Impact of COVID-19 on Global Travel & Tourism Industry

Before looking into the specific impact of COVID-19 on the travel and tourism industry, lets start with a quick comparison of industries. We all know that COVID-19 will impact all major industries but the impact is certainly not going to be equal across industries. In case of several industries, apart from negative impacts, COVID-19 has also created certain opportunities.

For example, in Medical Supplies, Consumer Packaged Goods (CPG), Food Retail, Pharma, Technology, E-Commerce, there are some positive impacts as well. People are purchasing groceries/food and medicines in bulk, they are getting more and more tests done and the use of technology as well as e-commerce has also substantially increased.

However, in case of some industries, the negatives significantly outweigh the positives. Some examples are Financial Services, Non-Essential Manufacturing, Construction & Real Estate, Oil & Gas, Automotive and Travel & Tourism. Travel & Tourism is most severely impacted industry due to COVID-19.

These days, when we read the news about the travel and tourism, the key themes that stare out are 'severe impact on industries', 'revenue losses', 'cash flow issues', 'jobs at risk', 'bankruptcy risks' and that the 'recovery may take a while'. Overall, it paints a gloomy picture and it has been worsening with every passing week.

So, how bad the situation really is?

Lets start by looking at some global statistics regarding international tourist arrivals. In the chart below, one can notice that barring few cases caused by abnormal events, the international arrivals grew each year. The first case of year-on-year decline happened in 2003, which was caused by SARS outbreak. It led to 0.4% decline in the international tourist arrivals. The second instance of year-on-year decline happened in 2009 due to the Global economic downturn and it caused a decline of 37 million in the international tourist arrivals.

And now, COVID-19 will cause the decline in 2020. United Nations World Tourism Organization (UNWTO) estimates that international tourist arrivals across the globe can decline by 290-440 Million in 2020.

It is important to note that several analysts are estimating figures regarding the impact. However, due to the unparalleled nature of the crisis, it is extremely difficult to quantify the impact of COVID-19. This is evident from the fact that estimates by several experts range from USD 400 Billion to USD 1,200 Billion!

Any quantification of impact should be taken as an indicator towards where the industry is headed instead of reading too much into the numbers. For any quantification of impact, a key input variable is going to be the duration of the crisis and that is a big unknown at this stage. Hence, instead of reading too much into figures, it is important for industry stakeholders to keep a track of the developments and best practices to derive key learning, understand potential opportunities as well as risk mitigation strategies for short as well as long term.

Segment Impact Analysis: Airlines

A mechanism used by several countries to control the spread of the virus is to put a ban on flights and travel. Though it is a necessary step and is warranted by the situation, it has decimated the airline industry. Impact on international arrivals has already been discussed earlier in this article. International as well as domestic airline travel has been impacted as flight or route suspensions have become common.

For example, on April 5, American Airlines announced that it will operate eight departures from New York’s LaGuardia Airport, compared to 170 in April 2019. Heathrow announced closure of one runway, while Paris Orly has closed altogether and what little traffic remained there has been re-routed to Charles de Gaulle Airport. Even where restrictions are not in place, demand has plummeted, leaving airlines with a conundrum to solve: discontinue routes and ground more aircraft or continue to operate them and risk exacerbating an already calamitous financial situation.

If we compare the impact of SARS vs COVID-19 on the aviation industry, SARS had an impact of USD 7 Billion whereas the potential impact of COVID-19 is USD 314 Billion. This estimate is from International Air Transport Association (IATA) however, it must be noted that IATA has been revising the number upwards with frightening regularity. It estimated the impact at USD 113 Billion at the beginning of March 2020 – later revised it to USD 252 Billion at the end of March and in mid-April, added another USD 62 Billion to the potential impact.

In terms of passenger revenue in 2020 against 2019 levels, APAC would take a hit of USD 113 Billion. The revenues would decline by USD 64 billion in North America, USD 89 Billion in Europe, USD 24 Billion in ME, USD 6 Billion in Africa and USD 18 Billion in LATAM.

In case of Revenue Passenger Kilometer (RPK) percentage change, the highest impact is expected be in Europe (-55%), followed by ME (-51%), Africa (-51%) and APAC (-50%). The impact on LATAM is expected to be -49% and the impact on North America is expected to be -36%. Overall impact is estimated at -48%.

Another area of concern is the jobs that are at risk. As per IATA estimates, there are around 25 million airline jobs that are at risk across the globe. The number is highest in case of APAC – a region where the travel industry has been severely impacted. It must be noted that the estimates are on the basis of 38% decline in RPK where as IATA has now revised the estimates regarding decline in RPK to 48%. Hence, technically, there are even more jobs that are at risk.

In response to the crisis, all major players have taken actions. Capacity reduction is a common theme and all major players have announced reduction in operations, routes, flights and seats. Another key theme that is emerging is around staff adjustments. There have been lay offs, employees have been asked to take furloughs or early retirement and some airlines have also given paycuts. American Airlines and Delta are seeking government support in US. Also, some airlines – for example Delta – have come up with ideas to ensure social distancing even during flights. Delta has blocked middle seats and are now using back to front boarding to ensure minimum contact.

For the airlines to survive and recover, it is crucial that governments extend support in form of direct financial aids, low interest loans or tax relief. The US government has acted decisively, pledging approximately $50bn to support the industry as part of its CARES Act economic stimulus package. Some other governments (e.g. Singapore, Australia, Brazil, China, Denmark, Norway, Hong Kong, Sweden, Qatar) have also extended support. IATA is putting pressure on governments in Europe to act, but so far, little is forthcoming.

In addition to financial relief, careful planning and coordination is required on part of the airlines to ensure that airlines are prepared for post-COVID. Lastly, airlines need to ensure that cancellation and re-booking policies are fair and do not penalize those who cannot travel through no fault of their own. United Airlines have been getting a lot of negative press over cancellation and re-booking fees in recent weeks. Airlines should see it as an opportunity to manage and strengthen relationships with their customers.

On a positive note, there are hints from some countries that airlines would resume operations soon but it would be on a smaller scale.

Segment Impact Analysis: Lodging (Accommodation/Hospitality)

The impact on lodging industry started to show later than other industries under Travel & Tourism. With travel bans, flight cancellations as well as cancellation of (Meetings, Incentives, Conferences, Events (MICE), the occupancy rates and revenue-per-available-room (RevPAR) eventually started to take significant hit. COVID-19 will impact several areas of operations such as F&B, MICE, marketing, financing and employee management.

Key challenges for the lodging industry include;

1. Low Occupancy - Occupancy rates in several markets have fallen less than 20% and they are even in single digits in some markets.
2. Non-Existent Business Travel – This is a major cause of worry as business travel is not seasonal and helps the industry in a big way. Experts believe that once the corporate world adjusts with the current working environments, the need for business travel would reduce in future.
3. Cash Flow: Another key challenge is cash flow. The hotel business is a costly business involving high fixed costs. With low occupancy, cash flow is a major concern for the industry.
4. Other key challenges and concerns include Cancellation of Future Trips, Discouraging Outlook regarding Tourist Arrivals, Declining RevPAR & ADR, and Decline in Consumer Confidence.
5. The crisis also poses existential risks to smaller players in the industry as they lack the deep pockets to see through the crisis. Degree of impact is extremely high in case of small hotels, hotel aggregators, bed & breakfast, homestays and hostels.
6. Marketing is a challenge as well - since there is a risk of the business coming out looking insensitive towards the whole situation. Many tourism organizations have decided to stop advertising during the current crisis. The objective is to strike the right balance and pick the right campaigns.

When it comes to actions by market participants, players are;

1. Offering Free Cancellations: It must be noted that it is not a straightforward decision for some smaller players. It is a choice between having strong relationships vs. easing cash flow. Yet, it is heartening to see that most hotels - of all sizes - are offering free cancellations.
2. Businesses are coming up with Crisis Management Plans - to reduce costs, to leverage any opportunity available and to ensure than consumer confidence does not decline. The plans also include strategies to increase preparedness and to recover in the post-COVID period.
3. Slashing Room Rates: While it is not the most effective strategy, as it proves to be counterproductive in the long term, some players may no longer have the luxury to think long term.
4. Using loyalty programs to lure customers – which could be an effective strategy to recover.
5. Food Delivery: Several players are taking the route, especially luxury hotels. Several 5 star hotels are now sharing online menus with a promise of safety and hygiene.
6. Some humanitarian actions include offering rooms to medical staff and first responders and turning hotels into make shift hospitals, homeless shelters and isolation centers.
7. Cost Cutting Measures include layoffs, sending staff on unpaid leaves, putting hold any renovation plans as well as new initiatives and even shutting some properties.
8. Several players are also seeking low interest loans to manage the cash flow situation.

What is Required?

1. Regaining Customer Confidence would be the first step. Strict sanitary and hygiene measures will need to be applied, with new practices put in place to monitor and control the environment in which the business takes place
2. Preparedness – MICE Events: Keep an eye on the MICE calendar in 2021. Hotels of all sizes and scales now need to attempt and secure MICE events as well as guests attending sporting events in the surrounding area.
3. Consolidation Activities: Since some hotel chains are letting go of properties and some smaller players may not be able to sustain, it would present opportunities for acquisitions. It is important that players go for opportunities that present meaningful synergies.
4. Focus on Domestic Market Opportunities: International tourists may not start coming in significant numbers any time soon. Hence, it is important that hotels try and tap opportunities in domestic markets.
5. Health and Wellness Tourism: Players can create luxury packages for prospective guests who are looking to avoid social contact and safety but are also looking for luxury and comfort. Some hotels are already trying to tap the opportunity.
6. Government Support: Governments will have to play a huge role in saving the hospitality industry. US and some other governments have promised support. Similar support is required from governments in other countries.
7. Support from Customers: After the outbreak is brought into control, hotels and associations should run campaigns asking for support from customers in form of not postponing their travel.

Segment Impact Analysis: Cruise

Lets talk about the key themes that are emerging in the cruise industry due to COVID-19 outbreak. First and foremost, we are witnessing the closure of several ports. Ports in Caribbean, Asia, Southeast Asia and South America, have begun closing their ports to cruise ships. In some cases, ships have been denied port causing inconvenience to the passengers and crew. At the same time, there have been reports about cruises not handling the situation properly and in a sensitive manner causing discomfort to passengers. This attracted a lot of negative publicity to the industry.

We are also witnessing suspension of operations. Many operators have temporarily suspended all voyages, with many others cancelling a number of cruises. Royal Caribbean and Norwegian have suspended global operations till around middle of May. In case of Carnival, several voyages have been suspended till June 26th. In some cases, the voyages have been suspended till the end of the year. Norwegian has cancelled the Alaska cruise from May to September due to fleet redeployment.

Staff adjustments and cost reduction is another theme that is emerging. Several companies are furloughing their employees or making them redundant. It will not be a surprise to see more redundancies across the industry in the days ahead as there is an urgent need for cost reduction. There are several ships that are still at sea and that means they are incurring expenses for payroll, food, fuel and other operating overheads. They also have to run the offices and cover the costs of on-shore staff. Cruise companies will need to put decisive cost cutting measures in place to ensure decreasing cash reserves do not diminish to a stage where the company can no longer operate.

It is looking increasingly likely that cruise companies will not receive financial support from governments. Cruise lines were left out of the US governments US$2 Trillion stimulus package.

Operators are also offering full refund or 100-150% credit. While a credit of over 100% would put pressures on the bottom-line, cruise companies are more worried about top-line at this stage. Offering credit is a smart strategy as it would help in reducing cash flow pressures or ensuring revenues for 2021.

On a positive note, reports suggest that cruise bookings for 2021 are on a rise. Also, reports suggest that around 76% customers, who cancelled a cruise trip in 2020, opted for credit towards a future cruise in 2021 - instead of refund. These are healthy signs and they indicate that the industry has the potential to bounce back once this madness ends.

What are Travelers Saying?

GlobalData, a leading research and consulting firm, has been conducting consumer surveys across the globe to understand the impact of COVID19 on consumer decisions and behavior. As part of a recent survey, participants were asked to respond to the statement that they have changed or are likely to change their upcoming travel plans. Globally, 58% respondents indicated that they have changed or likely to change their upcoming international business or leisure travel plan and that is a significant number.

The number was 49% in case of United States, 74% in case of China and 66% in case of Italy. Interestingly, the numbers were higher when asked about domestic travel.

It must be noted that these surveys are being done on a weekly basis (the above responses are from the week of April 14-19) and very direct, pin-pointed questions, are asked. While it does help in getting unadulterated response, a downside is that respondents – while answering such direct questions – fail to consider other factors, which they would otherwise consider while making such decisions. Hence, such findings should be considered as a broad indicator of consumer sentiments but not essentially a direct indicator of the market outlook.

Impact on Key Destinations

Based on international arrivals in 2019, the top 10 destinations are France, Spain, USA, Mainland China, Italy, Mexico, Germany, Thailand, Turkey and Macau.

It would be worth looking at the impact of COVID19 on key markets and the highlighted ones have been discussed below.

France

France received 85.8 million international tourists in 2019. The key source markets are UK, Germany and Belgium. Overall, France sources a large number of tourists from nearby countries. It is also evident from the fact that more than 60% of the international tourist arrivals are through land or rail modes. A key reason why a lot of visitors prefer driving to France is that several tourist attractions in France are not easily accessible through public transport.

France offers various attractions that cater to all kinds of preferences. As per MasterCard's Global Destination Index, Paris is the world's 2nd most visited city and received over 19 million visitors in 2019.

COVID19: What is Happening in France?

• After Italy and Spain, France is the most severely impacted country in Europe.
• Several attractions have been temporarily closed and many restrictions have been implemented. Many believe that the restrictions in France are stricter than other European countries.
• Several major events – including Paris Fashion Week, Paris Half Marathon, Football League and several other events have been either cancelled or postponed
• In the wake of the crisis, most flights to and from France have been suspended. All this would have a severe impact on international as well as domestic tourism.

Impact on Travel & Tourism in France

Lets look at the quantitative impact on international arrivals as well as domestic trips. In case of international arrivals, there have been declines in the past as well. For example, 2016 witnessed decline in international tourist arrivals, which could have been triggered by the terrorist attacks in late 2015. In 2019, the volumes declined again due to the global economic environment, terrorist attacks, protests, strikes and political unrests - such as the 'Yellow Vest Movement'.

As per GlobalData estimates, the international tourist arrivals in France is expected to decline by 41.4% in 2020 to reach 50.2 million. Arrivals from each of the Top 10 source markets is expected to significantly decline and the average decline is likely to be 40-45%.

In case of domestic trips, France has witnessed declines in the past as well but those were primarily caused by economic environment and terrorist attacks. In 2020, due to the virus outbreak, the domestic trips is expected to decline over 40%.

In some positive news, some flights are likely to resume operations soon and there are also unconfirmed reports that there may be potential easing of lockdown restrictions from Mid-May. If that happens, it would help in controlling the decline.

United States of America

USA received around 79 million international tourists in 2019. Tourists from neighboring countries – like Canada and Mexico - represent more than half of the total number of inbound visitors. US also receives high number of visitors from APAC countries including Japan, China, South Korea and Australia.

US has a large geography and offers all kinds of attractions like Grand Canyon, theme parks, casinos, skiing holidays, beaches etc. In addition, United States is a business powerhouse and attracts high number of business travelers.

COVID-19: What is Happening in United States?

• US has become the epicenter of the pandemic with highest number of reported cases and deaths from COVID-19.
• Travel from Europe has been banned and there has been a mass-suspension of domestic as well as international flights.
• Like in most countries, key events have been cancelled or postponed. Such events help in boosting tourism.

Impact on Travel & Tourism in United States

Severe impact would be felt by the tourism industry. With confirmed cases increasing daily, tourism industry in the US is expected to take a severe blow.

GlobalData estimates that the year-on-year decline between 2019 and 2020 in international tourist arrivals in US is likely to be 47.9%. Average decline from the Top 3 source markets is estimated to be in excess of 50%. Due to lack of adequate management of the pandemic, lack of coordinated efforts by states and rapid increase in cases & deaths, the epidemic would probably last longer in the US than in most other countries and it may lead to longer border closures and extended advice against travel to the US.

In US, domestic trips significantly outnumber international arrivals. Domestic trips are expected to decline by around 40% which is a significant decline and also the first decline in over a decade.

Mainland China and Macau

Mainland China received around 64.4 million international tourists in 2019. The maximum number of tourists came from Hong Kong, which could be attributed to both business as well as leisure related travel.

Macau received 18.3 million international tourists in 2019 out of which, 71% came from Mainland China. Gambling is banned in China and Macau is famous for Casinos and that is why it attracts a lot of visitors from Mainland China. According to the Wall Street Journal, Macau's gambling revenues are five times more than Las Vegas.

COVID19: What is Happening in Mainland China?

• We are all aware that China is where it all started. As a result, there were mass lockdowns and suspension of flights, activities, events.
• The Chinese New Year attracts tourists from across the globe but since it fell in the middle of the crisis, Beijing cancelled events for the Lunar New Year and tourists cancelled their trips.
• Business travel has also been severely impacted due to suspension of flights as well as restrictions put on people returning from China.

Impact on Travel & Tourism in Mainland China and Macau

Mainland China and Macau are both popular destinations and will see sizable drops in international visitation.

Apart from marginal decline in international arrivals into Mainland China in 2013 and 2014, and Macau in 2015, these two territories have enjoyed a prolonged period of growth in both international arrivals and domestic trips.

In 2020, due to the impact of COVID-19, international arrivals in Mainland China and Macau are expected to decline by 37.8% and 28.4% respectively. In China, average decline in arrivals from Top 3 source markets is expected to be ~29.4%. In Macau, average decline in arrivals from Top 3 source markets - which are Mainland China, Hong Kong and South Korea - is estimated to be ~31.3%. Since the decline in arrivals in China from closely-situated source markets is lower and the restrictions are slowly getting lifted, China has the potential of limiting the impact.

The decline in domestic trips is likely to be significantly lower. It is estimated to decline by 26.5% to reach 2.3 billion domestic trips.

On the positive side, the situation has reportedly improved in China. The number of new cases and deaths have dramatically declined (as per data shared by China). Several airlines are talking about resumption of services from Summer 2020. All this can potentially soften the impact on 2020 numbers.

Recommendations for Destinations

At a broad level, all strategies are relevant for all destinations however, the specific strategies would vary depending on the destination and its requirements. At a broad level the recommendations are;

1. Improving the Brand Image and Consumer Confidence: Several key tourist destinations like France, Spain, USA, China, Italy etc. have been severely impacted by COVID19 with high number of reported cases as well as deaths. It started from China and later it severely impacted Italy, Spain and France. Now, US is the new epicenter of the pandemic. It is important for each destination to carry out activities and run campaigns that help in improving the image and in instilling confidence. New practices to monitor and control the environment and strict sanitary and hygiene measures would have to be adopted and promoted.
2. Promote Domestic Tourism & Alternate Destinations: International tourism and tourists may take a while to come back. So, it is important to promote domestic tourism. Countries should look for alternate destinations which may appeal to potential travelers in present times. It is also important to keep a track of consumer preferences and expectations through regular surveys.
3. Push the Right Campaigns and Right Message: Destinations need to understand what would work and what would not. While promoting tourism, it is extremely important to ensure that the messaging is not insensitive towards the whole situation. Here also, consumer surveys would be useful. For example, consumer surveys suggest that people in France would look for change in scenery after the isolation period but would also look for safety and hygiene. Hence, relevant destinations should be promoted to them. In US, due to the current situation and the possibility of impact lasting longer, it may be counter-productive to advertise for summer. Instead vacations for Thanksgiving and Christmas period could be promoted. In case of Italy, holiday packages for summer could be promoted. Also, priority should be given to the promotion of staycations and domestic tourism as it is likely to resume first. Also, during the lockdowns, the use of social media and technology has increased significantly. Social media should be effectively leveraged by destinations for advertising and promotions.
4. Try to Capture MICE and Sports Events for 2021: This is a no-brainer. Destinations should try to bag as many MICE and sporting events for 2021 as that would help in recovery and large influxes of guaranteed revenue for 2021.
5. Extend Support: This is relevant for governments and tourism ministries, boards and departments. They must extend support to stakeholders in the travel and tourism industry to ensure the players remain there and help in the recovery. There is a need to extend helping hand to smaller players. If small players go out of business and if too many jobs are lost, the recovery would take longer. Also, there is a need for a coordinated effort for recovery. For example, authorities should work closely with players to plan recovery as well as to plan required activities and events.
6. Customer Portfolio Rationalization and De-Risking: The crisis should also make the destinations as well as players to look at the customer portfolio and identify unhealthy dependencies and risks. For example, there are several countries who are excessively reliant on Chinese tourists. These include most countries in Southeast Asia. As a result, countries like Vietnam, Cambodia, Thailand, Malaysia, Indonesia – which are heavily dependent on tourism – are staring at billions of dollars in losses and lost opportunities. There is a need for customer portfolio rationalization. The idea is not to reduce the traffic from a country or region but to attract traffic from other countries and regions too - as that would create a healthy balance.
7. Seek Support from Customers: Lastly, support from customers would be crucial for recovery. After the outbreak is brought into control, destinations as well as players should run campaigns asking for support from customers in form of not postponing their travel.

At the end, it must be added that there are positive signals from several countries. Some sectors/flights would resume operations sooner than later. The restrictions put by countries/governments are likely to be relaxed soon - though in some cases, it could be warranted by economic pressures. The industry has been knocked-down but it has been trying to get up. A lot would depend on how responsibly all stakeholders behave when the restrictions are relaxed and when some flights resume. If everything goes well, the industry will start the process of recovery - something it has done on several occasions in the past.

Hoping to see the end of this madness soon and also...hoping to see flights, hotels, cruises operating at full capacity. All of us need a break, don't we?

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