Greetings colleagues in tourism!
Many of you will think that I have lost the plot attempting to apply my mind to the journey for the next three years that all of us will have to endure, and you might be right. The last six months have taken their toll. After all, none of us have an idea what will happen next week, never mind next month or next year, but looking beyond that timeframe is critical in order to make the right decisions for a successful rebuild of our industry and our respective businesses.
I guess everything starts with the volumes that can be expected and when they arise. To my mind, the prudent way to do this is to have a conservative approach and then celebrate the upside, should it occur. From there I will then summarise the anticipated consequences that these business activities have on the various aspects of companies, and I will specifically focus on DMCs, but the same can be largely applied to suppliers, alternative channel management companies and customers.
It is my expectation that 2021 will trade around 40% of 2019 levels in a highly erratic and unpredictable fashion, 2022 will stabilise in its patterns at around 65% of 2019 levels and only 2023 will resemble 2019 numbers, both in absolute volume as well as seasonality.
Obviously there are many factors influencing this prediction, including
- The continued global impact of COVID-19
- The impact of the economic devastation and consequential disposable incomes
- The reduction of available leave due to substantial reduction in working days
- Unpredictable school holidays and terms
- Material competition of global destinations for a reduced target market
- The existence and availability of vaccines
- Decisions of governments throughout the world
- Changes to the attractiveness of a destination due to poverty levels, crime and infrastructure degradation.
What does that mean for…?
The unfortunate and deeply troubling truth is that staff on all levels have over the last few months carried the brunt of the business rightsizing projects throughout our industry and will continue to do so until some form of normality returns.
The erratic nature of volumes returning will also mean that income will have to be more productivity related, and hence the fixed income component must shrink whilst a growing variable component makes up the balance. This balancing act will be particularly difficult during the switch-on phase when work processes increase, but cashflow only occurs some time in the future once guests have travelled.
In the short term, this will be detrimental to the income potential of tourism employees, however the upside in the medium to long term is an improved participation in the success of a business by high performers within our respective businesses.
Core to the decision-making here is inherent fairness, not taking undue advantage of a changed labour market and, above all, a socially responsible approach considering the livelihoods of our teams.
One of my greatest learnings over the last seven months has been that work from home in a totally flexible fashion has not led to a degradation of productivity, actually the contrary. Simultaneously, I have noticed that maintaining a winning company culture digitally is impossible and hence the office of the future will be a hybrid between working from home and from the office.
The consequence is a reduced size requirement, the creation of a hot desk principle for most employees, a ‘googelish’ look and feel and, above all, improved management interventions and tools to manage the new processes and communication requirements. It is critical to understand that this is not a one-shoe-fits-all principle, but that individuals who have different requirements, personal circumstances and wishes that require a dynamic and flexible approach, previously not understood, have now been heard.
Product development over this period has the unique challenge to straddle customer/consumer requirements, their respective circumstances and risk aversity with the need to protect our own businesses and the supply-chain in destination.
Logic would dictate to utilise services and suppliers whose pricing, terms and conditions philosophy is aligned to source market requirements – however this might well not be possible across the board. Possibly inherently unfair and hence innovative and creative solutions will have to be invented that fulfil the needs of both stakeholders.
Especially complex will be the way forward in a groups, group series and scheduled tour environment where historic passenger breakeven numbers will be irrelevant and tour operators, in conjunction with overseas wholesalers, accommodation and transport suppliers, have to find a way of risk sharing in order to get this travel segment back to a level of commercial sustainability.
Core to the way forward is transparent, open and honest communication intended to find the best way forward, always remembering that our offering is not the only choice the consumer has when it comes to continent, country, experience and individual business.
The overruling principle here is that the rate trajectory before March 2020 no longer has any bearing on the rates into the future and we all have to develop amnesia about anything that came before COVID-19.
As a DMC, our profitability depends on the cost of a service we sell and hence we are aligned to suppliers in attempting to protect the highest possible rate going forward. However, our destinations on the continent are in a global competition with many countries for the reduced number of travellers over the next few years, and already discounting is used to attract same to many areas.
As we do not work in a vacuum, this global trend will influence pricing levels and this challenge is further aggravated by low occupancies that drive dynamic rates consistently below static contracted amounts. The logical consequence of this fact is a lowering of contract rates to ensure their relevance in a hugely discounted dynamic market.
My researched guess is that 2021 will see a contraction of rates between 25% and 30% with a partial claw-back in 2022 of 10% to 15% and inflationary adjustments thereafter, meaning a return to 2019 rate levels by earliest 2024/2025 contracting season… I hope I have got this wrong, but only time will tell.
Cashflow, terms and conditions:
DMCs will be ‘Piggy in the middle’ when it comes to this topic. Logically, suppliers of brick and mortar need to generate Capex and Opex for the upkeep and repayment of properties as well as some core staff.
Whilst there is no travel, one of the options is to charge deposits, which ideally should be non-refundable, to represent a permanent solution. By the way, if DMCs could get this right for themselves it would also be hugely helpful to contribute toward their survival, as process cost is incurred at time of booking and not at time of travel… #justsaying.
Clients and consumers, on the other hand, do not want to escalate risk by paying such deposits and agreeing to risk-sharing terms and conditions, as they are mostly governed by onerous one-sided consumer protection acts.
The consequence is a fight between DMCs and their clients, who often believe that part of the deliverables is to act as a bank/risk insurance company, another fight between DMCs and supply chain – and the only way out of the fighting is a narrower supplier strategy by the DMC, which is aligned to market demands and realities.
These fights, rules, terms and conditions will increasingly relax, and my prediction is that before the end of 2022 we will be back at our 2019 happy equilibrium.
Above is a lot of guesswork. Let us see how close to the truth my predictions were when we meet in 2023 for a few stiff drinks… and not only will we need those drinks by then – we will also be able to afford them again.