacity impacted is actually a small portion of the total available, and only a few of the flights cancelled were already fully sold. We would anticipate that for most airlines this demand is delayed, rather than cancelled.

We expect the impact of recent headlines to be that passenger numbers this summer should be slightly below previous expectations, but airlines should be able to partly offset any fall in volumes with higher prices, given overall consumer willingness to travel is unlikely to wane short term.

However, visibility on winter performance is difficult, with many companies not providing guidance for the full year. As the cost of living increases and discretionary spending falls, it’s likely travel demand will be hit.

That said, recovering capacity over the summer and a tight focus on cost-cutting initiatives should result in improved cashflow generation. As a result, leverage should decrease, although we expect it to remain higher than historic levels given the pressure on both yields and volumes. However, this is balanced by the robust liquidity profile of most players.

In our view, this has allowed European airlines to survive through the pandemic, to make necessary investments today to drive future growth, and to keep rating agencies confident that companies can sustain some short-term pressure.






[2] CoStar data as at May 2022.


[3] https://www.covidsocialstudy.org/_files/ugd/064c8b_c525505ffa6b432f96dc41d6b6a985ea.pdf


[4] https://www.ons.gov.uk/economy/economicoutputandproductivity/output/datasets/ukspendingoncreditanddebitcards


Ilana Elbim

Senior Credit Analyst

Ilana is responsible for LGIM's consumer and retail sector credit coverage for euro, sterling, emerging markets and global credit portfolios. Ilana joined LGIM in 2021 from Federated Hermes where she held the title of Senior Credit Analyst. During her five years there, she covered various global investment grade and high yield sectors including consumer, retail, automotive, and gaming. Prior to that, she was a consumer and retail analyst at Fitch Ratings for three years. Ilana graduated from ESCP Europe and achieved a Specialized Master in Finance degree. She has also passed the CFA Certificate in ESG investing.

Ilana Elbim

Matt Soffair

Senior Research Manager, Real Assets

Matt is LGIM Real Assets’ Senior Research Manager, specialising in the retail, leisure and hotel sectors. Matt is responsible for market research, influencing strategic operational initiatives and guiding investment strategy in the retail, leisure and hotel sectors, while also being responsible for research into key thematic areas, including transition risk, operational research and emerging alternatives sectors.

Matt joined LGIM Real Assets in 2018, having spent over seven years at specialist retail and leisure consultancy, CACI, where he held the title of Managing Consultant and was Head of Leisure consultancy. At CACI, Matt worked with over 45 retail and leisure operators to inform their property and customer acquisition strategies.

Matt Soffair