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
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.
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?
1.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.
2.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 trade down 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.
3.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.
4.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.
By Clayton Reid