HOW CORONA AFFECTS TRAVEL, THE TRAVELER MINDSET AND THE POST-CRISIS TRAVEL LANDSCAPE

Clayton Reid, CEO - MMGY Global

The Danger For The {Travel Industry} is Real.

And, of course, foremost for people who are infected, too, as the health crisis will surely grow over the coming weeks and months. But never before has the travel industry seen a crisis like COVID-19. In no small measure because the virus appears to be spreading more rapidly and shows to be more dangerous than pandemics of past decades. But the primary reason this dystopian-like situation is challenging travel more than ever before is predicated on two factors; 1) China's travel influence has become more pronounced over the last decade (over 180 million Chinese have passports) therefore its larger impact zone has rippled through the global economy, and 2) Social media has allowed the narrative to spin out of control, with needlessly grim images and erroneous claims gripping people around the world in a vice of fear. Have you tried to buy toilet paper or hand sanitizer lately?

To be clear, I am not a virologist, nor is John Oliver, but his POV captures some sense of how people are vulnerable to hysteria and while they should be prudent, they should also not be panic-stricken. I am hopeful that the U.S. Administration will not call for an all-out travel ban, which would definitely negate much of the following point-of-view on recovery. And there is some conjecture that a domestic air travel ban could be in place as early as March 19, and moreover that a federal quarantine could be enacted as a quasi-Marshall law is enforced still this month. This could present a situation where many travel industries will require bailouts and massive tax breaks to offset a long-term catastrophe.

What are the most relevant facts for travel's response?

It is important to pay attention to data about both the virus as well as how travelers are responding.

1) Travel is at the forefront of the economic carnage and expect over $2 Trillion+ to be carved out of global travel in 2020, with an $800 Billion+ impact in the U.S. alone. Airlines are facing a $115 Billion revenue shortfall, and I would expect to see a smaller carrier fall into bankruptcy (probably in Europe). It will take months for even the strongest airlines to recover, and they are cutting flights and operations drastically to enable cost savings. How quickly they will be willing to build back those capacities is an open question, and will likely rest in some ways on how much government assistance is offered. Travel demand will be there again before June, and GDP will still grow (at least in the US), so how quickly industry works to stimulate and support demand will be a predicate for the pace of revenue returns.

2) The primary impact will be felt in Asia and the Pacific Rim. Hundreds of thousands of trips have been canceled in Asia and the majority of that halt affects intra-China as well as regional destinations such as Australia, Hong Kong, Singapore, Japan, South Korea and Macau. But the Chinese traveler spends over $10 billion/year in the US, and when you combine that with the growing intra-US travel halt, the pain will be very real. By the way, the fact that COVID-19 originated in China is no excuse for the explicit bias being shown online, and in news outlets, toward Asians. This is a global problem, and with infection rates growing rapidly in Europe and the United States, the spread of economic damage is growing too. It will get worse in March and April before it gets better, and I would not be surprised to see most Las Vegas casinos close, along with theme parks and attractions as well as restaurants and bars in major cities shuttering. This could last into late April or May.

3) Cure rates are increasing exponentially in parts of the world where the virus first appeared. Not only are people recovering quickly, though it is important to note that the mortality rate is higher than the common flu and norovirus, but they are also beginning to go back to work. If you are interested in seeing infection rates and the associated statistics globally, see this link from Vox, which includes nine facts about symptoms & the virus as well as a look at specific travel impacts.

4) This crisis is as much the same as Swine Flu and SARS as it is different than Swine Flu and SARS. In 2003, we saw an instant decline in travel demand as SARS infections increased, and the same happened in 2009 with Swine Flu. If you look at passenger traffic over the last several weeks, you get a sense for how this immediate industry decline mirrored those of '03 and '09.

But Coronavirus is different as noted earlier, both in its rapid spread and in the resulting fear mongering that has deepened the economic impact. It's also different in the way travel has been asked to play "the" role in "social distancing." The industry has been placed in a position of closing, canceling, warning and dissuading, which while prudent makes the economic impact far more reaching than in '03 or '09. We suspect the height of this impact on travel will be in late March, April and early May as reported infections grow substantially, but will begin to abate some in late May and June, once the fear is replaced with understanding and action.

The good news is that we expect that a recovery will parallel previous pandemics in the rapid nature of returning revenue tied to pent-up demand. Business wants to get moving again (with most assuredly massive gov't stimulus), people will need to meet again and vacationers will quickly re-book once the fear is abated. Take a look at how quickly travel returned in 2003.

And already in China you see the beginning of a hotel recovery as bookings pick-up steadily, albeit still well below norms. Booking pace is up 230% for airlines and more than 40% for hotels, with the pivot happening in just days.

So how is the traveler responding? With great fear. Trip cancellation rates in the U.S. started to trend around 5% in the early weeks (excluding cruise which skews the data much higher) and has now eclipsed 60%+ in the go-forward weeks of Spring Break and April. Group and meeting cancellations have had the largest impact on hotel and tourism interests, and we expect year-over-year consumed hotel rooms to be down over 80% in April and possibly extending into May depending on what the infection curve looks like. Airlines and rental car suppliers are also seeing significant reservation cancellations and are now forced to reduce routes and fleets. It is conceivable that domestic airline load factors will fall into the 45-50% range, even with capacity reductions, and if government shuts down flights all together for 14-20 days, expect a slow return to mainline/full route-map service. Mainline consumer carriers are now resorting to carrying cargo instead of passengers.

In looking at MMGY Global data on the traveler response during Swine Flu, you get a sense for how travelers think about decisions during crisis. 31% canceled outright while the balance modified their decisions immediately.

We have seen this behavior consistently with a variety of crisis, including terrorist attacks and medical emergencies such as Ebola or Zika. Naturally, both leisure and business travelers lean toward caution. In the current situation, social listening analytics and anecdotal booking data suggests a higher cancellation rate, largely based on government response, social media influence and universal health professional warnings. We also know that the cascading effect of groups and events canceling is a major problem as it is difficult to re-book that business in out months, as the recovery begins to take hold. It will be impossible to fully recover lost group volumes in the second part of the year. Expect "force majeure" to become a buzz word during and after this crisis, as contracts are canceled and entities legislate what financial obligations will still be required as part of cancellations. Here is great way to track meeting cancellations and what is being re-booked, from Northstar Meetings Group.

As it relates to transient volume, in our latest evaluation of MMGY's travel segmentation profiles, we have identified an important subset (19% of travelers) who are still willing to travel, in the face of government advisories and global crisis. This supports suppliers who remain aggressive in a mid-term window, hoping to attract as much travel revenue as possible in the midst of the recession recovery. We also know that leisure travelers become emboldened to return to travel much more quickly than commercial interests, whether by plane or car.

We were headed to recession before COVID-19

Our planning and research teams have been tracking a secular decline in leisure and business travel sentiment for six quarters, and group as well as international demand have been softening since November. So, the virus comes at a time when travel strength was tepid at best. And on top of declining demand, the travel industry is adding historic new capacities across air, cruise, rental car and lodging, meaning rate compression will be yet more difficult to achieve in a recovery.

Three charts to underscore this point for you (traveler sentiment since 2007, room demand trends and international share of global travel) that are all pre-corona:

So the bad news here is that our industry was vulnerable before February. But perhaps some good news comes from JP Morgan and others who suggest this crisis might give the global economy permission to call a recession bottom whereby allowing a recovery from COVID-19 to move in lock-step with an economic recovery (almost a post-war effect), importantly in a v-shape vs a longer, slower slog down and then back up (the dreaded u-shape). For financial markets, there is early evidence with the Chinese market performance that an inflection point has been reached with decline of infections and a resurgence in the SSE.

It is my view that we could see a very strong travel resurgence as we move through Summer and into Fall, a call for the industry to prepare promotion and operational capacity that facilitates both leisure and corporate demand that might look a little different, but that will nonetheless be real.

What is important about positioning for the eventual recovery?

People will debate the timing of a returned strength to both the economy and to travel. We would argue that by late May we will see the return of travel demand, though global tour operations, group and business travel will be laggards to transient leisure travel (chart below showing this relationship coming out of the Great Recession). And, importantly, this is happening at a time when the hotel industry needs to fill 2 million+ new rooms that are in development today, which in effect drives aggressive revenue management strategies that place a premium on occupancy vs rate.

Many travel operators will need to position for transient and group business (ie social/SMERF) that looks different than traditional sources. An ability to replace lost demand from areas such as government or association group blocks as well as corporate FIT means recognizing these sources will likely trail individual trips and niche segment demand. The timing of Summer vacation could be a tailwind for mid-week volumes, and it is conceivable to see a Fall rebound in commercial traffic, including international demand as tour operators and wholesalers regain their footing. We have also been seeing a substantial increase in road trips in the U.S. market over the last two years, which can will buoy certain segments of the industry in the early months of a recovery.

It is also incredibly important that support and investment continue (and perhaps increase) for organizations such as Brand USA and US Travel Association. Both will be "tip of the sword" in terms of driving economic recovery which travel will surely lead. Read this statement from the UNWTO emphasizing that travel is the key for global strength.

What should be the focus as we emerge from a travel recession?

Winners in the current environment will remain aggressive and see the importance of a defined value-based strategy (note to revenue managers, this does not have to mean deep discounting). This is a time for credible brands to continue the dialogue with consumers, with the proper attenuation of message. Also, understanding the changing patterns of specific traveler segments will allow smarter and more effective sales and marketing strategies that produce Return On Marketing Spend (ROMS) as the recovery begins. Pockets of the traveler community will return more quickly than others (Millennial families, retired couples, small corporate and social group, affluents), and knowing that trip type will evolve differently (rise of road trips & visiting friends and family vs. long-haul trips, and; more frequent/economical trips vs trips-of-a-lifetime) means altering your marketing and operational approach. Paying attention to your data and social listening tools to tap into the traveler mindset will be crucial for those who want to emerge stronger. The importance of full social and PR strategies should not be undervalued, and maintaining a voice with current and prospective customers is vital. Marketing has never been so valuable.

You should also realize that travelers will expect something extra as you lure them back, which means special fares, a recognition of their loyalty, interesting amenities or partner offers. I suspect there will be a knee-jerk reaction to go low-funnel discounting with marketing investments vis a vis paid search, meta, email and rate-driven loyalty bounce-back. This is not necessarily a bad path, given past consumer behaviors, unless the discounting gets out of control. Our industry does not always have a great deal of revenue management discipline when forecasts soften, even knowing that shortening booking windows and travelers' willingness to travel remains high and will materialize. Growing inventories, weakened cashflow and an aggressive competitive market often equals price/fare wars.

It will also be interesting to see if traditional OTAs such as CTrip, Expedia and Booking will regain traction (after years of lessening influence) because suppliers will rely so much more on 3rd party volumes. Even non-traditional disruptors such as Airbnb, Deem and Helms-Briscoe could stand to gain considerably in a recovery, and Google stands to benefit the most as it leverages its data, marketshare and evolving travel technology to continue its dominance of traveler influence and booking information.

Brand, yes Brand

Now is the time to focus on brand, not just retail-driven offers or last click attribution. We know from past recessions that travel brands investing in a unique narrative early in the travel discussion with consumers stand to gain marketshare. Whether you're a resort in Greece or a small attraction in Florida, telling a story that includes elements of social purpose, experience-driven offerings and a general connection to the inspirational part of travel is important. Today, successful operators understand that branding and loyalty are a collaboration with customers & influencers that includes empathy for what the traveler expects you to deliver. Avoid the instinct to make it just about price or to talk "to" the consumer instead of "with" her. Recent studies by Forbes and Amazon prove that brand matters to consumers, and in a commerce environment of rate parity or geographic similarities, the brand story can make the difference in converting business.

We also do not expect this current crisis (or a soft economy) to reduce the importance of sustainability and social purpose in the minds of travelers. Programs from brands such as JetBlue, Marriott and Princess Cruises as well as destinations such as Costa Rica and Colorado will continue to be important as travelers demand more attention to the environment and social justice. Another reason to connect retail inducements to something larger, something that connects with a more aspirational calling.

See past the moment

I have been surprised to see the panic that has taken hold around coronavirus, and while I certainly understand it is a situation to be taken seriously, I also have lived through enough challenging events to know that normalcy will return. Those that see the long-game in both how they adjust future crisis preparation as well as in preparing their marketing plan to drive business still this year, can emerge stronger. I firmly believe that we will be in a very different place in 60 days and that we can still see a more positive year in the global travel industry than has been prophesied. I can also guarantee that both private and government institutions will have a new appreciation for how incredibly important travel is for both the international economy and for a reclamation only possible with the connection of global communities through travel.