Travel and Tourism: Megatrends for 2012 and Beyond

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By Michael Nowlis, Director of the Senior Executive Programme at London Business School and a consultant in the travel, tourism and hospitality industries. He has also been teaching at the Escuela Universitaria de Hostelería y Turismo in Sant Pol de Mar (Barcelona) for over 20 years.

Opprinnelig publisert hos Hostelco 30. mai 2012:

Sometime in December 2012, a sun-seeking vacationer, a business executive, a religious pilgrim or a teenage backpacker will disembark an airplane, boat, train or bus somewhere in the world to become the billionth human being of the year to cross an international border. For the first time in history more than a billion people will travel from one country to another. In the interconnected and interdependent world in which we live, international tourism has become a part of life for a substantial segment of human society.

Since the beginning of the twenty-first century, growth in the travel industry has exhibited a pattern of “two steps forward, one step back”. Military conflicts, disease, terrorism, economic recession and political turbulence have sporadically halted tourism in much of the world. However, people are becoming less risk adverse and accepting the reality that global business travelers and international vacationers are not necessarily threatened by events on the other side of the planet. Times have changed since the first Gulf war and SARS outbreak brought worldwide tourism to a screeching halt.

American university students of the seventies who spent the summer backpacking through Europe saved all year for airline tickets but once at their destination could travel for months on a shoestring budget. Their children, embarking upon similar trips today, are finding that disintermediation and dynamic pricing have resulted in rock bottom airfares. Savings on an air ticket, however, can easily be erased by proportionately higher hotel and food expenses, just for a long weekend.

Like other industries, the tourism sector is being rapidly transformed by developments in consumer behavior, technology, social media and global economics. Following are a few of the most significant mega-trends revolutionizing the business of transporting, lodging, feeding and entertaining a billion world travelers annually.

Tourism demand: Where it’s hot…

Much of the travel industry has focused on the impressive growth in South and Southeast Asia as the global economy slowly emerges from a prolonged recession. However, little attention has been paid to an emerging wave of tourism activity in South America. Favorable macroeconomic conditions are bolstering tourism throughout the region. On a stagnant global economic landscape, Venezuela, Bolivia, Peru, Colombia and Argentina are experiencing year-on-year GDP growth of 5% or more. Argentina’s GDP growth exceeded 7% over the last twelve months, faster than most of the BRICS. International arrivals for South America are up more than 10% over the last year, as airlines and hotel companies scramble to add capacity.

The International Congress & Conventions Association (ICCA) recently added Brazil to the list of top 10 countries for large international meetings. Five other South American countries made the top 50. Buenos Aires will soon join the club of top 10 cities for international gatherings. Enjoying favorable macroeconomic conditions, South America is becoming an aurora in the galaxy of international tourism.

…and where it’s not.

The Arab Spring has devastated the North African tourism industry which experienced a precipitous drop in international arrivals. Hotels in popular Egyptian destinations such as Cairo, Sharm El Sheikh and Nuweiba have experienced occupancy drops of 35-40%. While pricing has always been competitive in popular Maghreb destinations, aggressive hotel discounting in peaceful Tunisia and Morocco is becoming brutal as a last ditch effort to attract reluctant European vacationers.

Less conspicuous in tourism circles is the anemic state of the Oceanic holiday market. Rising airfares and economic recession in the developed world have resulted in shorter holidays taken closer to home. Tonga, Guam and Samoa are experiencing significant challenges in attracting holidaymakers, a vital source of foreign exchange for their small economies. Over the coming years, even fiscally healthy Australia and New Zealand will experience flat or declining international tourist arrivals. The drop will be exacerbated if their respective central banks do not move to stop the rapid rise of their currencies.

Shorter trips

With no end to economic malaise in sight, consumers in mature economies are increasingly opting for shorter trips closer to home. In the United States, almost half of all trips are now three nights or less. Europeans are also shortening their famously long summer holidays. A continuous six year rise in unemployment shows no signs of leveling and uncertainty about the euro has resulted in a drop in value against most major currencies. As a result, more Europeans will be spending shorter holidays on the Continent rather than spending the month of August abroad.

Hotel companies are responding to shorter stays by offering free nights for guests willing to extend their stay. While such incentives have traditionally been offered by mid-priced hotels, luxury establishments will increasingly follow the lead of Four Seasons which recently began offering “a complimentary third night” at some resort properties.

Travel bazaar

Belt tightening by leisure and business travelers is leading to more B2C direct price negotiations. Online auctions, reverse auctions and dynamic pricing will increasingly characterize the sale of diverse tourism products. Moving beyond revenue management, consumers will bargain directly with suppliers and individuals in digital souks. Considering the highly perishable nature of tourism products, sites like Craig’s List, Ebay, Zuji, Priceline and Last Minute are creating highly efficient commercial exchanges for hospitality suppliers to unload excess capacity.

While disintermediation removed many online brokers and agents from travel markets over the last decade, a new breed of discount voucher sites are reversing the trend. Groupon Getaways, Livingsocial Escapes, Travelzoo Local Deals and a dozen similar sites are offering deal-of-the-day coupons for discounted restaurant, resort, travel and recreational products. Groupon alone will sell over $1 billion in products this year.

IT to rein in corporate travel costs

With many companies smarting from the global economic downturn, corporate travel managers are increasingly encouraging executives to reduce the number of trips they take by smarter use of technology. Many companies are establishing policies requiring videoconferencing and laptop webcams for some internal meetings. Online learning modules are also replacing many training seminars and workshops.

As the cost of telepresence systems come down, more firms will install “halo rooms” to conduct virtual meetings and reduce business travel. HP, Cisco, Telanetix, Teliris and Tandberg are all producing telepresence systems with life size images, full body language and optically embedded cameras permitting real eye contact. Corporate travel managers will increasingly encourage the purchase of such systems as a means of shifting expenditures to revenue generating trips with measurable return on travel (ROT).

Hotels: Branding is big

Most large international lodging companies are finally completing the long drawn out sales of their real estate assets to focus on management contracts and franchising. As these companies move out of the hotel business and into the business of hotels, branding is taking center stage. In an attempt to offer hotels with individual personalities but standardized levels of service and facilities, hotels are branding, rebranding and sub-branding their property portfolios.

Typical of many international hotel groups, Accor is moving from vertical segmentation to distinguishing brands in the same price envelope with distinct features. The company is rebranding much of its Sofitel portfolio with new commercial labels – Legends, Pullman, So, M Gallery – while others retain the traditional Sofitel brand. Similarly, Accor will spend $200 million to group most of the company’s economy hotels under the Ibis label. Each hotel will be designated as an Ibis, Ibis Styles or Ibis Budget. While the company aims for each hotel-type to attract specific market segments with distinct services and facilities, some industry analysts believe the three sub-brands will only confuse travelers.

The importance of hotel branding is conspicuous when examining leadership of the major global hotel groups. In recent years, corporate hotel boards have appointed brand management heavyweights with no hospitality background to lead many of the largest international lodging companies. President and CEO appointments include Ian Carter from Black & Decker (Hilton), Andrew Cossett from Cadbury Schweppes (InterContinental), Denis Hennequin from McDonald’s (Accor) and Steven Heyer of Coca Cola (Starwood). When Heyer stepped down after only 3 years in the position, Starwood appointed Frits Van Paasschen, President of Coors Brewing and a renowned marketing guru to the helm of Starwood.

Airlines: Traffic up, profits down

International air traffic is experiencing strong traffic growth but airlines are having difficulty transforming higher passenger loads into profits. In spite of a 5% increase in worldwide passenger traffic last year, industry profits fell to $7.9 billion, representing a drop of more than 50%. Traffic for the first quarter of 2012 grew at 6% but high oil prices and increasing competition has reduced profitability further. The International Air Transport Association (IATA) projects overall airline profits of $3.0 billion for this year, revised downward from the $4.9 billion projected last September.

Airline profits depend largely on fuel costs, the major variable component in the industry. Escalating hydrocarbon prices, a function of geostrategic developments, are making aircraft operations expensive and changing the sector’s overall dynamics. Hedging strategies will increasingly provide a cushion to fluctuating fuel prices. In an effort to control costs, carriers will use a combination of calls, swaps and collars at varying West Texas Intermediate (WTI) crude-equivalent price levels to hedge.

Airlines will also modify route structures, develop new hubs and discontinue service to smaller, less profitable destinations. With customers reluctant to pay high fares for short routes, airlines discontinued service to 27 US airports over the last 2 years. This trend will continue as carriers shift resources to more profitable long haul routes.

Travel agent revival

Following a decades of decline, travel agents are experiencing a comeback. In the US, the industry witnessed a drop from 34,000 retail locations in the mid-1990s to about 14,000 today. For the last 2 years, however, agency sales have been growing and now account for a third of the $284 billion travel market. An improving business environment in many parts of the world is converging with a wave of consumers for whom online travel booking is arduous and time consuming. In a survey of more than 2000 travelers worldwide, IBM’s Institute for Business Value found that almost half of respondents spent more than 2 hours searching and booking travel online. About 20% said they spent more than 5 hours purchasing online. In a society suffering from time poverty and economic uncertainty, a new breed of travel agents is helping clients’ save time and money.

The days of consumers asking travel agents where they should go is long gone. However, agencies are increasingly focusing on specialized activities ¿ adventure travel, religious tours, extreme sports or educational and cultural holidays. They also serve as long distance concierges with access to sold-out museum exhibitions, private country clubs and VIP behind-the-scenes tours. High end travelers with specific needs and high service expectations will cultivate a new breed of traveler.

Online travel sales will grow – to a point – but mobiles won’t be the channel of purchase

Once viewed as an ever-accelerating algorithm, growth in online travel sales will slow after reaching a particular penetration threshold. Researchers have recently discovered that once online purchases capture 35% of a region’s travel spend, further increases in demand drop to single digit rates. The United States, United Kingdom and Scandinavia, all of which have reached the 35% tipping point, have seen a precipitous decline in the growth of online travel purchases. In spite of the Scandinavia’s tech-savvy population and a relatively healthy economy, online travel sales are growing at just 2% annually in the Nordic region. While the developed economies of Europe and North America represent enormous markets, online travel professionals will increasingly turn to emerging economies for growth opportunities.

Keeping up with developments in online tourism purchases will be increasingly difficult. While potential consumers will use mobiles devices to browse travel sites, purchases will be made elsewhere ¿ primarily on PCs, tablets and by phone. Suppliers expecting social media to play an important direct role in sales will also be disappointed. Trip Advisor and similar websites that assist in gathering travel information, posting hotel/restaurant reviews and engaging in interactive tourism forums will gain importance as influencers in travel decisions. However, Trip Advisor and other travel sites based on user-generated content will remain relatively insignificant as a distribution channel for tourism related purchases.