Volatility provides an opportunity for firms to prove their resilience credentials, says OC&C Strategy Consultants’ Rebecca Henshaw
As summer draws to a close, many in the sector would have been hoping they could now put the disruption caused by staff shortages at airports and rail strikes behind them. However, in spite of positive consumer sentiment towards travel, the outlook for the rest of year is challenging with inflation biting into customer demand and labour shortages hampering recovery. But for businesses, times of disruption can also be seen as opportunities to refresh old practices and seek new solutions. While it will certainly be challenging, travel businesses can use the remainder of 2022 to plan for a more fruitful future ahead.
Considering the short-term outlook, there are a number of pressures squeezing the industry and slowing the strong Covid recovery. Inflation, labour shortages, and weakening consumer confidence are holding back the industry at a time when the pandemic induced standstill is still fresh in the mind.
As has been the case for other industries, rising fuel costs have emerged as a new cost strain on the travel sector, with prices hiking at 30-40% across geographies as a result of the war in Ukraine and Russian sanctions. Air, cruise and other transport are particularly vulnerable to this.
So far, customers appear to be absorbing inflationary impacts and protecting their travel spend to fulfil their pent-up needs. However, as banked savings continue to dissipate, the recovery is likely to slow as consumers look to save where they can. Consumer confidence is still below even 2020 levels, and this is unlikely to recover in the near future as the cost of living crisis continues.
The result will be a mass market squeeze with lower income customers shifting to shorter, budget and domestic travel options. Data from OC&C Strategy Consultants has found that , while sentiment towards travel is positive, households are 21% more likely to book a short leisure break than a long vacation in the next 3 months. However, there is some positivity to found amongst the higher income segments, who are more insulated from the impact of inflation and make up 60-75% of overall travel spend.
The travel sector is also struggling to shake off the longer-term hospitality labour gap, meaning that many operators are unable to meet pent-up travel demands. In the US, the capacity of hospitality labour falls short of demand by 11%, compared with March 2019 levels. Added to this, the rising cost of labour, exacerbated by inflation-driven wage increases, is putting pressure on operators’ bottom line. This will only get tighter as the year goes on.
Travel bounced back quickly across the group as restrictions were lifted, however there are still some international routes facing limitations. For instance, a 14-day quarantine still stands for travel into China. Recovery on these restricted routes remains low, at just 5-30% compared to 2019 levels. It is difficult to predict how these corridors might reopen as we continue to monitor how Covid develops.
While this year will certainly continue to be challenging for the industry, there are also opportunities for innovation and change that can make travel businesses stronger and more robust in the longer term. There are a number of strategic choices travel businesses can make to navigate the increasingly challenging environment and help mitigate the pressures.
Management teams can review their labour proposition and leverage technology to bridge labour gaps. Nearly four in five (78%) of hoteliers expect to increase hotel tech investment in the next 3 years for this reason, according to a report by OC&C Strategy Consultants . It is also a critical time for companies to be thinking through their pricing and supply strategies, as well as active customer retention, to navigate the period of demand and margin pressure.
In many cases, consumers are also already signalling the changes they want to see. Over two-thirds (65%) of consumers want to see more sustainability information from lodging and transportation providers, and 70% feel overwhelmed starting the process of being a more sustainable traveller. Businesses that improve and communicate their sustainability credentials now can gain a competitive advantage and are more likely to attract customers and succeed in the long-term. Although in the shorter term, it remains to be seen whether inflation pressures will impact travellers’ ability to pay for sustainable choices
There are other shoots of positivity to be found amongst the difficulties. Total global M&A deal value reached all-time highs of $5.9tn globally in 2021. Despite macro-economic headwinds, namely supply chain friction, geopolitical issues, inflation, economic slowdown, the fundamental drivers of M&A activity continue to exist. Investors still have dry powder they need to deploy and the private debt market is still open. Businesses that demonstrate their Covid, recession-resistance and future-proofing abilities are prime targets for PE houses.
The remainder of 2022 presents volatility and challenges for the travel sector, some unexpected, others longer-term. The industry must see this as an opportunity to prove their resilience credentials and invest in technology, sustainability, and trusted consumer brands. From this, a robust, refreshed and agile travel sector will emerge, fit to tackle predicted and unprecedented change.