Sourcing and Procurement
To travel, or not to travel: the dilemma of COVID-19 impacting the tourism industry
There are hardly any people or industries in the current times that are not impacted by the COVID-19 pandemic. Business travel, along with leisure travel, is without a doubt the most severely impacted, given the supply-side constraints. In this article, I will deep dive into four main supply markets involved in business travel – airlines, hotels, car rental, and travel management companies (TMCs).
As the COVID-19 pandemic spread, the majority of airlines were forced to pause operations, which in turn impacted the TMCs with a dwindling list of travelers; business hotels were rendered unserviceable as lockdown ensued, while takers for car rentals dried up quickly. Considering the current scenario, the question that now stands, is that how long before we regain the volumes of pre-COVID times?
The airline industry has been heavily impacted by the pandemic and it should come as no surprise that the incumbent companies are urging governments for immediate help to avoid bankruptcy. With aircraft grounded, combined with high fixed costs, airlines have been forced to cut jobs. The fate of industries closely tied to airline services, such as ground services and manufacturers, has been similar. Before the COVID-19 outbreak, the worldwide air passenger traffic was forecasted to clock $581 billion in revenues in 2020. The adjusted revenue estimate has now dwindled to $267 billion, down 54%.
While a few airlines are gradually resuming operations as lockdowns ease, the industry is unlikely to regain full-fledged operations before 2021. Overall volumes are expected to lag behind 2019 figures, for at least the next 3-4 years. We can also expect changes in the supplier map as it is rather obvious that some airlines will be forced to cease their operations completely. Which airlines, in particular, we will find out in the course of just the next few months. A few other airlines are scouting for vacant routes to operate, which might just increase their coverage, and hence their revenues. No doubt, airlines are eagerly waiting for people to resume flying as soon as possible. As a result, aggressive price campaigns are expected to follow, especially from low-cost airlines.
Closely associated with the airline industry, travel management companies have also suffered huge losses in revenue and are now facing a cash flow crisis. Some are strong businesses that can withstand the storm, but many could fall before the demand situation improves. For the first few weeks of the ongoing crisis, TMCs were busy managing pre-booked trips, cancellations, refund requests, and so on. However, at this juncture, it is obvious that some percentage of corporate travel may not return at all, as companies found remote working alternatives for several functions. It is estimated that TMCs will continue to see lower demand, less supply, and higher prices for business travel, even after the impact of the pandemic subsides.
Hospitality is another industry, which is expected to be impacted for the long haul, by the COVID-19 pandemic. Several hotels and resorts have found themselves with unutilized capacity during the crisis. The average occupancy in the US, for instance, has fallen below 25%. Such a sharp drop is unprecedented and hoteliers are struggling to keep their businesses alive. Most of the hotel properties have now been allowed to restart operations, but there are hardly any travelers seeking accommodation, due to persisting border closures. France, Switzerland, Spain, and other European governments have promised aid tallying millions of Euros towards rescuing all types of local businesses hit by the pandemic. A similar practice has been adopted by several other governments in other parts of the world also. It is the need of the hour more so, considering that several standalone hotels, as well as hotel chains around the world, opened up their premises to house medical staff, first responders, or quarantined individuals, during a time when governments have been struggling to accommodate the growing number of suspected COVID-19 cases.
While the airlines and the hospitality industry have the government’s backing, the pandemic has potentially hammered the car rental business to the ground. Global companies like Avis and Hertz are facing massive issues in continuing operations. The 102-years old car rental giant Hertz, has already filed for bankruptcy protection. With nearly $19 billion in debt and roughly 38,000 employees worldwide, Hertz is among the largest companies to be undone by the pandemic. In Europe, the Europcar has reduced its operations significantly to a limited number of rental stations. Issues in this industry are impacting the automotive industry also as the renewal of the fleet is pushed out and car rental companies are reducing their fleet size.
We can expect a further reduction in supply in the next few months, which will further push companies to the brink. We may see more examples similar to Hertz tumbling out due to the crisis. But, as demand is expected to stay below pre-COVID volumes for a longer period, the market will cover the open gaps. In the very short term, we will see some price reductions caused by campaigns attracting travelers to venture out again.