Calmer Waters Ahead As the Travel Industry Looks to a Post Pandemic Recovery – By Ian Dudley and Danielle Quinlan

Airplane over water - Source pwc
Calmer waters ahead as the Travel Industry looks to a post pandemic recovery

While 2019 saw travel companies enjoy continued growth driven by strong consumer demand across the sector, the COVID-19 pandemic and uncertainty surrounding Brexit have caused unprecedented turbulence for the short to medium term outlook.

This article originally appeared on pwc.

While 2019 saw travel companies enjoy continued growth driven by strong consumer demand across the sector, the COVID-19 pandemic and uncertainty surrounding Brexit have caused unprecedented turbulence for the short to medium term outlook. 

Across the sector businesses have been impacted, with significant redundancies and heavy reliance on government support schemes. Most travel groups have essentially moved into hibernation by cutting all possible costs, maintaining minimum overheads, and undertaking redundancy programmes of up to 50% in an effort to keep the level of costs to a minimum before they can hopefully return, post COVID-19, to normal trading. 

However, those businesses that have been quick to adapt their business models and diversify their offering have been more resilient to the challenges being faced. Those businesses that have flexed their offering have created new opportunities for revenue and will ultimately be in a stronger position to weather the storm. 

Those businesses that have been quick to adapt their business models and diversify their offering have been more resilient to the challenges being faced.

In an effort to retain bookings and reduce the level of cancellations, many travel groups have encouraged and accepted deferral of holidays to 2021, which, while providing some stability and future visibility on booking levels, importantly allows the retention of cash within the business. To encourage further bookings, we’ve seen tour operators starting to offer fully flexible bookings and cancellation policies as standard to increase the level of customer confidence and loyalty. 

The knock on effects of recent high profile insolvencies in the sector such as Thomas Cook has left the Air Travel Trust Fund – the Civil Aviation Authority’s (CAA) compensation scheme – depleted. The CAA had granted the majority of its licences in March and September this year however we have seen a number of new conditions attached, including restrictions on taking future bookings beyond certain limits in addition to maintaining their historic cash to client money ratio levels and minimum cash level limits. Licence holders being required to apply for a variation and submit updated information to allow the CAA to re-assess before lifting any of these restrictions. This has inevitably increased the focus and emphasis on the levels of liquidity available to licence holders to reduce the exposure of the Air Travel Trust for customer monies (inc. vouchers) for bookings. The high level of refunds being claimed by customers and the lower level of ongoing bookings continues to put financial pressure on the tour operators, even before considering the impact of the regular FCO government guidance changes.

While externally, the requirements and new licensing restrictions from the regulators have made it a tough environment for travel operators, this should help maintain a level of consumer confidence for booking and ultimately be a long term benefit for the businesses.

Adapting to a post-pandemic world

Short Haul Travel

Short haul travel is proving to be more resilient, in part due to the ability to change destination from one country to another at short notice depending on the varying restrictions at a point in time. However we have all seen the sudden rush to the borders when revised FCO guidance comes in as holidaymakers seek to avoid a period of quarantine on return.  There is an expectation that Summer 2021 should show the start of a recovery, particularly with the recent news regarding a number of potentially successful vaccine options hopefully being available at scale.  

Brexit and the ongoing negotiations remain a cause for concern, and until a formal post Brexit agreement is in place this provides challenges for the industry, both in respect of providing UK employees options to work overseas and with any pre-holiday travel arrangements. This, coupled with the economic impact the crisis is having on disposable incomes will have a knock on effect for travelling abroad, and it is likely to hit the lower value package holiday market the hardest.

Long Haul Travel

The outlook for the long haul market is likely to see a slower recovery. There are numerous challenges including the following: the capacity for safe long distance flying, rapid screening requirements and testing in advance of travel, the ability for planes to service economically at reduced capacity, the changing FCO restrictions varying from free movement through to nothing but essential travel with last minute changes and impact on restrictions when they return, and lack of rapid COVID-19 testing at airports. These are all contributing to a prediction that the long haul travel industry will not restart until late 2021 at the earliest, and is unlikely to return to FY19 levels until around 2023 or 2024. 

Corporate Travel

In the corporate travel world, volumes are at historically low levels, with the prevalence and ability of home working using virtual technology potentially leading to a longer term shift in the need for and level of business travel.  Some organisations are adapting to offer rapid COVID-19 testing packages for business travellers to boost consumer confidence.

Private Air Travel

There has been an increase in demand for small jet aviation from those with high disposable income who still want to travel or holiday and can afford to do so, but in a manner that is perceived to be safer. Additionally, private aviation companies have expanded their offering to carry greater volumes of cargo given the impact the reduction in commercial passenger is having on cargo capacity, creating further opportunities which will be felt beyond the current pandemic.

2020 has been a turbulent year for the travel industry, with record cancellations, a number of travel groups failing and volumes at record low levels. The outlook for 2021, with the recent announcements of successful vaccine trials, is finally looking more positive, and the expectation is that as soon travel returns without restrictions and health concerns, there will be a rush for holidaymakers to travel abroad. Given the restrictions and lockdowns of the last 9 months, this should see a boost for the industry ahead of its longer term recovery.