In association with Travelport
As we cruise into the spring, it’s probably time to take a breather from the maelstrom of recent results - and frenzied forecasts about the all important summer booking season.
Let's focus instead on the likely key drivers and dynamics for the travel market over the next 12 to 18 months.
Assuming that the global economic recovery continues its slow but steady progress – a big assumption that could easily be tested in the summer and autumn – what’s likely to be on directors' minds over the next year or so?
US points the way to low growth
The good news is that if we’re looking for examples of how the upturn in consumer sentiment could pan out, we have a perfect example just across the pond. The US consumer market is undoubtedly stabilising and showing evidence of a profound positive bounce. That’s the good news.
But the bad news is that the bounce isn’t quite as strong as we first hoped. This suggests that those analysts feverishly hoping for a traditional mid-business cycle recovery are woefully over optimistic – if the US market is still showing signs of fatigue, god help the more fragile UK market.
Recent evidence for a more cautious (even frugal) take on US consumer spending came in the shape of a recent PhoCusWright report (their US Consumer Travel Report) which suggests that “overall leisure travel incidence remained flat in the past year, and many of the US adults who did manage to vacation took fewer and shorter trips.
"But while the average traveller may still not be feeling confident enough to splurge, there are signs that some vacationers are tentatively loosening the purse strings”.
According to the PhoCusWright report "travellers on average took 2.8 leisure trips, down slightly, and some travellers economised by shortening medium-length trips (4-6 nights) into quick weekend getaways. Not surprisingly, taking fewer and shorter trips also meant that travellers spent less – average annual travel spend dropped roughly $230 year over year".
Carroll Rheem, principal analyst at PhoCusWright reckons that "fewer trips may create the impression that consumer confidence has fallen, but many were simply making some small sacrifices to leave room in their budget for the big annual vacation".
There was, of course, some more upbeat news in the report – “Many hotel guests, for example, felt comfortable enough to move up-market this past year” – but the tone was remarkably cautious.
This US analysis, I think, echoes strongly across the Atlantic and backs up a number of key conclusions for UK boards.
The big summer holiday – especially after our dreadful weather – is probably still looking strong, especially if it’s in an all-inclusive format.
I’d also suggest that this is a positive back drop for packaging up a more luxury experience in an apparent budget price. Obviously this frugality will also power an even bigger shift on line, which will bring with it another key dynamic.
High St versus online debate
High Street travel agents in relentless decline? The debate continues. A recent analysis from consultants at PwC and the Local Data Company prompted another outbreak of the old debate around the future of high street travel agents.
The top line analysis was aimed at the state of the overall UK high street, which as you can guess was pretty dreadful. According to PwC and the Local Data Company “retail store closure statistics show shutdowns climb tenfold in a year” with “multiple retailers closures reaching 20 stores a day on average across Great Britain’s town centres in 2012”.
The worst affected sectors - you guessed it - "greeting cards, computer games, clothes, health foods, jewellers, travel agents, recruitment agencies, banks and sports goods shops are all falling in numbers" while "pound shops, pawnbrokers, charity shops, cheque cashing (payday loans), betting shops, supermarkets and coffee shops are bucking the trend".
The key trend of concern has to be that the 'retail ice age' is now being driven by the big chains. According to the Local Data Company “2012 was the first year that we have seen significant reductions of multiple retailers in town centres across Great Britain with a net loss of nearly 1,800 stores - equivalent of 131 football pitches, or just over four Westfield London’s.
"We can expect to see this trend continue and indeed accelerate in 2013 as more leases come up for renewal along with the ever increasing demands from consumers for space that delivers an experience good enough to pull them away from their technology devices".
Cue a broadside from the wonderfully controversial David Speakman of Travel Counsellors who reckons that the traditional travel agent is in trouble.
Which in turn required a rebuttal from Abta, reminding us all that “in recent years we’ve seen a definite shift back to the high street with many travel companies opening up new stores", with outfits such as Kuoni and Virgin Travel given star billing as examples of the big positive trends.
Personally I think a far more interesting debate is not whether the high street travel agent is dead but how those surviving branches have to adapt and change. The key for me is to look at the example of another sector – banking – for inspiration.
Banks have also been closing their high street branches at a steady rate but no-one thinks the high street bank is dead - you’ll just have to walk a bit further to find one. But among those that have survived we’ve seen three huge concurrent revolutions.
- The first is the most predictable, which is that these banks have become proper retail environments – but its the next two that have the most significance for the travel trade.
- Progressive banks such as HSBC have pushed segmentation into their branch networks, making each outpost on the high street a representative for a segmented customer base that ranges from Premier and Business customers through to Basic accounts. This emphasises that wealthier customers still crave the human touch and are willing to pay for it.
- Yet that segmentation also only works when integrated into technology, so that the internet customer experience can be seamlessly implemented offline (Argos has excelled at this transformation through their click and pick up in-store programme).
Travel agents will need to copy these two trends – segment their smaller number of bigger stores and then enable technology so that the final part of a customer journey can be implemented in store.
If these transformations don’t happen, then retail travel agencies will indeed struggle – especially as the internet travel battle war hots up. Here the key driver is consolidation. Put simply, the major internet travel search giants are snapping up rivals and intensifying their battle to win customers over form the high street.
The big US giants such as Priceline and Expedia are steadily snapping up their smaller rivals – Priceline is buying the airline and hotel search engine Kayak, while Expedia has snaffled up the German hotel search site Trivago.
Priceline will now aggressively push Kayak down through its internet pipes, widening the choice of products using this particular platform.
The drivers for this transformation are obvious – growth in the core US market is now slowing down and flattening out with the days of double digit growth long gone.
And this wave of acquisitions will also attract regulatory interest - the Office of Fair Trading has already said it will review the Priceline-Kayak deal.
But be under no illusions as to what’s actually likely to happen next – the regulators will eventually let the deal go through and Priceline and Expedia will look to broaden their appeal in the European markets.
That means they’ll increase their marketing spending to aggressively win new clients and that, in turn, will raise the cost of IT implementation and marketing for the likes of Tui and Thomas Cook.
Both of the UK travel giants are rightly pushing full steam ahead with their internet plans but the US consolidation is going to force them to spend vast amounts of money to keep up – and remember just how IT plans can vastly over shoot costs.
More and more C Suite directors time will be focused on working out how to spend money online wisely – what proportion needs to go on technical development (all those in store links for example) and what needs to go on building brand new technical platforms?
The overall bill will relentlessly go up and up but management within the travel sector will have to justify every pound carefully.
And that will focus attention on issues like making mobile technology pay. Vast amounts of money have been spent building all manner of clever new travel apps that can quite literally do anything for the discerning digital customer – but is anyone actually making any money from these products?
Again, it might be worth looking at the finance industry and their experiences with technology – many investment companies in particular have pumped tens of millions into mobile enabled trading platforms tailored to the smart phone, yet volumes have been pitiful.
By all means use a mobile phone app as a shop window but be prepared for it to be a chronic cost centre for at least another two or even three years.
Go for growth – the itch that has to be scratched
My last dynamic has to be the most exciting – and scary. The emerging markets have obsessed investors and boards for at least the last decade, providing endless talk of fantastical opportunity.
The travel sector hasn’t been immune to this feverish excitement – many of the world’s leading travel companies are still on the hunt to buy businesses in places as varied as China, India and Brazil.
And that excited rush is likely to continue as it becomes obvious to all and sundry that if you want to buy into growth markets, you should avoid the developed world.
The raw data based on projections is still quite startling – only last week I ran into a report by internet specialists eMarketer that suggested that the “ top 5 fastest growth in online travel sales from 2011 to 2016 were the populous fast-growing BRIC countries, along with Korea.
India has the highest CAGR (compound average growth rate), which is 30.6% while Korea is the second with the CAGR of 19.8%. The CAGRs of Brazil, China and Russia are 18.2%, 14.1% and 9.8%. “
These are amazing numbers but we all know the brutal reality – most western firms end up making a right royal mess of their expansion into the BRICs.
All the usual cautions come into play not least that this huge opportunity hasn’t gone unnoticed by muscular local players who have huge financial firepower.
But there is a grim inevitability to what will happen over the next few years in the travel sector. As some growth and confidence does return to the global financial markets, mergers and acquisitions activity will start to pick up.
Unfortunately there’s not alot of big deals to be done in the travel sector, which means that M&A activity in buoyant markets will be focused on more piecemeal acquisitions designed to show investors that a travel company has some exposure to where the growth really is, and we know which countries will keep cropping up in that discussions.
At the moment the focus of both Thomas Cook and Tui is on repairing their core domestic markets and making their balance sheets more robust but sooner or later the temptation to spend aboard will be irresistible. Watch this space.
One last thought on Thomas Cook fund raising
It seems inevitable now that TCs will launch a big rights issue in the next few months. The shares have shot up, confidence is returning in the City and consumers are booking holidays.
But don’t under estimate the struggle Cook will have to raise this amount of money.
Traditional and loyal shareholders who’ve held through thick and thin will be reluctant to dip deep into their pockets which leaves new investors, nearly all of whom will be demanding big fees and generous terms, and a short-term payoff, measured in months at most.
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