Industry must rise to a new challenge
Foreword from Travel Weekly executive editor Ian Taylor
The UK travel industry emerged from the Covid-19 pandemic when the government lifted restrictions in March to encounter a welcome but at times overwhelming surge in demand.
To accelerate from a near standing start to 75%-80% of pre-pandemic capacity was always likely to prove challenging. Given the numbers of workers in the sector – and, in particular, the number in aviation – who quit the industry in 2020-21, it proved impossible to operate as scheduled. Cancellations and delays became endemic for a period and, although never quite as bad as the daily media reports of ‘chaos’ suggested, travellers suffered and it put a dent in the recovery.
“The economic outlook will dominate in the short term. Businesses will need to adapt to display the resilience shown during the Covid crisis”
No sooner was the worst of the disruption addressed, with August passing remarkably peacefully, than it became clear the rising inflation of the previous months would not subside without a recession. Hopes of negotiating the transition from recovery to downturn with a minimum of drama were torpedoed by the mini-Budget of the short-lived Truss government, ushering in a new period of tax rises and austerity to add to soaring energy bills, rising interest rates and a general crisis in the cost of living.
When Virgin Atlantic chief executive Shai Weiss addressed the Airlines 2022 conference in November, he expressed a general incredulity in the sector at “the looming recession”, asking: “Who would have thought after the years of pandemic we would be facing such a difficult situation?”
Weiss described summer demand as “robust” and said: “From Covid, I take the lesson that we can rise to any challenge.” But he added: “Optimism is not a virtue in planning. We can’t fight the [economic] cycle. It’s going to be a tough 2023.” UK household disposable income is forecast to fall 7.1% over the coming two years.
The economic outlook will dominate in the short term, compounded by Russia’s war in Ukraine and its impact on energy prices. Businesses will need to adapt to the changed circumstances to continue to display the resilience shown during the Covid crisis.
Abta partnered with Deloitte to produce a Climate Action Guidebook in October to help businesses start the process of decarbonisation which will dominate over the longer term. The World Travel & Tourism Council produced the first detailed calculation of the industry’s carbon footprint in November at 8.1% of global CO2 emissions. This may sound manageable but is colossal for a sector reliant on hard-to-abate aviation fuel and forecast to double in size while others cut their dependence on carbon. The industry will not be able to rely on demonstrating reductions in carbon intensity per passenger and distance to escape sanctions if total emissions fail to fall.
The consumer research which runs through this report suggests no shortage of demand for holidays although this is likely to remain below pre-pandemic levels and financial concerns will shape the decisions of many customers.
I am indebted to Tom Costley of Service Science for facilitating the research and to Deloitte and the many Deloitte contributors who gave their time and expertise.
Executive summary:
Resilience and sustainability are key to travel’s future
The desire for certainty is unlikely to be met. Business leaders must adjust to unpredictability, argues Deloitte’s Alistair Pritchard
In March 2020, the World Health Organization declared the Covid-19 outbreak a pandemic and within days people were told to stop all non-essential travel. Within a month, the travel industry stopped as international travel became impossible.
The end of the pandemic proved no less disruptive. As travellers returned this summer, staff shortages caused severe disruption with many flights delayed or cancelled. Yet despite consumer confidence declining for a fifth consecutive quarter, the Deloitte Q3 Consumer Tracker recorded spending growth on holidays and hotels in the quarter compared with the previous three months due to persistent pent-up demand.
The industry made a good recovery in summer 2022. However, a combination of geopolitical instability, surging inflation, higher interest rates and tightening monetary policy brought fresh headwinds and prevented the sector’s full recovery.
Deloitte data showed consumers expected to spend less across all leisure categories in the final quarter of 2022, with the biggest declines expected in holiday spending. Continued high inflation, higher taxes and rising interest rates will mean the income for discretionary expenditure will fall in 2023. In the circumstances, demand is likely to remain subdued, in volume terms at least, until energy and food price inflation ease notably, with spending in the travel sector tempered by household attempts to save money.
What business leaders most want is certainty. Yet the series of shocks the world has experienced in the past two years mean, on the contrary, that leaders have to learn to manage businesses in an environment of increasing unpredictability.
Notwithstanding this uncertainty, the difficult choices businesses have had to make through the pandemic and now the economic slowdown should make them more resilient to disruptions. In the face of unpredictability, businesses have increased their focus on developing the capability to flex operations while continuing to deliver value.
Enforced changes, such as the accelerated shift to digital channels and solutions to interact with consumers and faster adoption of technologies to counter shortages of labour, can provide new opportunities, as can recognition of the financial gains from engaging in the ESG transition.
The travel sector will need to continue to focus on identifying gains in operational efficiency wherever possible while also cutting costs as a volatile environment can be expected for the foreseeable future.
Long-term structural problems in the sector became apparent during the pandemic and the recovery period, highlighting the need to tackle operational inefficiencies and reduce travel’s impact on the environment. The industry’s future depend on its leaders taking responsibility to drive the sector’s transformation beyond their current tenure. Investing in rethinking and redesigning the travel sector in the face of the climate crisis should be a key priority.
We hope you enjoy this latest Travel Weekly Insight Report. We look forward to discussing its insights and their implications with you.
Market outlook:
Recession clouds outlook following strong summer rebound
Demand for international travel rebounded sharply as the UK’s Covid entry restrictions were lifted in March, although it was the summer before the US reopened and cruise lines fully returned, and long-haul destinations opened more slowly.
Severe labour shortages replaced Covid-19 as the main cause of disruption to travel, causing endemic delays at busier airports through May, June and July, leading at one point to cancellation of as many as one in 20 flights.
Daily media focus on the “chaos” had a dampening effect. Tui Group reported summer bookings, which hit 120% of 2019 levels before the disruption, fell back to 85% after it cancelled 200 flights in May and June. Yet bookings recovered to 100% by August as the strength of demand defied concerns that fuel prices sent soaring by Russia’s invasion of Ukraine and the highest inflation for decades would hinder the recovery.
By August, Ryanair was reporting a “double-digit increase in fares” despite raising its capacity for the summer to 15% above the 2019 level, and Ryanair chief Michael O’Leary was forecasting “a three-to-four-year period of fares growth”. EasyJet chief Johan Lundgren acknowledged the “pressures on households” but argued: “Travel is one of the last things people sacrifice.”
Luis Gallego, head of British Airways parent IAG, shrugged off Heathrow’s attempt to limit the disruption by capping the daily passenger volume at 100,000 – not least because BA had stripped out one-fifth of its schedule anyway – and insisted: “We don’t see any sign of weakness in booking behaviour.”
However, the outlook darkened by late September. The transition came abruptly in Britain when, following a period of official mourning for the Queen, the short-lived government of Liz Truss unveiled a disastrous mini‑Budget. Within weeks, a promise of £45 billion worth of unfunded tax cuts had turned, under the replacement Sunak government, into £55 billion in spending cuts and tax rises. In between, the pound sank to a record low of $1.04, interest rates rose, and business and consumer confidence plunged.
The expected fall in UK household spending due to recession could be small, but ‘we don’t know what parts of the economy could struggle’
The chancellor’s autumn statement on November 17 brought a forecast of the steepest fall in living standards on record, with real disposable income predicted to fall 4.3% in 2022-23 and a further 2.8% in 2023-24. The Office for Budget Responsibility calculated incomes would remain 1% below pre-pandemic levels even at the end of 2027-28.
Addressing the European Hotel Investment Conference in London in November, Deloitte chief economist Ian Stewart warned: “The squeeze on consumers will probably be worse than after the financial crisis.”
Recession akin to the 1990s
Deloitte senior economist Debo Debapratim said: “We expect GDP to contract by about 2% from peak to trough of the recession. That is small compared to the contraction during the pandemic when GDP contracted 20%. The closest previous recession was in the early 1990s when GDP contracted 2% and household consumption by about 1%, which is what we forecast now.”
He acknowledged: “That is a fairly optimistic view. In October, there were people forecasting inflation would peak above 20%. But most economists have forecast a shallower recession. We expect inflation to fall through next year to reach 4.5% by the end of the year.”
Debapratim forecast interest rates would peak “at about 5%” and unemployment rise to about the same level. But he warned inflation could remain “more persistent” and said: “If it was 6.5% or 7% at the end of next year it would mean interest rates stay higher for longer.”
He suggested household consumption would contract by less than the overall economy despite a “collapse in consumer confidence”, explaining: “Household consumption generally tends to be stickier. Those higher in the income spectrum accumulated savings during the pandemic. Wage growth has roughly kept pace with inflation in high-value jobs. Also, many households maintained their spending even during the financial crisis by taking on more borrowing.
“We also often see household members work longer hours during crises. The post‑pandemic experience has been the opposite and we’ve seen a rise in inactivity, but different cohorts respond differently or have different amounts of spending power. The top half of the income spectrum are in a better position to weather the cost-of-living crisis.
“During this kind of recession, investment tends to take a greater hit than household consumption. Business confidence has fallen and businesses are likely to prioritise cost reduction. We’re going to see weaker hiring over the next 12 months. We’re starting to see insolvencies pick up, largely among small and medium-size enterprises (SMEs) and we’re going to see that rise. Most economists think we’ll see a recession but not a rise in unemployment because of the tight labour market. [But] that is unlikely.”
Debapratim warned energy prices would remain high for the foreseeable future. He said: “Even though gas prices are expected to fall, they’re forecast to settle at about six times the level before Russia invaded Ukraine. We’re looking at significantly higher energy costs even in the medium term. Energy prices are not going back to pre-pandemic levels anytime soon.”
How much impact this has on consumer confidence and for how long will depend on “what people see as normal” he said, arguing: “Before the financial crisis, people saw 7% or 10% interest rates as normal. Now they represent a shock. The question is how long will high energy prices remain a shock for consumers? How long will it take them to adjust spending to higher prices?”
Most people will be poorer. Debapratim said: “Wages have been rising below inflation for a fairly long time. We expect that to continue for most of next year.” He also noted the pound’s weakness against the dollar and said: “I would expect the dollar’s strength to continue.”
Debapratim added: “There is a risk of a US recession next year. Developed economies tend to go through recessions in synchrony. This time is unlikely to be different. We’re likely to see a recession in Europe. Germany, Italy and France seem susceptible. Eastern European economies are significantly exposed to Russian gas.
“Emerging markets are affected by higher energy prices and higher levels of inflation and also by the dollar’s strength. All these factors work towards slowing growth, although Middle Eastern economies are doing well because of high energy prices. In China’s case, there are the complicating factors of the crackdown on the tech sector and a zero‑Covid policy. What is worrying about China is its property market.”
Reversal of monetary policy
Despite his view that the recession should be relatively shallow, Debapratim acknowledged the situation is fragile.
He said: “Central banks are embarking upon a huge change with a reversal of the monetary policy consensus across the West for 50 years putting pressure on various parts of the financial system.
“We know banks are well capitalised because of everything done in terms of regulation after the financial crisis. But whether the non-bank financial services sector is ready for a rapid rise in interest rates remains to be seen.
“There will be pockets of consumer businesses affected by rising interest rates, not just the financial markets – for example, the automotive sector, given most people buy cars on financing. What does that do to the car manufacturers’ model? It’s a big change for a lot of the economy.
“Businesses may adapt to higher levels of interest rates in the long run. But there is a question mark over whether they are able to adapt at the pace at which central banks are raising rates. That is the primary reason why there is fragility. We simply don’t know what parts of the economy could struggle.”
He added: “If there is one lesson from the autumn, it’s that we’ve seen a reassertion of authority by the markets. We had a fairly long period of easy monetary policy and a significant amount of quantitative easing which made it easier for governments to borrow and not need to deal with the moderating effect of market influence on their plans.”
Yet Debapratim does not see the costs attached to the drive to decarbonise negatively. On the contrary, he argued: “If the need to decarbonise leads to a significant rise in investment, it’s probably a good thing, especially as we expect the West to lead the world in developing the technologies needed to drive this low carbon future.
“In the short term, it might mean higher costs and these will have to be borne to some extent by consumers and taxpayers. But in the long run, you’re looking at a lower marginal cost of energy. The cost of producing energy on a solar farm is significantly lower than the cost of extracting oil or coal. We’re looking at a long-term benefit, notwithstanding the environmental benefits. Also, the oil-price shocks in the 1970s drove significant improvements in the fuel efficiency of cars. It’s a difficult thing to argue when people face a challenging winter, but the inflation and cost-of-living crisis we’re suffering now are going to drive efficiency gains.”
‘Holidays tend to be a priority’
Alistair Pritchard, Deloitte lead partner for travel and aviation, suggested “there will be differences across the market” in how holiday consumers respond to the squeeze on living standards. He said: “Some of the easier areas to cut back spending are on things like eating out. People can choose to do things less often or only on special occasions.
“Holidays are discretionary but still tend to be a priority, albeit people may delay a decision on booking. There is an argument that post-pandemic people see holidays as even more important, particularly certain groups. So many consumers will continue to treat holidays as a priority.”
"People tend not to trade down in quality. They might go for eight days instead of 10, or have four nights in the UK instead of a second overseas trip"
Pritchard added: “People tend not to trade down in terms of quality. They might go for eight days instead of 10 or stick with their main holiday but have four nights in the UK instead of a second overseas break. Duration is also something people under pressure could look at and there could be destinations people perceive as greater value, for example, Turkey. But I don’t see people downgrading on quality.”
Debapratim agreed, saying: “I don’t know how easy it is for holiday consumers to trade down. With retail, it’s a lot easier. You can simply buy a value brand and not branded products. But if you’re used to a certain type of hotel, would you suddenly go to a hostel?”
This analysis appears borne out by consumer research for this report which found a rise of five percentage points year on year in the proportion of UK adults intending to take an overseas holiday in the next 12 months. However, at 42% the proportion remains 11 points down on the pre-pandemic level. This can almost certainly be attributed to the rising cost of living and deteriorating economic outlook.
Asked what factors might impact on their decision to book a holiday, almost half the respondents identified increased costs of holidays and two in five the increased cost of living or rising price of energy. A similar proportion intend to limit holiday costs by travelling outside peak times, choosing cheaper options, reducing time away or taking fewer breaks. More than half (55%) said they would holiday outside peak periods and 52% book cheaper travel, with 48% taking fewer holidays and three in five planning a main holiday of seven nights or less.
The survey found substantially reduced concern about Covid-19, with just one in five registering the Covid rate or procedures in a destination as a consideration. There was also diminished concern about flexible booking conditions. But the congestion at airports and disruption to flights through the spring and early summer appears to have had an impact with a four-point rise year on year in those saying they will book with a ‘trusted company’ and a six-point increase in those opting for the security of a package holiday.
Covid does seem to have had a residual impact on demand over the past year, with the survey finding younger adults, aged 16-34, twice as likely to have travelled abroad as those aged 45 and above.
It is disappointing but perhaps not surprising to note a fall in the level of concern about sustainability issues among holidaymakers, despite more than two-thirds admitting concern about the impact of travel on climate. The proportion prepared to pay more to travel with a company taking action to reduce carbon emissions declined somewhat to 28% although it remained sharply higher among younger adults at two in five. A seven-point drop in concern about the impact of flying perhaps reflects the level of pent-up demand from the pandemic.
More broadly, the appeal of all‑inclusive holidays, particularly to families, shows no sign of abating. Demand for beach holidays has returned to pre‑pandemic levels and there appears no real change in likely booking channel.
Research and report partners
Service Science brings insight and expertise together
Service Science is a market research agency specialising in the hospitality, leisure, tourism and travel sectors. We work with clients to bring actionable findings, from their customers, people and supply chain, to help improve the customer experience.
We have four practice areas:
Think Like Your Customers: using behavioural science techniques, qualitative and quantitative, we provide insight to help understand and influence customer behaviour.
Online Reputation Management: through the monitoring and management of online reputation we provide the means to increase loyalty and maintain clients’ competitive edge.
Strategic Online Data Intelligence: using multiple sources we unlock the power of online data to provide insights and travel intelligence tools to destination managers, tourist organisations and operators.
Service Quality Measurement: through mystery shopping, brand standards audits and survey tools we ensure clients deliver exceptional service.
Clive Nicolaou
Service Science was founded in 2010 by Clive Nicolaou, a market researcher with 28 years’ experience in the hospitality, leisure and tourism sectors. Prior to that Clive was head of hospitality and leisure at Kantar TNS having previously been a successful operator in the hospitality sector. He is a fellow of the Institute of Hospitality and a member of the Market Research Society.
Tom Costley
Tom is the most experienced researcher in the team with almost 40 years’ experience in market research from both a client and agency perspective. He has wide-ranging experience but especially in travel, transport and tourism research. Prior to joining Service Science in 2018, Tom headed the travel and tourism team for Kantar TNS, the UK market leader in travel, transport and tourism. His client portfolio included national tourism organisations, leading operators, airlines, hotel groups and travel firms. He is a fellow of the Tourism Society.
Deloitte is an industry leader in the travel and aviation sector.
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Contributors
| Alistair Pritchard | lead partner, Travel and Aviation | ajpritchard@deloitte.co.uk |
| Debo Debapratim | senior economist | dde@deloitte.co.uk |
| Martin Bowman | director, Aviation Digital Assets | martinbowman@deloitte.co.uk |
| Andy Gauld | head of Aviation | agauld@deloitte.co.uk |
| Farina Azam | head of Travel | fazam@deloitte.co.uk |
| Andreas Scriven | lead partner, Hospitality and Leisure | ascriven@deloitte.co.uk |
| Gillian Simpson | partner, Retail | gisimpson@deloitte.co.uk |
| Danielle Rawson | director, Risk Advisory | darawson@deloitte.co.uk |
| Oliver Graves | director, Human Capital | ograves@deloitte.co.uk |
| Oli Hemming | partner, Transport, Hospitality & Services | ohemming@deloitte.co.uk |
| James Meadowcraft | partner, Risk Advisory | jmeadowcroft@deloitte.co.uk |
| Jamie Avni | director, Financial Advisory | javni@deloitte.co.uk |
| Tim Robinson | director, Travel and Tourism | timrobinson@deloitte.co.uk |
| Ed Knight | director, Tax | edknight@deloitte.co.uk |
| Luke Golding | director, Legal | lgolding@deloitte.co.uk |
| Jon Bolger | head of Business Travel | jbbolger@deloitte.co.uk |
| Bethany Hawkings | senior manager, Risk Advisory | bhawkings@deloitte.co.uk |
| Celine Fenech | insights manager, Consumer Industries | cfenech@deloitte.co.uk |
| Devi Santosh | assistant insights manager, Consumer Industries | devisantosh@deloitte.co.uk |
