US Travel and Tourism Industry

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US Travel and Tourism Industry

The travel industry is more susceptible to economic downturns and instability than other sectors, as proven by the terrorist attacks and the Great Recession. As the recession progressed, occupancy rates dropped, hotels lost revenue, and airlines lost passengers. Even though both periods greatly impacted the industry, the COVID-19 pandemic is creating unprecedented levels of disturbance for all players involved, from airlines to hotels and restaurants. Oxford Economics believes the impact current crisis will be nine times the impact of 9/11.

The Impact of the Great Recession on the US Travel and Tourism Industry

  • As reported by Deloitte, the travel industry is particularly susceptible to economic downturns. Given that wealth and disposable incomes are significantly reduced during economic turbulence, people tend to avoid unnecessary expenditures, which is precisely what Americans did during the Great Recession of 2008. When the US GDP contracted by 2.8% in 2009, travel expenditures declined by almost 9%. Even those that continued to travel were more conservative with their budgets than before.
  • 2008 and 2009 saw a significant decline in domestic travel (business and leisure). Historically, occupancy rates during economic disturbances stay below the 60% mark. During the Great Recession, the lowest occupancy rate was 54%.
  • Corporate traveling was also affected. A 2009 survey discovered that 70% of US travel managers were planning to spend less on corporate travel in 2010. The same survey conducted in September 2008 showed much milder results, with only 33% planning to cut travel spending for 2009.
  • In 2010, per capita disposable income started to rise again, but still at lower rates than before. As a result, the industry started to recover. The US domestic travel volume increased by 3.5% over the previous year, totaling 1.96 billion person-trips. There was also a 7.4% increase in domestic travel expenditures.
  • The Great Recession and 9/11 have a common pattern: travel spending declines faster and recovers more slowly than total trips. However, the spending bounced back faster after the recession than 9/11.

International Visitors

  • While domestic and business travelers stayed home or reduced their expenditures, the number of international visitors entering the country in 2008 was the highest in a decade (58 million), marking the second year to reach pre-9/11 numbers.
  • There was a slight decrease in the number of visitors in 2009 (55 million), probably a result of the Recession hitting developed nations. Following the same patterns of domestic travel, the number of international visitors started to rise again in 2010, reaching roughly 60 million.
  • One peculiar aspect of the 2008 recession was the shift in the country of origin of international visitors, presumably a result of the Recession having a more significant impact on developed countries. While the number of visitors arriving from advanced economies dropped as the Recession progressed, the number of those arriving from emerging economies increased, as well as their expenditures.
  • For instance, Brazilians spent $4.6 billion in the US in 2009. In 2011, it rose to $8.5 billion. On the other hand, Germans spent $5.6 billion in 2009 and $6.3 billion in 2011, even though more people from Germany visited the US in both years.

Airlines

  • Airlines felt the impact of the downturn, with the seven largest airlines reporting a 9.47% drop in domestic passenger miles traveled and 9.2% fewer passengers between 2007 and 2008. The financial strain was so severe that 13 airlines filed for bankruptcy in 2008 alone, while major airlines reported over $5 billion in operating loss (combined).
  • The number of passengers dropped from 770 million in 2007 to 743 million in 2008, and 704 million in 2009. Interesting to note that these numbers are still higher than the aftermath of 9/11, which saw the number of passengers drop from 699 million in 2000 to 641 million in 2002. In fact, many analysts stated that 9/11 was worse for the industry than the recession.
  • Moreover, some impacts remained for years, as airlines were forced to restructure their operations by downsizing, or through mergers and bankruptcy reorganization. Numerous airports were significantly impacted, enduring a partial or complete closure of their major airline’s hub operations. For example, the Cincinnati airport sustained a 63.1% reduction in departing scheduled passenger flights between June 2007 and June 2012.

Hotels

  • By September 2008, the New York Times reported a 5% decline in domestic hotel occupancy over 2007, while cancellations were 50% above the standard rates. For example, Marriott International reported a third-quarter (2008) profit decline of 28%.
  • Both 9/11 and the Great Recession had similar effects on the hotel industry. For example, luxury and upper-upscale chains were affected the most in both instances. Overall, revenue per available room (RevPAR) went from $66 in 2007 to $54 in 2009. It only surpassed the $66 mark again in 2013 ($69). The following charts show the RevPAR of 2002 and 2009, divided by category:
  • If 9/11 was more severe for airlines, the hotel industry suffered more in 2009, with the decline in demand in 2009 reaching 7% and a 7.9% decline in average daily rate. In 2002, the decline in demand amounted to 4.3% and a 4.4% decline in average daily rate.


The Impact of the COVID-19 Pandemic on the US Travel and Tourism Industry

  • According to McKinsey, the impact of COVID-19 on the travel industry and travel demand is "much worse than that seen after September 11, 2001, and the 2008 financial crisis, combined."
  • From the beginning of March until April 22nd, the pandemic has resulted in $99 billion in losses for the US travel economy. National weekly travel spending fell from $19.8 billion in the first week of March to $2.5 billion in the week ending April 18th.
  • Between March and April, the travel industry reported losses of $34.9 billion in the South, $30.4 billion in the West, $19.4 billion in the Northeast, and $14.6 billion in the Midwest.
  • A survey conducted on April 21, with 1,000 travelers in the US, discovered that 82% of those who were planning to travel in the next six months would change their travel plans due to the coronavirus versus 58% who said the same in March. Furthermore, 63% said the pandemic would greatly impact their decision to travel in the next six months.

Airlines

  • Airlines were in a better financial position when COVID-19 emerged than they were in the previous downturns; however, a “slowdown of this magnitude leaves even the strongest players vulnerable.” It is estimated that most airlines have enough short-term liquidity to withstand six months.
  • US airline capacity is already down 70% in April 2020, compared to April 2019, a decline far greater than 9/11 (19%) or the 2008 Recession (11%).
  • In March, the International Air Transport Association predicted a loss of $252 billion in revenue (44% of 2019 revenue).
  • The government is responding with a stimulus package stipulated by the CARES Act, which allocates $50 billion for passenger airlines.

Hotels

  • As of April 22, 80% of hotel rooms in the US were empty. Since February, hotels have lost more than $15 billion in room revenue, and they are expected to lose more than $500 million per day as the year progresses.
  • CBRE estimates revenues losses of 80% for the second quarter, while hotels are projecting occupancy rates below 20% for the next months. The American Hotel & Lodging Association predicts that the occupancy rates will put “33,000 small businesses at immediate risk.”

2020 Forecast

  • Things are rapidly declining for the American travel industry. In March, Oxford Economics released a report predicting a 31% decline in spending and a 75% drop in revenue in April and May. It estimated losses of $355 billion, resulting in a cumulative GDP impact of $450 billion in 2020.
  • The March report predicted that the impact would be six times greater than the impact of 9/11 and that the travel industry losses would "far exceed that of any sector," leading to a total economic loss of $809 billion in economic output.
  • However, in April, Oxford Economics released a new analysis, forecasting a 45% decrease in spending and 81% revenue drop in April and May. It now estimates that the continued losses will amount to a $519 billion decline, resulting in a "total economic loss of $1.2 trillion in economic output."
  • The new forecast claims the impact will be nine times greater than the impact of 9/11 and that most of the losses will be connected to domestic travel. The following infographic presents a breakdown of the expected travel-related losses:
  • International visits are anticipated to decline by 54%, with 43 million fewer international visitors than in 2019. The most significant decline is expected to be from European (-68%) and Asian (-63%) visitors. When it comes to visitor spending impact, it will probably exceed four times the impact of 9/11, with a loss of $116 billion in international spending, an unprecedented decline of 60% in one year.
  • The research tank believes it is possible to mitigate the damages through multiple efforts, such as “opening of travel businesses on a region-by-region basis, enhanced traveler safety measures, and a robust array of marketing campaigns to encourage travel among low-risk US residents.” Even with all the efforts, the industry would still suffer a cumulative decline of $401 billion, albeit 1.3 million jobs could be saved.

The Industry After Covid-19

  • Nobody knows what will happen after the pandemic is over or how long it will last. Most reputable sources seem to believe the impact will stretch into 2021 or even 2023. It is worth noting that media outlets and insiders are more optimistic about the future of the travel industry than the big consulting groups.

Consulting Firms

  • One thing Accenture, the Boston Consulting Group, and McKinsey agree on is that the travel industry will come out of the pandemic “in a world forever altered by COVID-19.
  • McKinsey predicts two scenarios: An optimistic scenario, where the virus is rapidly contained and global economy begins to recover in early May. “Simultaneously, airlines successfully stimulate demand by lowering ticket prices. People resume their normal behavior, with no lasting differences, and airlines ramp up operations. Global travel returns to pre-crisis levels by 2021 and exceeds them in the following years.” In the pessimistic scenario, a resurgence of the virus requires long-term restrictions, and travel bans last longer. Work trips are replaced by videoconferences and demand does not recover until 2023 or even later.
  • Accenture states that the travel industry will need to regain the ground lost by the pandemic. Cooperation between players is one way the group believes the industry can start to rebound. It also believes that the “fabric of the travel industry will change significantly as a result of COVID-19. Expansion of services, mergers, and acquisitions will likely be part of the new normal.” Accenture ends its forecast on a positive note, saying that the crisis can be a driver for innovation and change.
  • The Boston Consulting Group released an infographic with the possibilities they expect for the future:

Media outlets and insiders

  • Adam Blake, professor of economics and head of research in the Department of Tourism and Hospitality at Bournemouth University, believes that people "haven't changed in that they still want to go places, but they're going to necessarily be a lot more cautious about what they do. And they're going to need not just persuading that it is safe to travel, but they'll need to see actual physical changes made to make travel safer."
  • TripAdvisor echoes the professor's sentiment, stating, "People's desire to travel is resilient. What we've seen through SARS, Ebola, terrorist attacks and numerous natural disasters is that the travel industry has always rebounded."
  • CNN Travel predicts that cruises will be cheaper, cleanliness will become a priority, travelers may prefer hotels than vacation rentals, business travel will help airlines, and sustainability will be more important to travelers.
  • Insider does not agree with CNN when it comes to business travel, as it stated that “business travel could plummet, which may impact fares.” The publication also claimed that travel agents could be more relevant after the crisis, as the challenges people faced during the pandemic may shed new light into how valuable they can be.
  • The New York Post believes the industry will come out of the crisis "stronger than ever before."
Sources
Sources