Tourism in the aftermath of COVID-19
Kim Catechis and Chris Schade, Research Analyst at Martin Currie Australia discuss the shift from international to domestic tourism, and the outlook for the sector.
The tourism industry will be significantly smaller going forward. Unfortunately, many will struggle to make it but that provides a good opportunity for the survivors.
Kim: Hello again, thanks for tuning in. This is the AFTERMATH and today we are talking tourism, and I'm discussing it with my colleague from the Melbourne office Chris Schade. Chris, really good to see you.
Chris: Hi Kim, likewise.
Kim: Now tourism is a fantastic industry, no matter where you are in the world. It brings in valuable foreign currency, it employs lots of people and the really big additional positive here is that you can employ lots of semi-skilled and low-skilled people too. There are lots of jobs that money tends to spread in the local community so that's fantastic.
We know that there is a strong relationship with GDP growth, so in positive GDP growth years the relationships about 1.2 on average.1 However, in down years, we know there is a really powerful relationship there too. So for example, 2009 world tourism collapsed to the extent of five times the fall in GDP.
Now in that kind of scenario, which I guess we're replicating here Chris, how would you sum up the current state?
Chris: It’s a similar context you know, pre COVID the sector had been a really good growth sector, growing faster than GDP over much of the past decade post the GFC, as you indicated with the sort of multiplier of GDP growth. And a key driver of that was certainly Asia, so we have seen a massive increase in tourists, particularly out of China, over the last decade.
Also, post-GFC gave rise to an environment of fairly solid business travel, and also we think we've seen a consumer shift towards experiences. So travel has really benefited from that shift. So that was sort of the outlook leading into COVID, and then obviously came the biggest shock the sector has seen in probably a century.
With peak revenue declines across key sector activities, whether it be airlines or cruises or hotels or local tours, of 60-80%+2. And in many cases revenue declines are still sitting at those levels, so a dramatic shift in terms of revenue decline and therefore earnings decline. It was helped to a degree by stimulus which is obviously temporary so that delays as opposed to removes the impact.
Perhaps just a final point the sector relies quite heavily on advanced customer payments for funding, so not only have we seen quite a large revenue and earnings hit, we've also seen basically a removal of a key funding source. So the sector is in pain, to be honest, and you know it's going to be a tough recovery from here. In summary, a really challenging environment for the sector.
Kim: That makes sense. So tell me, what do you think are the lasting impacts on the sector going forward?
Chris: It will take a long time for business and international travel to return to their pre-COVID levels.
In terms of business travel, through COVID, people have become much more familiar and comfortable with video networking tools, and we simply think a lot of business travel that might have been necessary, or at least favoured, pre-COVID won't be necessary in the post-COVID more connected world.
We also think the industry will be significantly smaller going forward, so a number of players, particularly small players that don't have access to funding markets, will struggle to survive as they go through the recovery process. Unfortunately they will struggle to make it.
Now that provides a good opportunity for the survivors, so likely the larger players that do have their balance sheets in good shape, can take market share on the other side of this crisis. So that means that just because the industry is smaller, their businesses don't necessarily have to be smaller.
We certainly seen a lot of the more nimble travel businesses, with better or at least more flexible management, take this opportunity to remove some significant costs from their business, and also shift the way of doing business. So more digitally enabled business, less face to face interaction. So that means they'll be more leveraged from a profit perspective to the ultimate recovery.
Kim: That all make sense too. So, tough times for most. When we turn to outlook, what do you see?
Chris: It’s a mixed bag, the good news is domestic tourism accounts for around 70% of the global industry3, and Australia fits quite nicely into that statistic. So there's quite a bit of optimism from the sector around a domestic tourism boom, without getting too excited. Key drivers of that are pent up demand from being in lockdown, restricted to your local areas, and also an element of forced savings.
Also, surveys of travellers show people are quite willing to travel domestically, certainly in their cars, so shorter sort of trips will probably do the best, at least initially. But even domestic air travel, people are much more willing to do than they are international travel, so that sort of bodes well for the domestic industry.
Certainly, on a sustainable basis, while international travel remains closed, it's hard to see the domestic industry achieving the same level of overall activity. So we're still talking about probably quite significant decline. It's still a challenging outlook, and we can't forget there's still that sort of delayed economic hit that stimulus is currently masking that will hit this sector quite significantly. As you mentioned earlier, there is that economic multiplier effect, so yeah as I said quite a mixed bag.
Kim: Chris, thank you that was really helpful. Thank you all for listening and watching. Please send in your feedback, good or bad, as I keep saying every week and tune in next week, we're going to move to another sector.
1Source: UN World Travel Organisation. https://www.e-unwto.org/doi/10.18111/9789284421152
2Car rental: AVIS Budget Group Q12020 Earnings Call. Transcript link: http://ir.avisbudgetgroup.com/static-files/7cdf3ca7-c207-48f7-a8b9-84c9c338cbfe
Airlines: Direct conversations with QAN (analyst calls) and widely reported by most airlines.
Hotels: McKinsey report: https://www.mckinsey.com/industries/travel-logistics-and-transport-infrastructure/our-insights/hospitality-and-covid-19-how-long-until-no-vacancy-for-us-hotels#
Cruises: E.g. Celebrity Cruises suspension of cruises (i.e. zero). https://www.celebritycruises.com/au/travel-alert/voluntary-suspension-of-cruising
3World Travel & Tourism Council https://wttc.org/Research/Economic-Impact/moduleId/1445/itemId/91/controller/DownloadRequest/action/QuickDownload
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