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City Insider: Travel can look forward to a vintage 2014

City Insider - FT journalist David Stevenson on the travel industry



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Our regular columnist David Stevenson gets out his crystal ball and predicts that the coming year will be one to relish for the travel industry

Hopefully all the wet and blustery weather over the festive season hasn’t completely got you down, and now you’re looking forward to what I think will be a vintage year for travel.

To understand what might be on its way, lets kick off with a “helicopter” – big top down – view of the direction in which most financial strategists and investors think we’re heading in the coming 12 months.

The good news is that most investors are fairly confident about 2014, with what’s called a “risk on” world view very much the norm – that when it comes to investing it’s absolutely worth taking some extra risks in order to bet on growth.

That view is largely built on the reality that in both the US and the UK consumers are coming out to play again.

That positive vibe has, of course, filtered down to the travel industry, pushing ahead the share price of the leading players and giving some hope that 2014 might be the best year yet since the end of the global financial crisis.

Both Tui Travel and Thomas Cook finished 2013 on a largely positive note with ‘in line’ expectations for growth, powering in Tui’s case what looks like a projected 7% to 10% increase in earnings.

Personally, talking to front-line economists who spend endless hours looking at the hard numbers, I’d be a bit more optimistic than either Tui and Thomas Cook, both of whom have learnt from bitter experience to be a tad cautious.

Summer 2014 should be a great season and I wouldn’t give much credence to the cynics who suggest that the recent upturn is almost entirely the result of central bank intervention and increased risk taking and credit creation by consumers.

There’s no denying that these are indeed the twin drivers of the recent pickup, but what on earth do we expect to happen?

Economies are nearly always led by interest rate decisions, and consumers (and businesses) have been bingeing on debt for decades – why on earth would they stop now?

The painful restructuring that is needed here in the UK – more manufacturing, less debt – will take at least a decade to accomplish and probably won’t be helped by a high level for sterling.

Then again, much of our recent growth in the last two decades has been as a result of service sector growth (much of it exported internationally) and this part of the economy has been growing aggressively in the last year.

We should though keep an eye on two big moves on the macroeconomic front – one in exchange rates, the other in bond yields.

In the world of foreign exchange I think the big ‘macro’ move of the next few years is that the dollar might increase substantially in value against both the euro and sterling (which conversely means sterling will weaken against the dollar).

The driver here is that the US Federal Reserve central bank will start to taper quantitative easing which will eventually result in an increase in short-term (bond) rates, which will in turn ‘benefit’ the dollar.

Dollar strengthening is absolutely the consensus view on Wall Street at the moment with firms like Bank of America calling for the dollar to reach $1.24 on the euro from its current $1.38, which implies a 10% move.

The US Fed will be trying very hard to walk a tight rope between pulling back in its activities, which in turn will allow those short-term (bond) rates to increase while also not tipping the economy into another recession.

This should prompt us to watch out for the second key signal – the interest rate paid out by the US government on its ten year Treasury bonds.

This rate has moved steadily upwards in recent weeks and it’s currently cruising at around the 3% mark.

UK bond yields will almost certainly go in tandem with this rate, but the Fed will be eager to see what happens when that yield starts to clear 3.5% and maybe even 4%.

If the US economy continues to power ahead after evidence of a small ‘breather’ in recent months, we should expect the quantitative easing to carry on being scaled back. But those higher bond yields will trigger other interest rate moves especially for credit, making any form of borrowing more expensive.

But again we need some perspective on the threat of increased loan costs.

Interest rates are unlikely to go up at all in 2014 and even if they did they might only rise say 0.5%.

The knock-on effect might see other rates rise by say 1% but we need some perspective here, especially around consumer spending.

Most UK consumers pay a mortgage rate that averages around 3.5%, with many paying above 4%, so a 1% increase in interest costs will be unhelpful but hardly the end of the world.

If we assume that the average UK home owner spends between £400 and £700 a month, a 25% increase in interest expenses will probably only add between £150 and £200 a month at most. And that assumes a fairly bleak scenario.

As for ordinary consumer credit around personal loans, the average ‘dirty’ price (actual price paid in terms of interest charge) is probably between 8% and 10% including credit cards and loans – this might rise by 1% to 2% but again the impact wouldn’t be cataclysmic.

My own sense is that we’re midway through a four to five-year business cycle which still has a good year or two left on the ‘clock’, making 2014 one of the better years.

But that doesn’t mean that there won’t be any scares as the US Federal Reserve tries to pull off its balancing act (too much tapering could push the US economy into a stall) although it will be helped along by declining energy prices in North America.

The consensus view is that Brent oil prices might push decisively past $100 a barrel and then head towards $90.

The big dark clouds on the horizon probably sit further afield, on the continent in Europe and in Asia.

One evident risk could be that the European banking system lurches into crisis following the soon to be completed banking asset quality review – this might discover that many ‘Club Med’ countries have a large number of local banks whose entire net worth (many times over) consists of local government bonds rated as entirely ‘risk free’ by the regulators – at the moment.

If this asset review did decide to challenge that idea, we could see big trouble in Italy and Spain.

Many investors are also wary that as tapering finishes and markets become more volatile we could see more bumps ahead in the road for recovery in emerging markets, especially in Asia and Africa, with periodic panics leading to currency runs and sudden liquidity seizures.

Turkey is currently everyone’s favourite ‘country to worry about’, closely followed by South Africa, Indonesia and Brazil.

Personally if I had to be on alert for one big blow out risk I’d be looking closer to home at France where a political crisis could put the National Front into a political pole position, an outcome which is so dire that most investors would rather not even think about it.

Travel industry trends?

Turning to more industry-specific trends let’s start by looking at the products offered by the travel industry giants and how they need to change in the next 12 months.

“Wow” service is a terrible expression but it does do a great job in reminding us that the digital review economy (TripAdvisor et al) has sharpened the knife used against those travel businesses which boast unacceptable dreadful customer service.

The whole American service ethic is now very much a standard for business and I can only see more and more businesses investing real money in making certain that front of house service is in tip top shape. Maybe it might start at Gatwick airport.

While we’re on that “wow” theme I think we could apply the same thinking to the inexorable rise of the travel industry retail shed also known as the experience travel store that isn’t sitting in a poky high street shop.

This trend of diverting the customer to technology-enabled, content-rich out-of-town stores will absolutely intensify.

One message that did come through loud and clear from the recent trading statements from Tui and Thomas Cook is that the all-inclusive package holiday as provided by the travel agent is very much alive and kicking and in fine form. Expect more of the same as the travel industry overall has a solid 2014.

In terms of hunting down big growth opportunities, Chinese cruise holidays has to be the travel industry’s next great money spinner.

The potential for this ship-based, quality-controlled, safe, all-inclusive package holiday is absolutely enormous, and although Chinese travellers may be bingeing on their global city breaks at the moment, that’ll change as the big cruise giants start rolling out their local Asian fleet. For the likes of Carnival this could be an absolute game changer.

Turning to all matters technology I’d wager that we’re really very close to saturation point for the whole online booking revolution. In fact I’d argue that that point has already been reached in the US but I think we’re probably only a year or two behind here in the UK.

Yet this doesn’t mean that the online travel sector won’t continue to grow, just that growth will be powered by consumers spending more money on each transaction rather than lots more transactions being taken away from the high street.

We’ll also see a change in the shape of travel with the remorseless rise of always on commerce, enabled by mobile phone booking platforms, and the emergence of the automated traveller who will use their phone to plan, book and facilitate every part of the journey experience.

Crucially the pre-Christmas bloodbath on the UK high street (for some at least) has given us one valuable technology lesson – retailers who can’t absolutely deliver via the online experience are dead in the water.

A superb web presence, brilliantly integrated with the offline product set, is an essential requirement for any travel company as we enter into 2014.

I’d also suggest keeping a beady eye on two smaller, more distinct smaller technology trends playing at the moment, both mentioned in this column on previous occasions.

Firstly we’re likely to see an intensification of the trend to turn travel websites into content-driven channels, in effect turning a brand into its own content marketer and broadcaster based around extensive use of video.

Secondly ‘person-to-person’ travel, based around concepts like car sharing and AirBnB, will only become even bigger and much more mainstream.

I’ll finish on one last fun area that everyone in travel likes to talk about – new customers.

2014 will probably be much like last year in that we’ll see ever more focus on niche targets with the all important millennial Generation Y becoming absolutely crucial, especially as the growing economy gives this discriminating young age group much more extra spending power.

But if we’re talking really niche I’d also look for rapid growth based around gourmet travel (seen the TV programme, tasted the food, visit the resort).

Plus the inexorable rise of the Panks – professional aunt, no kids, under 45 – with lots of spare time and money and a love to travel, sometimes with younger nieces and nephews.

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