As the eternal optimist, I have been trying very hard to
ignore some of the recent warning signs we have seen in MMGY's research as well as
in the economic news and revenue forecasts that pervade around the world.
One
could choose to be optimistic. After all, we have had 100‐plus straight months
of travel expansion in the United States, and there are now parts of the world
that are just starting to join the travel revolution, including emerging
economies with hundreds of millions of travelers now spending in destinations
that have long hoped for the benefits.
But despite these positive factors, I
see increasing and worrying signs about where worldwide demand is headed and
evidence that suggests the U.S. is poised for a slowdown across every travel
category. Among the concerns:
- The MMGY Global Traveler Sentiment Index (TSI)
In the graph below,
the TSI represents eight straight quarters of secular decline in our demand
index, suggesting that American intent for leisure travel has softened
considerably. And this tends to be a harbinger for further demand declines
going forward, especially when you dig deeper into our data to see that price
sensitivity has jumped significantly over this same period, with 34% of
travelers now citing travel costs as the number-one concern - versus only 18%
in 2016 - another bad sign. - Prices are still rising in many cases.
In the short term, we see strength in both the U.S. group and corporate
transient markets but suspect that those sectors will also begin to decline
over the next three quarters. And because commercial demand drop‐off is
trailing leisure, higher air fares and hotel rates remain in place, creating a
further headwind for leisure demand.
So, while this could provide some
near‐term aggregate travel spending increases, RevPAR improvements and airline
profits (the latter because airline inventories are at historic lows), by 2020
we expect corporate demand to reverse, followed by pricing and demand erosion
across the board. And if international demand in American gateway cities
continues to soften, this would not be good for rates in places such as New
York City and San Francisco. - Economies around the world are softening, and travelers are on notice.
European disharmony, U.S. and China trade relations, currency issues, the
new, more restrictive NAFTA and lapsing tax break benefits are all reasons to
believe economic tailwinds are quickly becoming headwinds. In our recent Portrait
of UK Travellers research, for example, we saw over one‐third of British
travelers identify Brexit as a challenge for travel.
According to The Wall Street Journal, 49% of economists
predict a global recession late this year. Yes, that’s only half of those
polled, so the optimist in me wants to believe the other 51%.
The problem: Half
of the 51% think a recession is still coming in 2020, and, by the way, in 2007, only 44% of economists thought we were headed for a recession that came just
months later.
Chance of a recession
Source: Wall Street Journal, 2019
Our industry also faces ongoing security concerns and a heightened anxiety
around travel safety in the world.
While the U.S. traveler has proven to be
resilient in the face of international terrorism, the Zika virus and mass
shootings, we know that these events influence travel demand, sometimes in only
small ways and sometimes in more fundamental ways, such as has been the case in
Egypt, Africa and Central America.
As economic conditions worsen and travel
becomes less of a priority for global households, we do expect security
concerns to further hurt demand for long‐haul travel.
The balance of power for international travel share is shifting east.
Although U.S. and European travel economies are still benefiting from
inbound international demand, this overall demand as a percentage of global
travel has dropped dramatically over the last decade.
India and China, as well
as emerging economies in the EMEA region and pan‐Asia, are fueling growth in other parts
of the world, meaning less proportional demand for traditional destinations as
populations change and global airlift chases these new markets. This chart
reflects where U.S. share of international travel has gone since 2000.
Source: U.S. Travel Association
It has been interesting to watch the massive investments
being made by governments in Dubai, Saudi Arabia and Vietnam to attract more
visitors, and this has an effect on the traditional powerhouse destinations in
the developed world that stand to lose share if they do not continue to grow
airlift, infrastructure and marketing budgets.
If you are not aware of the
continuing debate on open skies, you should read this from the Centre for Aviation (CAPA). This is
but one example of where global competition can also fuel shifts in tourism
demand and where private company interests are sometimes at odds with general
pro‐tourism policy.
What can we expect as we move through 2019 and into 2020?
- Leisure demand will contract below 2002 levels by early
2020, and corporate demand will follow by Q3 2020. There is good reason to
believe that pockets of the market will remain strong, such as affluent
travelers or the Mature age group. In the case of Matures, they do offer some
hope for leisure brands with products or packages that cater to tour business,
cultural tourism or off‐season offerings.
But the problem is that these smaller, niche opportunities
(including young solo travelers and government groups) cannot compensate for
the larger travel segments - such as middle‐class families, small businesses,
corporate and association group segments and long‐haul tours that will
contribute less volume to the market over the next two years. - As a result, we will likely see what we commonly see in
this tougher environment: a drop in fares and rates (i.e., 2008) combined with
shorter booking windows, a shift to more frequent trips with lower spend
levels, shorter‐haul itineraries, as well as a tradedown on product and amenity
sets.
Take a look at what happened in 2008 below. Spending declined faster and recovered more
slowly than total trips, which also means more domestic travel in‐country than
trans‐Atlantic or trans‐Pacific trips. The question is whether we will bounce
back quickly, as in 2009, or more slowly, as in 2002. - It’s possible that the gains brand suppliers have made
against third parties will be reversed. Especially in the hotel space, and as
demand contracts, we would expect to see less revenue management discipline
among suppliers.
Franchisees and owners in hotels and VRBOs - plus cruise and
gaming operators - will be quick to turn to discounted channels, high‐cost
distribution sources and third‐party group aggregators in search of volume.
You’d think past recessions would be a cautionary tale, but we doubt it will
change anything this time around. And I know it’s easy for me to preach
discipline when I don’t own a hotel or a $2 billion ship, all with perishable
inventory, but certainly OTAs and other third parties have more to gain in a
tight environment.
Just as Marriott has negotiated its new Expedia deal and cut
meeting planner commissions to 7%, we would expect higher commissions to become
more tenable as business is harder to find. We will see how this plays out in
air, rental car and attractions, but we would expect even these sectors will
rely more on sources such as travel trade or discounted aggregators. - Amazon will move into the travel space and completely
alter the landscape. I know there is no formal announcement or even tangible
evidence that this is happening, but I still call it a certainty. Put another
way, Jeff Bezos would be crazy if he does not take advantage of his programmatic
data, Prime membership, ability to sell at a discount and potential to curate
unique off‐the‐shelf travel packages at a lower distribution cost to suppliers.
According to our 2018 Global
Portrait of American Travelers, 44% of travelers say they would trust
Amazon to build and sell a travel package (a far higher percentage than No. 2-ranked Google), and in that the company has already revolutionized pharmacy,
grocery and retail forever, it’s a good bet they will do the same in travel.
In
a tightening economy, Amazon could also become a better option for both consumers
and suppliers looking to connect supply and demand.
* In part 2, publishing Friday, Reid will offer suggestions on how travel brands can prepare for a potential recession.