Trends in the travel industry
On 2 December the Travel & Tourism committee hosted a lunch featuring guest speaker Joyce Goh, Regional Sales Manager, Amadeus Travel Intelligence, Amadeus GDS Singapore. In her presentation Goh shared Amadeus' key findings from the recently-published independent study "Shaping the Future of Travel, Macro trends driving industry growth over the next decade". The study, which drew on macro-economic forecasting and interviews with travel industry executives from airlines, hotels, rail, airports and travel agencies, was commissioned by Amadeus and written by Oxford Economics. The study outlines the trends that will shape travel and makes some projections for the next 10 years.
According to the study, trends for the travel and tourism industry are positive and the outlook is bright. Global overnight tourist flows fell at the peak of the global financial crisis in 2009 but they have since rebounded and continued to increase at a healthy rate of 16.5% from 2009 to 2012. This is slightly higher than the 15% growth rate from 2004 to 2007. Global travel is projected to grow by 5.4% per annum from 2013-2023, higher than the projected global GDP growth rate of 3.4% over the same period. This would represent a new era for the industry, which has to date been in line with GDP growth.
China is fast becoming the world's largest travel market and is projected to surpass the US as the world's largest source of outbound travel spending this year and the largest domestic market by 2017. China's boom is underpinned by a unique cultural and behavioral shift, whereby a large number of Chinese individuals are expanding their overseas business interests and engaging in cross border tourism in a manner unprecedented in previous generations. China's share of global outbound travel expenditure is expected to reach 20% by 2023. This is significant as it was only 1% in 2005.
Besides China, other emerging markets, notably Brazil India, Indonesia Turkey and Russia are expected to witness average annual growth of over 5% in air traffic over the next decade. Outbound spending by Russians, for example is expected to double between 2013 and 2023 to U$100 billion.
Modelling by Oxford Economics indicates that business travel expenditure by US and European passengers is not forecast to reach pre-recession levels until 2014 and 2018 respectively. This is in stark contrast to Asia, where growth in business travel expenditure was unaffected by the financial crisis. Business travel between emerging and western markets has rebounded very strongly, especially the Europe to the Middle East and US to South America routes, which have seen the most dramatic growth in premium air travel. Overall Western companies have become more cost conscious by introducing more sophisticated tools to control business expenses and making smarter use of technological alternatives such as video conferencing. While this does not mean that business travel will be eliminated, there are clear changes in corporate travel policies, meaning that the yields on such travel may have declined through downgrading from business class to premium economy or economy class, shorter hotel stays or changing to restricted fares and so on.
As airlines depend greatly on business class passengers for high yields, more are trying to adapt to this changing consumer shift by introducing hybrid classes, such ‘Premium Economy', which provides elements of business class, such as better quality service, at a more affordable price. According to Oxford Economics, North East Asia alone will account for 42% of the growth in global outbound business travel expenditure over the next decade, with South East Asia accounting for a further 13%. China is also fast catching up with the US as the largest domestic market for business travel.
Along with the rise in travel, demand for international hotel stays has outpaced demand for domestic hotel stays. From 2009-2012 international accommodation nights grew by 20% compared to only 5.8% in domestic growth. This divergence is likely to continue until 2023 with international stays growing at 5.1% per annum, driven by Asia, Middle East & Americas compared to only 3.4% for domestics stays.
Looking at airline trends, Goh noted that the cost gap between low cost carriers (LCCs) and full cost carriers (FSCs) narrowed from 3.6 to 2.5 US cents per Available Seat Kilometre (ASK) between 2006 and 2012. FSCs are aggressively reducing costs while LCCs are increasingly adjusting their products, levels of service and distribution strategies to appeal to higher margin business travellers to ensure continued growth. For example, LCCs are beginning to implement reserved seating, business class and flexible fares. This trend of blurring of the distinction between FSCs and LCCs and the offering of more complex hybrid business models is expected to continue. In future, LCCs may experiment with longer-haul flights or accessing hub airports to pursue growth, adding cost and complexity.
The concept of seamless travel is seen by many as the holy grail of the travel industry but realising the vision, however, is not easy given the complexity and need for extensive cooperation among various players in the industry. Examples of delivering a truly seamless experience across different modes of transport are few and far between and to date there has only been limited connectivity between physical infrastructure.
As the number of global smart phone users has increased, so have the applications and uses of mobile for travel. US mobile travel bookings are projected to more than triple between 2012 and 2014 to reach $25.8 billion. In Europe, one in five travel bookings are projected to be made using mobile devices by 2015. However mobile technology is still not being effectively harnessed by the travel industry and it will take time to develop the best applications and detailed business models.
The study offers three main recommendations: 1) Prepare and invest now to capitalise on projected growth levels; 2) Travel businesses of all types should establish a strategy for emerging markets, if not directly, then through partnerships; 3) Be clear on how the changing macro-economic situation will influence your areas of operation. In order to do that effectively, businesses are increasingly placing emphasis on the importance of business intelligence and effective analysis of it to gain better insights into customers, competitors and markets to stay competitive and profitable.
Global traffic numbers in June 2014 indicate that China is the top destination in North Asia, followed by Japan, Korea and Hong Kong. Taiwan is in fifth place. China's lead is substantial capturing 65% of market share, compared to Taiwan's 3%. Over the past five years, traffic growth from Africa and Asia has been substantial. More African carriers have been flying to the region, although the volume is still small and there are limited direct flight options. In terms of volume, Asia dominates while Europe is a distant second.
Although growth in traffic to China has increased across all regions, an extremely high amount of traffic (about 95%) is generated within the North Asia region and 92% of originating traffic is from within China. The next highest is origin is Hong Kong, followed by Taiwan.
Based on figures for June this year, 78% of inbound travelers to Taiwan were from North Asia, 14% from the rest of Asia, 5% from the Americas and 2% from Europe.
As travelers get more sophisticated and rely more on the internet for research on their holidays, it is important for industry players to better customize and package their offerings based on the preference of their customers. In the case of China, for example, analysis of online searches conducted by individual travelers in China for travel to Taiwan show that they tend to look at doing short trips and conducting their searches on Tuesdays. Knowing this could help airlines and organizations to tailor their promotions for the best results.
Goh concluded that airlines should leverage their alliances to expand their reach and markets.