Covid-19: Can the travel sector bounce back?

August 18, 2020 6:00 AM

In markets like India, characterised by high economic growth and rising disposable incomes, the same factors that cause a steep fall in travel demand in a crisis help in a quick recovery as growth returns

This suggests that as GDP growth comes back, we can expect the travel sector to return to >10% annualised growth, making it among the fastest-growing sectors in India in the medium term.This suggests that as GDP growth comes back, we can expect the travel sector to return to >10% annualised growth, making it among the fastest-growing sectors in India in the medium term.

By Aditya Agarwal

Working in the travel sector in the times of Covid-19 feels like being in the eye of the storm. One cannot pick up a newspaper or listen to a news byte without coming across, yet another headline proclaiming a doomsday scenario for the industry. With international borders still being shut, and domestic travel only starting in fits and spurts, passenger volumes continue to be abysmally low, and companies have drastically cut fleet sizes and headcounts.

Is this pessimism justified? Undoubtedly, this is the biggest crisis that the industry has faced in a generation, both in terms of the geographic and sector-wide breadth of its reach, and the severity and depth of its impact. However, lessons from past crises, including the 9/11 attacks, the 2008-09 global financial crisis and other pandemics, show that the travel sector has proved resilient to large shocks in the past. Perhaps, the closest parallel is to past disease outbreaks, and a study by OAG of six aviation markets impacted by diseases outbreaks in the last 20 years, such as SARS (2003), found that passenger demand recovered to pre-crisis levels within seven months in each case.

In fact, in markets like India, characterised by high economic growth and rising disposable incomes, the same factors that cause a steep fall in travel demand in a crisis help in a quick recovery as growth returns. Travel demand, especially air travel, tends to have a high discretionary component both in the business and leisure segments, which results in a disproportionately high growth in periods of economic growth and vice versa. This ‘multiplier effect’ can clearly be seen in India where domestic air passenger growth in the 10-year period from 2008-18 was 1.6x of the GDP growth in the same period. This suggests that as GDP growth comes back, we can expect the travel sector to return to >10% annualised growth, making it among the fastest-growing sectors in India in the medium term.

Nevertheless, Covid-19 will result in far-reaching changes in the travel industry, which will shape the industry structure, and the winners and losers emerging from this crisis. These changes will be spurred by a shift in consumer requirements and priorities when it comes to travel. In the last 20 years, which have seen the emergence and growth of online travel aggregators (OTAs), the key consumer priority has often been price, which will now change. Firstly, the industry will need to win back the confidence of consumers who have felt let down by the lack of transparency and consistency in aspects such as cancellations and refund policies. While the industry was caught off guard with sudden lockdowns and overnight changes in government regulations, we also need to acknowledge that clear communication to consumers has sometimes been lacking. Secondly, flexibility will become a big priority in the near term. Consumers will look for cost-effective travel options that provide them with the ability to make amendments and cancellations as their plans change. Thirdly, the demand for ancillary services such as travel insurance will rise.

How can the industry respond to these shifts? We see three key themes resulting from this crisis: (1) accelerated shift to online channels, (2) premium on innovation, and (3) industry consolidation. Travel is already the leading consumer vertical when it comes to online penetration, and this shift will become more pronounced in times of lockdowns, physical distancing and contactless transactions. In turn, this will mean an even greater role for OTAs as consumers will look to compare multiple attributes across suppliers. Companies that have a culture of product innovation and customer service will be able to respond with agility to changing consumer needs as well as disruptions on the supply side. The pace of automation will increase, especially in areas like customer service, which need a complete overhaul to be able to deal with events of this magnitude in future. These changes, along with pressures on balance sheets and the need to find cost savings to make up for lower revenues, could also result in a round of industry consolidation.

Covid-19 will clearly impact all sectors of the economy and perhaps travel more than others. However, for companies that are innovative and focused on changing consumer needs, it presents an opportunity to emerge stronger and benefit from a long period of sustained growth.

The author is Head of Corporate Strategy, Cleartrip
Views are personal

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