by Carl Michel
Setting out a Strategy Roadmap in a time of maximum uncertainty
There are plenty of crystal ball gazers commenting on how the travel industry will look in the future. The most optimistic – usually those from within the industry – are hopeful for a fast bounce-back. Maybe not quite a V-shaped recovery but certainly one built upon travel bubbles, air corridors, rebuilding consumer confidence and a veritable tsunami of frustrated holidaymakers coming out of lockdown and returning to their old ways, helpfully assisted by a vaccine later this or early next year. The pessimists – some with an eye to the environment and global warming – paint a much darker and gloomier scenario, of a virus that will be with us for many more years, or forever, with further waves of infection; of periodic lockdowns and of social distancing as the new norm; with travellers increasingly fearful and opting for more solitary travel experiences, if at all.
The truth is no one really knows – and the reality will lie somewhere between these two scenarios. We simply do not know if (and when) a vaccine may be found and be widely administered, nor how long antibody immunity is conferred once one has had the virus, nor if we can find suppressants to manage any infection before it becomes acute.
Travel executives should therefore be careful to not fall under the spell of frothy confirmation biases (the endless sentiment surveys, the excitement of a restart date or the exponential growth in online searches for next year) as these are not equivalent of actual, sustained and profitable demand. Equally it is worth remembering that humans are remarkable for their ability to adapt: we are all used by now to not taking liquids through airport security. But remember for a few weeks after 9/11 the discomfort felt when mobile phones had to have their SIM cards removed and to be checked in on flights?
Nevertheless, what has taken place in the first half of this year is a massive demand shock that has no real precedent in our lifetimes. This shock is much like a heart attack – and we are now being kept going by fiscal pump-priming, much like a defibrillator can restart our heart and drugs can then prevent a clot. It is too much to call this a fiscal stimulus, as it is much more a case of “demand replacement” to avoid a cliff-edge crash. Only once the furloughing, the business loans and the other rent and tax deferrals are wound down and stop, will we see the true state of health of the tourism sector.
The demand shock – with many businesses shut or operating at under 20% capacity – will have significant consequences for supply (something economists call hysteresis). By the end of this year many businesses will have gone for good; many others will have significantly downsized and probably all will have revised their operating models. Virtually no one is coming out of this crisis unscathed. There will be some winners, relatively speaking, and many more losers. The travel world will never be quite the same again.
The extraordinary demand shock and supply effects will also have a profound impact on consumer psychology, which is much harder to predict at this stage. While many people will return to their old ways and habits quickly, or at least want to, others will be permanently scarred. This impact will differ by country, age cohort, ethnicity as well as individual circumstances, such as income, education, underlying health and any direct or indirect virus episode. Again, a vaccine would do much to speed any transition, but it may be some while before we see the full contours of this behavioural change. Rebuilding trust may take a long time.
Planning in uncertainty
For the travel industry it makes forecasting unusually difficult, with a range of possible outcomes that is exceptionally wide. If a V shaped recovery is optimistic, might it be U-shaped or look more like a W? What happens if it an L-shape after all? Most businesses have been deep in fire-fighting mode, conserving cash and hanging on, with little thinking beyond the next few months. Some of the more obvious questions that they should be asking are:
- How will travel preferences be impacted by an extended period of social distancing?
- How will necessary adaptations to products and services be received by consumers?
- How can this business operate at significantly lower demand level?
The virus shock is likely to create much more heterogeneity in what is the accepted norm. Consider an airport. Up until the early this year, few people would have given one the “evil eye” for standing directly behind them at passport control or at a boarding gate. Now – even when wearing a face mask – it is likely many more people will find such an invasion of personal ‘safe’ space much more distressing. And how will disembarking an aircraft look like if we are to each maintain a 1 or 2 metre distance? The person in row 34 may have to wait an hour to get off. So much for fast aircraft turnarounds!
Of course, the likely result is that more people will chose not to fly or cruise or take a coach, or even to visit a popular attraction and eat out in a restaurant. Perhaps they will do so, but less frequently than before. Surveys that breezily point to a major recovery in travel often do not spell out just how different the experience might actually be. So, while the idea of a care-free week on a Greek island naturally attracts, the actual experience will be rather different. Not just in getting there, the destination itself may be less care-free. Checking in to your hotel early? Sorry, not possible until we do a deep clean. Fancy a meal? Can you pre-book your taverna as the number of tables has now been reduced. Catching a ferry or bus? Don’t forget your mask and hand-gel (oh and sorry if its uncomfortable in the heat). Off to a museum? Get your timed entry ticket in a small group before you go and, hopefully, you will not have to line up outside too long in the blazing sun (or rain)! Lastly, what happens of one develops symptoms while away? Let us hope you can buy insurance that covers this, but it will be a major concern for older travellers who have been a key driver in the growth of tourism.
However, shifts in demand preferences can only go so far. Not everyone can now head off in their camper-van on quiet roads nearer to home, as it ends up with everyone snarled up in a giant traffic-jam near a beauty spot which will then be forced to close to avoid over-crowding! For the very wealthy, splendid isolation may be achievable, but for most of the rest of us, travel has only been made accessible and affordable by being volume driven – densely packed planes, large tour buses, hotels with buffet meal services, attractions packed to the gills. It has never been so cheap to travel which is why so many people, even on modest incomes, can and do go away.
If travel becomes more expensive or customers end up having less disposable income, demand will fall. If customers dislike product and service adaptations, demand will also fall. do Of course, it is still possible we bounce back from this – that 2021 will be the year of using our refund vouchers or taking a rebooked trip and that 2022 will be the year when things are ‘back to normal’. But much will depend on how well the virus remains suppressed and on consumer psychology. And unless we get a vaccine or achieve herd immunity, our global interconnectedness makes a full recovery rather a doubtful prospect; as long as the virus is out there somewhere, it can return.
In short it is quite possible that we have lived through a halcyon era of abundant care-free travel for the last 40 or so years and that the travel industry now needs to downsize. Environmentalists would applaud a decrease in carbon emissions if we flew and holidayed less (as well as for the reduction in plastic pollution). But tourist receipts have been an important means in providing seasonal work, in lifting incomes in developing economies, of providing communities with the support needed to conserve natural habitats and wildlife. It is for this reason that governments should be alarmed if tourism declines sharply – too much depends on it.
If the future is one of less travel but with more environmental consciousness, it will still have profound consequences for an industry accustomed to relentless growth. The giant hotels, huge aircraft and the mega ocean cruising ships cannot be easily repurposed and could end up as zombie assets – too many, too big and possibly even in the wrong place. There were enough tell-tale signs of that the travel industry was not in rude health well before the pandemic hit – from the collapse of Thomas Cook to the various airline failures or basket-cases (some of which have ironically managed to be kept going a bit longer with loans from governments).
It is prudent for businesses to examine how to be better prepared for this new economic environment, given that waiting for a vaccine to be developed and administered is not a strategy. And simply assuming a return to what things were before is putting hope ahead of expectation. In short, what does a strategy team do, if it cannot simply rely upon never-ending market growth?
The future of travel – key strategic themes
Strategies need to adapt to the new reality that, for some indefinite period, consumers will not behave and buy travel as they did before. There is still a lot of uncertainty and not much hard data to go on. Forecasting is at best hazardous (at worst a waste of time) and most likely to be wrong. But in the fog of information, some broad themes already seem clear:
- Building in financial resilience. This comes in many forms but one of the most obvious is the tendency to use debt-finance (thanks to interest costs being tax-deductible and cheap loans), which has allowed many businesses to gear-up. If one reckons more earnings volatility – whether from a pandemic such as this, or due to climate change – then high leverage is simply not sustainable and needs to be reset. Finding means to share the risk – like rents or leases linked to turnover – would make sense.
- Rebuilding customer trust. The travel sector needs to be weaned off using customer prepayments to fund their business model. Many have struggled with refunds, simply because the customer’s money had already been spent, rather than being put in trust for when the service is delivered. Customer confidence has been impaired and the whole bonding regime has been exposed as not fit for purpose. Working capital requirements may look very different if consumers book much later or with much smaller deposits.
- Developing environmental thinking across the business. This is not a new theme but one which has begun to become more important both to governments and consumers, especially Generations Y and Z (those under 40). Finding a carbon-neutral means of travel may become a business necessity, not just a nice to have. Failure to lead on the green agenda will at some point result in regulations being imposed. When everything is being redefined, now is a golden opportunity to hardwire in a genuine environmental design (not just a mindset) to ensure the travel industry is rebuilt sustainably.
- Investing in more digitalisation. Using technology to help manage (and indeed limit) human interaction is an opportunity to capitalise on the huge shift in online behaviours. Whether it is a QR code that stops one having to pick up a hotel room service card (how often do you expect that gets wiped clean?) or having a room key-card on ones’ mobile device to avoid needing to check-in are just some examples of what can be done. Indeed one should consider where virtual reality can be an acceptable even better alternative – as in seeing the treasures of the Uffizi or Louvre without leaving home and without having to deal with even reduced crowds.
- Work on operational resilience. Thinning out densities – whether in aircraft or tour buses or hostels, increasing spacing between tables in food and beverage environments, removing buffets – will inevitably mean that prices need to rise. If travel is less affordable and the market shrinks, consider how things would work and whether you could make money if you had 20 or 30 or 50 per cent fewer guests. Perhaps other new customers can be attracted to “fill the void” but if everyone is doing this, someone will have to lose out!
Winners and Losers
The good news is that there is no prima facie sector that needs to lose out in the medium term, if the themes above are worked upon, to rebuild consumer trust, intelligently incorporate environmentalism, harness new digital capabilities and grow operational and financial resilience. But the medium term could take a long time to reach us.
One immediate impact of hysteresis – supply contracting with the collapse in demand – is that if your competitors go bust first, you can pick up some of their customers. But if someone picks up ‘discarded’ assets on the cheap, they can then operate on a different cost basis to you. Any positive effects of redistributing the remaining demand can be short-lived, unless supply genuinely exits. It also presupposes demand remains broadly the same, but that may be optimistic if we are going into a recession with jobs being lost and (at some point) taxes increased to pay for the huge increase in government borrowing.
It is probable that within the whole travel industry, some sectors may struggle more than others, at least in the short term. School travel, major conventions, ocean cruises are candidates where the group aspect of the product may increase the perceived or actual risk, thereby making forecasts particularly uncertain. It also seems likely that the wanderlust in older persons and those of greater vulnerability will be more sharply impacted and, if they still wish to travel, may switch to more local or domestic alternatives. Businesses that rely on a high proportion of such customers may need longer to re-establish confidence. Some aspects of regaining trust are within their control – such as having well-trained staff with suitable protections, new hygiene and distancing protocols – but some are not – such as how well the pandemic is, or appears to be, controlled in the wider community.
Even sectors noted traditionally for their resilience – like youth travel – may find they do not simply bounce back quickly. While the virus may be a very low threat to those under 40, and young people typically show scant concern over risks to their health, sharing a dorm room with a bunch of strangers or going to a crowded concert, bar or party may put some people off. Especially if in the next week you need to visit your grandmother or meet a friend with an underlying health condition. The fact that transmission can occur without the infected person showing any symptoms makes more normal self-isolation self-discipline quite tricky.
Winners in this new world of travel are therefore likely to be those who can function well – and make money – with lower occupancies or volumes while still leaving customers with a memorable and positive experience. It is that simple really.
Carl Michel is an Operating Partner at The Strategy Exchange, a Visiting Lecturer at the City University of London and is Chairman in several travel businesses.