Two big issues take centre stage
Foreword by report author Travel Weekly executive editor Ian Taylor
Identification of a new coronavirus ‘variant of concern’, the Omicron variant described by the chief medical advisor to the UK Health Security Agency as “the most complex” and “most worrying we’ve seen”, set countries racing to reintroduce travel restrictions as this report was finalised in late November.
In the UK, the reimposition of PCR tests for all arrivals, the requirement to quarantine while awaiting the result and the return of countries to the red list put the Christmas-New Year getaway at risk and threatened to cast a pall over the winter travel season and the January-February peak booking period.
The reaction was understandable if regrettable. We can be confident our understanding of the new threat and the necessary response will develop quickly, but short-term pressures on travel businesses’ finances could be significantly ratcheted up.
It was a sharp reminder that however the pandemic now evolves, the Covid-19 crisis is not over. Rates of infection and hospitalisation were already rising across Europe before the variant appeared, leading to renewed restrictions.
Ryanair chief Michael O’Leary, normally the most bullish of chief executives, warned of a “fraught period”, arguing: “It looks like Europe is going to get very nervous again at the worst time of year, when people are making Christmas travel plans.” It could also hit hopes of a strong post-Christmas.
In the circumstances, industry demands for the removal of the UK’s day-two rapid test on arrivals at the government’s January review of its entry policy may prove premature.
Unfortunately, Covid-19 is not the only major concern for the sector or the world. Indeed, in the medium to long term it is not even the most pressing despite the immediate threat to some businesses’ survival. The reality of the climate crisis must now be clear to all but the most determined to deny it, and the urgency of the crisis is increasingly obvious.
Whether that leads to the transformative action required and at the necessary scale remains to be seen. It is hard to be wholly optimistic. The Financial Times chief economics commentator Martin Wolf rightly noted following the COP26 conference: “If we compare the global discussion today with that of a decade ago, we have come a long way. But if we compare it with where we need to be, there is a frighteningly long way to go.”
This year's report includes:
Building Resilience: The climate challenge, future of work, future of retail, future travel experience, technology, investment in travel.
Re-emerging from Covid-19: Air travel, hospitality, outbound, corporate travel, inbound, cruise, domestic.
Executive summary: There is a climate for change
The sector’s desire for recovery is accompanied by a growing willingness to target net zero, argues Deloitte’s Alistair Pritchard
There are promising signs of recovery for the UK travel sector following the uncertainty of 2020 and much of 2021.
This year, great medical advancements have enabled us to resume activities we’ve missed due to the pandemic and the travel sector was at the heart of the quest to return to ‘normality’, from reuniting families after the reopening of international borders to offering people their first post-lockdown holiday or work trip. The sector has shown great resilience and commitment to serving consumers.
Improving confidence, combined with the savings some consumers built up over lockdown, created strong pent‑up demand for all leisure activities, including travel. Our Deloitte Consumer Trackers for Q2 and Q3 2021 showed net spending on short breaks and long holidays recovering to pre-pandemic levels. However, consumers showed a preference for domestic holidays amid fluctuating travel rules. This gave many UK-based travel companies the boost they needed to continue in business. The recovery in outbound travel was slower, although many businesses saw a notable upturn in bookings once travel rules were simplified this autumn. The hope now is that sentiment continues to improve.
There are still many risks to recovery. Some consumers may be wary of travelling. The pandemic could lead countries to impose stricter protocols or travel requirements, creating further complexities for travellers. The risk of fresh variants remains. However, the experience gained over the past two years gives reason to believe the sector can cope with new challenges and adapt.
Climate of change
Some things have changed for good, the focus on climate being one. Our research suggests 57% of consumers globally feel worried about climate change and 52% would support new climate regulation even if it made some goods or services dearer or unavailable. It suggests consumers increasingly want a collective change in behaviour and expect governments and businesses to join them in this.
Now is the time for bold strategic action to ensure a future for the sector. The travel industry has made some progress in reducing its impact on the environment but there is much to do. This is just the beginning. We see a need for greater collaboration across the travel ecosystem to improve our understanding of climate change, the impact it will have on businesses and the actions needed to reduce emissions.
While climate action is partly about doing things differently or doing new things, much of it is about accelerating the transformation that has been on the sector’s agenda for some time.
Technology is likely to be a key enabler for travel businesses to become more efficient and innovative in how they operate. However, it is equally important for businesses to invest in creating a workforce of the future. Many people left the sector during the pandemic and there is an urgent need to acquire new talent with different skills as well as upskill existing staff so that the sector can move forward to net zero.
Alistair Pritchard, lead partner, Travel and Aviation, Deloitte LLP
Market Outlook: Prospects brighten for fuller recovery
The rapid development of vaccines by late 2020 and rollout of vaccination programmes through 2021, both unprecedented in speed and scale, transformed the Covid-19 pandemic. It brought a semblance of normality to daily life in much of the developed world.
Yet the virus proved remarkably resilient, not least by throwing up the Omicron variant in late November 2021 leading to new restrictions and a race to deliver booster jabs.
The pressure on health systems, whether from Covid or from conditions exacerbated by or left untreated due to the pandemic, hardly abated. At the time of writing, much of Europe was in the grip of a new wave of infection despite significant rates of vaccination even before the Omicron variant was identified. As Karen Taylor, head of Deloitte’s Centre for Health Solutions, warned following approval of the first vaccines a year ago: “We are far from out of the woods.”
The UK’s first relaxation of pandemic restrictions in summer 2020 proved to have been grossly premature and it was July 2021 before the government relaxed most domestic restrictions in England, with the devolved administrations following never entirely in lockstep.
Most EU governments acted earlier and went further, despite the UK’s initial lead on vaccinations. International travel within the EU resumed at some volume from July, while the UK government hesitated to make meaningful changes to its traffic light regime until September. That left the UK lagging other European markets with the exception of Scandinavia, where caution also prevailed.
The situation changed from September as one relaxation followed another for fully-vaccinated travellers as the UK government abandoned its traffic light system, removed all red list countries, removed PCR tests and requirements for a pre-departure test to enter the UK and accepted all under-18s as fully vaccinated. These measures, allied to the opening of the US border from November, made travel at least an option again for those fully vaccinated although entry to the UK still required completion of a Passenger Locator Form and purchase of a day-two rapid Covid test, and there was a remarkable lack of consistency in the requirements of destinations even among EU member states. The obstacles for unvaccinated travellers remained daunting.
The Treasury resisted almost all pleas for sector-specific support other than providing some business rates relief for the retail and hospitality sectors and a VAT reduction for domestic tourism and hospitality businesses. There was also some provision for loans.
Furlough continued until the end of September 2021 amid considerable trepidation that ending the scheme would trigger a wave of redundancies across the economy. In the event, the most-pressing issue became not a shortage of jobs but a shortage of labour.
That did not prevent much of the travel sector feeling unsupported by the government despite aviation and maritime minister Robert Courts assuring an Airlines 2021 conference in London in November: “Let’s be clear, the government has supported aviation to the tune of £7.8 billion.”
Industry leaders urged the government to remove day-two Covid tests for vaccinated arrivals and simplify the PLF at the next review of international travel policy in January.
Courts insisted: “We want to remove testing and all restrictions, but it has to be done in a way that protects public health. I would push back on any suggestion the UK is lagging. It’s a balance to retain public confidence and protect public health.”
The economic outlook appeared mixed. Global economic growth was “approaching a post-pandemic peak” in November, according to the intergovernmental body the OECD.
The Bank of England noted in November that “higher energy and goods prices” had pushed inflation above its 2% target and inflation would “rise to around 5% in the spring”. It reported “interest rates will need to rise modestly” as a result, although the Bank held the official rate at 0.1% in November.
It added: “The size of the UK economy is getting close to where it was before the pandemic. Unemployment has fallen, although it is higher than before the pandemic.”
The Bank’s monthly survey of chief financial officers in October suggested the percentage of workers on premises had risen to 74% in October, up from 70% in September, and was expected to rise to 80% in 2022. But 83% of firms reported finding it harder to recruit employees, with 55% reporting it ‘much harder’ and “overall uncertainty continued to tick up” with 55% of businesses viewing the level of uncertainty as ‘high’ or ‘very high’.
Deloitte senior economist Debapratim De noted: “This has been a crisis like no other, with a deep downturn followed by an extraordinary recovery. It took five years for the economy to recover output lost in the financial crisis.
“The downturn caused by the pandemic has been far worse but the recovery much quicker. The pace of the early summer rebound was unlikely to be sustained and the recovery lost momentum as supply and labour shortages blight parts of the economy.
“There are a number of reasons for the slowdown, but the key one is that Covid-19 has not gone away, slowing normalisation of activity in the West, with outbreaks in China and Southeast Asia feeding into supply shortages.”
He explained: “The pandemic has also exposed acute labour shortages in certain sectors. This is not just a UK issue. It is happening across the developed world. In the UK, one could argue Brexit is a factor but I’m not sure it’s the primary explanation for what we are seeing. The once‑in‑a‑generation transformations brought about by the pandemic – including a reassessment of work-life balance, greater demand for flexibility and a focus on wellbeing, decisions to retire early or stay in education and to move out of urban centres – have made matching workers to jobs a more complex task than before. The labour and supply shortages could become worse in the immediate future but should start to ease after summer 2022.
“On the supply of materials, consumers are likely to readjust spending back to services from goods as the pandemic wanes. Demand is also likely to stabilise after the supercharged recovery in 2021. Finally, supply chains are being bolstered, with production expanding for goods that we had acute shortages of earlier in the year. Labour market fundamentals should also normalise, with furloughed workers back in the workforce and as participating rates increase through immigration (to some extent) and the supply of graduates.”
Despite the Bank of England’s decision not to raise interest rates in November, De said: “We expect the Bank to raise rates. Inflation remains well below its post-financial peak despite the much faster recovery this time. So there is scope for a further build-up of price pressures before these begin easing in the second half of 2022. At the moment, that seems likely to result in two to three rate rises over 12 months.”
Yet De said: “People with high incomes seem to have weathered the pandemic much better. There is a proportion of the population which has accumulated significant savings over this period. That is driving strong consumer demand and we expect that to continue.”
On the risks to growth, he said: “The risk of vaccine-resistant mutations means we could go back to restrictions. But we saw industry adapt quite well to the lockdown during the second wave of infections over winter 2020-21. The hit to activity was weaker than during the first wave because the corporate sector was better prepared to work with restrictions.
“Vaccines should also give us some lead time to respond to new variants. If the right decisions are taken at the right time we could avoid the stricter restrictions imposed in 2020-21.”
However, he noted: “The developing world is nowhere near vaccinating the majority of the population and is much more susceptible to further waves of Covid-19, which could squeeze demand for exports and disrupt supply chains.”
The Deloitte Q3 Consumer Tracker released in November recorded a quarter-on-quarter decline in confidence “driven by worries about personal finances” but noted the confidence index at -10% “is still significantly higher than the same period a year ago (+7 percentage points) and now at the same level as in Q3 2019”.
Deloitte suggested the fall in overall confidence “was driven by deteriorating sentiment surrounding debt and disposable income. Consumers’ confidence about their household levels of disposable income fell by nine percentage points to -21% [to] three percentage points lower than a year ago.”
It noted the data “also points to the rising cost of living and winding down of government pandemic support schemes as reasons why consumers were more worried about their personal finances. More than one in three consumers (36%) said their overall personal expenditure went up in Q3 2021. . . One in eight consumers (12%) experienced a drop in wages in the last three months and one in four saw a decline in savings.”
Alistair Pritchard, Deloitte lead partner for travel and aviation, insisted: “Broadly, people have more confidence. There have been times when a lot of people thought ‘Is the business I work for going to survive?’ Now those in work have more confidence of retaining their jobs and pay, knowing they could move to another. [For businesses], there is increased pressure to keep the people you have because there are opportunities to move to other roles. We see a race for talent.”
The travel industry faces a long haul to recovery despite the fillip from the relaxation of UK government restrictions.
Pritchard noted: “The UK’s removal of the pre-departure test had a significant positive impact. Thinking you may get stuck abroad was unnerving. The government has recognised the virus is not going away and businesses need to operate with protocols in place. It bodes well for the European short-haul market, with the caveat that a new variant does not derail things.”
He argued: “There have been fewer failures than we expected, largely helped by furlough and the other support in place despite the lack of industry-specific support. The industry had to take a lot of difficult decisions – reducing the cost base, looking at the workforce, locations, restructuring. The end of furlough from October 1 added to the pressure.
“But most big companies are in a more secure place than 12 months ago. Most have other source markets than the UK where the restrictions were eased earlier to allow people to travel and they have done multiple refinancings. When they did the first round of fundraising there was a lot of optimism around the prospects for travel. By the time of the second or third round, businesses went with a much more cautious outlook.”
The resulting debt will not be quickly paid down. Pritchard said: “Undoubtedly the sector will be much more leveraged than before.
“Businesses in the tier below the largest face other challenges. Many are either UK-focused or have not been able to establish a robust cash position. Some may fail. What that looks like will be driven by how the market comes back, how they have set up their business and the patience of investors or shareholders.
“Businesses are much more highly leveraged in a sector that generally operates on low margins. It will either take a long time to pay down or you have to push up prices, and will the consumer pay for that? A certain category of consumer will be prepared to pay. But there is a category of consumer who found the pandemic challenging and would not be prepared to spend more.”
He added: “Businesses are going to need to invest in technology and sustainability and that is going to be hard as they try to navigate the recovery. Many have already cut their cost base. Some reduced their workforce. Will they be able to deliver the same level of service?
“There is plenty of consumer demand. That is not an issue. [But] there will be fewer businesses. We expect consolidation among larger businesses and those in the middle tier. Businesses have to look at synergies. Some will see opportunities in M&A at a price that is appealing.”
One sector Pritchard previously envisaged having a struggle to recover, he now sees rebounding more strongly – cruise. He said: “Six months ago, I would have said cruise would be one of the slowest sectors to recover. But the UK allowing domestic cruises had a really positive effect. It gave a lot of people an opportunity to try cruises for the first time and it saw ships moved to the UK. Some lines were quoting new-to-cruise numbers north of 40%.
“The challenge for cruise is that there could be restrictions on visiting destinations for some time. If you go for two weeks to Spain, you have to comply with one country’s restrictions. If you take a multi-destination cruise, recovery could be slower because of the different restrictions from country to country.”
He is less optimistic about corporate travel, arguing: “Business travel probably won’t come back to the same level as before. Twelve months ago I thought it would come back in time because globally there would be more people travelling as economies become more global, offsetting a reduction in Europe and the US.
“But my view has shifted. It will be slower to get back to pre-pandemic levels as more corporations revisit the amount spent travelling on business.
“The technology to allow meetings to happen online will make it more challenging for business travel. The implications for airlines are significant. Pre-pandemic only about 30 airlines in the world made money and a lot of the profits came from the front end of the aircraft. Airlines are probably going to carry smaller volumes of business travellers.”
De echoed the point, noting: “We asked chief financial officers [CFOs] at large UK businesses to rate the biggest risks to their firms and climate ranked in the top three alongside the pandemic and inflation. It’s a key priority.”
Yet he added: “Despite foreseeing large-scale change to their businesses due to the transition to a low-carbon economy, 87% of CFOs see opportunities arising out of it. Businesses are acting on climate not just as part of their broader social contract, but increasingly as a key element of their corporate strategy.”
Consumer research for this report by Service Science and Kantar gives cause for optimism that 2022 will bring a recovery in international travel. It suggests two out five UK adults (38%) are likely to take an overseas holiday in 2022, not yet at the level of 2019 but considerably up on the 22% who in October 2021 said they had taken a holiday abroad in the past year.
Winter 2021-22 may prove challenging for many businesses with limited cashflow, especially as the pandemic continues to rage and restrictions continue to vary by destination. Parts of winter programmes may prove difficult to fulfil given the changing requirements in ski destinations such as Austria and Switzerland, and confidence to travel may yet be undermined.
But we can have greater confidence that spring and summer 2022 should be easier and that should feed into consumer willingness to plan and book holidays. The demand is certainly there.
Travel Weekly Insight Annual Report Partners
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