The two most recent upgrades from the sell side are based on the Business traveler traveling and taking clients out to an expensive dinner.
From a top line perspective, clearly things have stopped getting worse and we have seen sequential improvement in sales in November. December was the worst month of the year in 2008 so I expect to see further improvement on a YOY basis. Importantly, same-store sales will still be down year-over-year in December.
Morton’s, which states in its most recent 10-K that “a vast majority of its weekday revenues and a substantial portion of its weekend revenues are derived from business people using expense accounts,” saw some stabilization of trends in 3Q09; though comparable sales were still down 16.8%. If we assume the company maintains similar 2-year average trends in the fourth quarter, comparable sales will still be down 11%-13% (better than the 20%-plus declines in the first half of the year).
There appears to be some further evidence that business travel is recovering. Both Delta and United said in early December that business travel is improving and that “the worst of the demand slump has ended.” According to US Air Lines, corporate travel revenues in the U.S. are already recovering from a decline of 35% in early 2009. Revenue began improving in May, turned positive in November and now is up about 5%.
Southwest Airlines is the lone dissenter. Southwest’s CEO, Gary Kelly said recently, that “it hasn’t had a pickup in business demand and doesn’t expect one in 2010.”
Todd Jordan, Research Edge’s Gaming, Lodging and Leisure Analyst, thinks business travel could be fine over the near term but could disappoint beyond 1Q10. Additionally, the new security regulations are not going to be good for business travel. People won’t want to deal with the new headache.
The general consensus from the airlines seems to be that the business traveler is traveling. The real question as it relates to the restaurants is whether business travelers are spending more and taking their clients out to eat which is likely reflected in the T&E spending trends at American Express. On this front, there are signs of stabilization, but there does not seem to be a big incremental lift in spending as 2-year average trends have not yet started to move higher. T&E volume growth turned negative in 4Q08 so the 1-year trend should look much better in 4Q09. Assuming the same 2-year trend in the fourth quarter implies that T&E volumes will be down only 2%, which is a marked improvement from the -20% in 1H09 and -14% in 3Q09. I will be more convinced that the business traveler is spending again once 2-year trends start to pick up but increased travel is the first step toward increased T&E spending.
Offsetting some of this increased T&E spending at restaurants could be increased pressure on personal consumer spending. Let’s not forget the impact that rising fuel prices had on marginal consumption in 2008, particularly in the summer months when gas at the pump reached $4.00. On a YOY basis, consumers have benefited from lower gas prices for most of 2009, but with oil trading above $80.00 again, gas prices are likely moving higher in 2010. Higher oil prices will not impact spending immediately, but we could see some impact toward the end of 1Q10 and into 2Q10. We know that main street cannot afford higher prices at the pump as it changes the psychology of consumers and impacts how they spend discretionary dollars.