A New Normal in Travel Post COVID-19
Some parts of life will return to normal quickly, but the travel industry will undergo a fundamental reset. Here are four variables that will define the travel industry’s post pandemic new normal.
The WHO Declared Coronavirus COVID-19 a pandemic on March 11 2020 when the world had 125.000 total cases of coronavirus. Nineteen days later, with 750.000 cases and with the growth curve getting steeper, we are far from hitting the top of the curve. It is yet hard to know when the world’s population will emerge from its collective isolation and when we will start regaining a new sense of normalcy.
Yaneer Bar-Yam, MIT physicist and pandemic expert who is one of the leading experts in the frontline of the COVID-19 fight, states that in order to beat this pandemic, three actions need to to take place simultaneously: 1) travel restrictions, 2) testing and contact tracing, 3) lockdown. Two of the three have a profound impact on the travel industry.
At least until there is a vaccine (unlikely in the next 12–18 months) and widespread testing for virus and antibodies in place, the travel industry will not go back to the previous normal. The impact on the travel industry will continue to be more severe and long-lasting. Some parts of life will return to normal quickly, but the travel industry will undergo a fundamental reset. This posts attempts to address some of the variables that will define the travel industry’s post pandemic new normal.
1. Closed borders
Countries are experiencing the epidemic curve in different waves. The virus is cascading from one region to the next on a worldwide scale. With the exception of a handful of Asian countries, every country in the world is either undergoing a dramatic and deadly uphill climb up the pandemic curve, about to start it, or blind about what’s about to hit them. 115 countries across the world so far have adopted complete or partial border closures. In the US, given the absence of a consistent national lockdown, and given the different approaches taken by individual states, states might even need to close their state borders in order to control the outbreak.
Once countries climb their way out of the pandemic danger zone, their borders will not reopen up anytime soon. It is a lot more likely that they will put in place country specific travel restrictions depending on country risk levels. In any case, the result is that there will not be a sudden and simultaneous reopening of all the world borders, and borders will most likely remain either closed or open to select countries.
The era of traveling freely from country to country seems to be over for the foreseeable future. Hotels will thus have access to a smaller universe of potential guests and those hotels that rely more heavily on the domestic market will see a quicker turnaround. Same applies to those airlines that have a greater share of domestic flights, such as Southwest (domestic passenger revenues account for around 95% of its total passenger revenues). An exception could be large international mega carriers from Middle East that, even though they have a relatively small domestic share, they will be able to channel traffic from different world regions via their hubs — even if health restrictions will indeed reduce in certain cases their range of network combinations.
Similarly, countries that have a higher proportion of domestic travelers such as China (94% domestic travelers), US (90%) and Brazil (87%) will be able to recover tourism activity sooner than countries such as Portugal (7% domestic travelers), Italy (18%) or Spain (31%) (source of domestic traveler data: Transparent).
The ability to methodically market the right travel product to the right audience will be key. OTAs could have a comparative advantage vs suppliers, as they are not tied down to physical assets and their success has relied on their expertise to segment, reach, and acquire the right customer for the right product in the right location.
2. Behavioral norms
Social distancing norms and limitations on public gatherings will stay past the easing of lockdown measures and will have a profound impact on our daily life. Hotels, airlines, airports and other travel players will have to adapt their product to these new norms to comply with new regulations and to make guests feel at ease.
Similar to the airport terminal restrictions that were imposed on non-travelers in the wake of terrorist attacks, one of the consequences of the new behavioral norms could be that airport and hotel common spaces will only be available for hotel guests and ticketed travelers. This would go counter to the pre-COVID19 trend of hotel common spaces becoming social gatherings for guests and non-guests alike. Highly exclusive properties and hotels with lower “population density” will be relatively better off. Airbnb and alternative accommodation providers might be better positioned than traditional hotels from a social distancing perspective, but hotels and professionally managed accommodations could have an edge on keeping a higher “hygiene standard” than individual alternative accommodations. Being able to brand a standardized and homogeneous “virus-free cleaning and servicing protocol” will be a way to build trust for the end customer.
Hotels will also be hit by the cancellation of corporate events. O’Reilly Media, the organizer of large tech & media conferences such as OSCON, has decided that not only is it cancelling its conferences this year, but all future in-person conferences, thereby closing down the entire conference division altogether.
Social distancing measures will also have consequences for airlines as they would need to reduce the number of passengers in their cabins in order to keep the required distance between passengers. Good news for passengers but devastating news for airlines. In the absence of vaccines and antibody testing, proxies of immunity will be required. Airlines may require passengers to carry temperature scanners and similar monitoring devices for a period of time before the flight to identify disease risk and reduce the possibility of boarding COVID19 positive passengers.
One can imagine a world in which, to get on a flight, perhaps you’ll have to be signed up to a service that tracks your movements via your phone. The airline wouldn’t be able to see where you’d gone, but it would get an alert if you’d been close to known infected people or disease hot spots……..The intrusive surveillance will be considered a small price to pay for the basic freedom to be with other people. — MIT Technology Review
3. Uneven recovery- emerging markets and developing economies will be hit hardest
Since World War II there’s been only four global recessions (in 1975, 1982, 1991 and 2009), all of them lasting about a year. But until now, we had never seen the world economy shutting off into a standstill. The recovery will likely be longer and the toll it will take on individuals will also be unlike what we have seen in modern history. Countries will be hitting all time high unemployment rates that could reach 20% in the US and 50% in Spain to just name a couple. Even if the world is open for business, travelers’ wallets will likely not.
Today’s coronavirus infection map is a close proxy of the world’s richest countries. Six of the 10 countries with most COVID19 declared cases are also in the top 10 ranking of the world’s richest economies. The reason why lower income countries are not showing more COVID 19 cases is not because the virus hasn’t yet hit them but because they’re either not yet testing sufficiently or they’re not able to grasp and report the true numbers yet. The hospital systems in many lower income countries will collapse at a lower threshold, once the onslaught of cases start kicking in, which will increase the mortality rate of COVID19 and collateral deaths from other illnesses. The number of ICU beds in South Africa is around 1.7 per 100.000 people. Very low if compared to the US (34 ICU beds per 100.000 people), Germany (29) or Italy (12.5). (ICU data from Forbes and Atlantic Council).
It seems inevitable that low income countries, emerging markets and developing economies will be hit particularly hard given a combination of lack of medical infrastructure to respond to such a crisis, and inability to deploy the scale of financial assistance and emergency support programs that richer economies can. Furthermore, remote work and effective social distancing does not apply evenly across the world. The way that some countries have been able to transition into remote work does not necessarily translate to other countries with large segments of their populations that don’t necessarily have access to the basic services and tools needed (electricity, internet access, hardware, software).
More than 70 percent of African urbanites — approximately 200 million people — reside in crowded city slums, with limited access to plumbing or electricity. In those environments, social distancing may be effectively impossible. Bronwyn Bruton, The Atlantic Council
Hotels, airlines, OTAs and other travel players whose business is most reliant on emerging markets and developing economies will suffer a greater impact. Truly global intermediaries like Booking.com or Airbnb that do not have a high dependency on any single geography and can quickly and opportunistically redirect its business to the most promising geographies are better positioned to adapt than other OTAs that are more reliant on a particular country or region.
4. Focus on core business
Travel players will have to readjust to the new normal. Hotels and airlines will need to reinvent large components of their product and value proposition in order to adapt to new regulations and behavioural norms. They will also have to readjust their geographic footprint based on the new travel flows, travel restrictions and country specific opportunities.
In the previous normal, suppliers were investing heavily in their digital capabilities to increase their share of direct booking and avoid paying commissions for OTA-originated bookings. In the new normal, maybe these activities will no longer be seen as essential core business, and suppliers might welcome paying OTAs an 18% commission in exchange for acquiring elusive clients.
The asset-light nature of OTAs allows them to be able to reduce costs and adapt on a dime to the new conditions post COVID-19. The OTAs largest cost item, marketing, can mostly be reduced from one day to the next. This is a level of agility that hotels and airlines do not have.
This said, and as my friend and colleague Mario Gavira pointed out to me, a crisis could make supplier industry concentration (airlines and hotel chains) stronger, because the large ones 1) are better positioned to survive the cash crunch and 2) will be bailed out by governments if needed. A stronger market concentration means that intermediaries will be in weaker position to survive — we only have to look at the airline landscape in the US for guidance. Furthermore, OTAs sit on smaller cash reserves than most of airlines and hotel chains and don’t have the same government support for financial bailouts. A relevant case in point here is how airlines are not refunding cancelled flights and IATA is taking a hands off approach in the process, as Nicolas Brumelot (President of French OTA MisterFly) explains in this interview with Skift.
I am confident that the travel industry as a whole will adapt to the new normal. The travel industry has demonstrated its resiliency in every single crisis, and it will do so again after COVID-19. The new normal will present a whole set of new opportunities for those existing companies that will be able to adapt and for new ones that will be created without pre-COVID-19 legacy. Given the immediacy of the changes, corporates in the travel sector will also need to expand their collaboration with startups in areas such as sanitation, hygiene, personal tracking and MedTech.
Stay strong healthy and well. I look forward to seeing you on the other side of the tunnel (or on Zoom).
PS. Thanks to Mario Gavira and Lance Conn for their constructive criticism and input of the draft.
