Insight

How Can the Travel Industry Prepare for a Recession?

Travel demand is up despite COVID-19 and now inflation. But what does a predicted recession mean for hotels and airlines, and how can brands best position themselves for an economic slowdown? Let’s dive in.

A resurgence in travel has defined the summer of 2022 for the travel and hospitality industry. However, an ongoing travel rebound into 2023 may not pan out as expected.

We have all become familiar with the recent impact of inflation. However, according to economists, a rare scenario defined as stagflation may be on the horizon. But the travel industry doesn’t need to worry just yet—so far, inflation alone hasn’t slowed travel down.

In fact, in addition to full domestic flights, consumers are back to taking international summer vacations, even amidst cost increases of up to 42%.

Unfortunately, there are growing concerns that this demand might slow, as some economists and financial leaders are now predicting a recession as early as 2023.

There’s also growing sentiment we may see a rare combination of two or more quarters of negative GDP growth, defined as a recession. This outcome, combined with inflation, would create a stagflation environment in the U.S. that we haven’t seen since the 1970s.

Whether we continue to see ongoing inflation or enter further into a stagflationary period, either scenario could shake up the predicted road to recovery for travel brands, depending on exactly how economic conditions play out.

Why are inflation rates so high?

What many economists saw as a “transitory” period of inflation after COVID-related travel restrictions were eased has turned into a longer period of sustained price increases.

There are several contributing factors to this:
In 2020, the U.S. government, faced with the unknown impact and duration of a global pandemic, injected massive amounts of liquidity into the financial system via three rounds of stimulus checks sent out to Americans totaling more than $1.5 trillion.

Meanwhile, the U.S. Federal Reserve maintained historic low-interest rates—and continued a policy of ongoing quantitative easing well into 2022. This combo was meant to defend against a concerning economic collapse of unknown length or severity created by COVID-19 lockdowns and unemployment levels during the initial phases of the outbreak.

Now in 2022, looking back, the financial toll of COVID-19 was indeed tough. However, it did not have the longer-term economic impact the Federal Reserve feared at the outset of the pandemic in the U.S.

In 2021, large spikes of initial unemployment recovered with virtual work, social distancing protocols and eventually, vaccines.

The influx of liquidity from stimulus checks increased demand for goods and services simultaneously—when many of those goods and services were slow to return due to ongoing supply chain issues.

This created the initial spark to the inflation flame starting in Q1 2021, when year-over-year (YoY) inflation data became higher than the 2% annual target rate in place by the Federal Reserve since the great financial crisis over 12 years ago.

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Given 15 straight months of escalating inflation growth over the 2% target, it is clear that this inflation is not transitory. However, its effects on travel and hospitality have yet to play out fully.

How inflation has affected the travel and hospitality industry: a timeline

Inflation emerges – Inflation appears for the first time in four decades, having simmered mostly in the background during much of 2021.

The U.S. Federal Reserve points to lingering COVID-19 supply chain issues as a temporary or “transitory” reason for the inflation, creating demand versus supply imbalances.

Travel rebound – December 2021 – With COVID-19 rates in decline at the end of 2021, airlines project a record 2022 demand and a return to profitability. U.S. domestic leisure travel begins to lead the charge. Airlines cautiously add to post-COVID-19 fleets with more efficient aircraft and begin the push to get lost workers back. Travel prices are inflated compared to 2020 but remain comparable to 2019 levels.

Omicron enters – January 27 – In January, another unforeseen COVID-19 variant peaks in the U.S., and travel demand drops, so airlines experience slow capacity growth. Q1 profits turn to Q1 losses.

Russia-Ukraine conflict – February 24  – Russia invades Ukraine, which initially impacts international travel. Already-elevated energy and commodity prices are pushed even higher given Russian oil and gas and Ukrainian crop supply disruptions.

U.S Crude Oil Price History
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Omicron variant exits – April 18 – Omicron’s impact is felt worldwide. However, restrictions are lifted, and mask mandates are gone, even for international travel.

International travel increases – May 24 – Impact on travel from the Ukraine war is minimal. American tourists flock to Europe as flights and hotels are full through the summer, even with inflation. According to the National Travel and Tourism Office, U.S./U.K. travel increases by 1003%.

Logistical travel issues arise – May 28 – Airlines and airports begin to suffer operational delays and cancellations due to the seismic shift in demand versus supply overnight.

Travelers experience heightened cancellations during popular travel weekends around holidays like July 4th and Memorial Day.

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Recession fears escalate – July 18 – Two critical economic reports shake global markets and now foreshadow potential major headwinds for the U.S. economy and travel industry.

June’s 2022 Consumer Price Index – Inflation accelerates in June. For the YoY ending in June 2022, the Consumer Price Index for All Urban Consumers increases 9.1%. The 9.1% increase in the all-items index is the largest 12-month increase since the 12-month period ending November 1981. Prices for food go up +10.4%, energy prices rise +41.6% YoY and prices for new vehicles increase by +11.4%.

June’s 9.1% overall inflation rate marks 12 straight months of 5% or more YoY price increases, well above the Fed’s target of 2% or below since the 2008 financial crisis.

June/July’s 2022 University of Michigan Consumer Sentiment Index – June’s consumer sentiment index plunges to 50.2 in June, the lowest in survey data history going back 44 years to 1978. In July, the index rises slightly to a 51.1.

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Staffing shortages – July 8 – According to an American Hotel and Lodging Association survey, 97% of members face a staffing shortage. About 130,000 positions at hotels remain open nationwide. In Europe, staff at various airports are striking for higher wages, causing disruption and cancellations.

What economic conditions should the travel and hospitality industry expect in 2023?

As for the rest of 2022, airlines and hotels are continuing to make up for staffing shortages, given increased demand, which is predicted to continue through the end of the year.

Given the volatility of the first half of 2022, economists need a few more cards out of the economic deck before predicting a recession next year.

In Q1 2022, top economic indicators predicted a 0-15% of recession, and the likelihood rose to 30-38% for Q3 2022. However, the U.S. job market and economy up through Q3 have been quite strong.

Moving forward, the Fed has laid out a plan to aggressively increase interest rates and tighten access to credit well into 2023, not stopping until they finally impede demand enough to slow inflation to the target YoY 2%, even if it means taking the U.S. economy into recession while doing so.

It’s unclear exactly how much the Fed will hike rates and how this will play out.

How the travel and hospitality industry can prepare for potential stagflation

If we are headed to a stagflation economic environment in 2023, here are a few strategies travel companies can follow now to best position themselves for the effects of inflation on the tourism industry:

Optimize hotel and airline operations through ongoing digital business transformation

Travel companies can leverage technology that optimizes operations and reduces costs to drive revenue and long-term growth.

Many travel companies today have multiple, complex legacy or on-premises systems that require manual oversight or duplication of effort to support business processes. Travel companies can identify their core business challenges and find small ways to address them digitally (within their current tech stack) with continual adjustments until target efficiencies are achieved.

For example, chatbots can be used in the right place/time to support certain transactions, allowing human agents to better focus on high-touch priority customer service issues.

Travel companies who put digital transformation at the forefront of every operations decision—leveraging technologies like cloud architecture, mobile apps, Internet of Things (IoT), machine learning (ML) and artificial intelligence (AI)—can maximize productivity and increase customer loyalty, which counters the negative impact of a worst-case prolonged stagflation period.

Learn about Publicis Sapient’s digital business transformation solution for travel and hospitality brands.

Monetize first-party customer travel data via retail media networks

Retail media networks (RMNs) offer travel companies a valuable source of untapped incremental revenue and a way to enhance their customer experience. If the economy enters a prolonged period of stagflation, RMNs may be a critical lifeline to revenue growth, replacing revenue lost by diminished recessionary travel.

Large travel companies, which already have established loyalty programs and/or branded credit cards, have access to first-party data that positions them very well to take advantage of RMNs.

Just last month, one of the world’s largest hotel chains introduced a media network that helps advertisers target consumers—in part by using the hotel chain’s data on its guests—to bring them ads via the hotel’s websites and, eventually, on the TVs in their rooms.

According to research firm Insider Intelligence, net ad revenues for retail media advertising in the U.S. could reach more than $60B in 2024 compared to $41B in 2023.

Learn about Publicis Sapient’s retail media network solution for travel and hospitality brands.

Expand ways for airline loyalty members to use points to pay for goods and services across a variety of partners

Large airlines today have become central banks, which issue points as a tax-free currency used by their loyalty members to pay for various goods and services. To demonstrate the power of this, a major U.S. airline (in a 2019 8K filing) estimated the value of their loyalty program at $21.9B but had a total market cap of roughly $10B during the same period. Thus, if you subtract the estimated value of their loyalty program from their total market cap, the value of the airline (ex-loyalty program) was negative ($11.9B).

Most larger travel companies today (airlines, hotel chains, cruise, online travel agencies, etc.) offer a loyalty program and/or branded credit card. Airlines, like the ones mentioned above, have maximized opportunities for their members to earn points on any purchase and use those points across an ever-expanding network of partners tax-free in exchange for goods and services.

These airlines and their partners often use AI/ML-driven analytics to find unique ways to stretch the value of certain points with specific partners in ways that do not impact margins for that transaction. However, they do offer tremendous savings and value to specific loyalty members based on their preferences.

This offers a powerful alternative of using fewer points for more goods, versus the alternative of using the inflation-reduced purchasing power of the U.S. dollar (also taxed on the transaction).

This is a win-win for an inflation-strapped customer who will find ways to earn and use points at every opportunity and, in return, rededicate their loyalty to a travel company that is profiting from a transaction, which in the end makes them less susceptible to inflation pressures.