Business

Travel industry faces difficult voyage

Travel
Image caption The report says that airlines and travel firms will have to improve the customer 'experience' to survive

The past 10 years have tested the travel industry's crisis management skills to the limit.

Terrorism, recession, the SARS virus, strikes, the Icelandic ash cloud: the list piles up.

Even the peaks and troughs of economic cycles can hit the travel industry more than other sectors.

It is a sobering thought that despite a huge expansion in the travel industry - fuelled by opportunities created by the internet and emerging markets - consistent profitability for many airlines and travel-related firms remains elusive.

Given this state of flux, where are future profits to come from? More specifically, what are the travel trends that will secure consistent revenue streams?

A major new report attempts to answer these questions, drawing on interviews with leading executives, including from Lufthansa, Easyjet, Carlson Wagonlit Travel, analysts and academics.

Written by the forecasting group Oxford Economics, in partnership with travel technology company Amadeus, The Travel Goldrush 2020 says the industry will have to shift business models as it adjusts to changing demographics and new customer demands.

Struggling sector

As they enter the next decade, airlines start from a position of weakness.

Having lost $9.9bn (£6.3bn, 7.5bn euros) in 2009, the global aviation industry is expected to return to profit of about $2.5bn in 2010.

But this figure only represents a net profit margin of 0.5%.

Furthermore, the global profit figure obscures the fact that losses in Europe will be about $2.8bn.

It is growth areas in Asia and Latin America that will lift the sector as a whole into profit.

Travel agents, too, have been struggling.

Global tourism arrivals fell by 42% in 2009 to 880 million. Tourism receipts of $852bn were 5.7% below the levels of 2008, indicating that people were spending less per trip if they did travel.

Despite these downsides, there is no question that global travel will expand.

Over the next decade, says the report, arrivals will grow 3.3% a year in Europe and 5.8% in the Asia-Pacific region.

By 2020, Asia-Pacific will account for nearly 22% of arrivals, up from 18.3% now, and 32% of all travel spending, from 21% today.

The business - and profits - are there for the taking. But how?

Interviewees highlighted the growing importance of ancillary revenues - earnings from non-core operations.

Airlines increasingly unbundle products previously included in the ticket price, such as seat assignment and in-flight services.

The cross-selling of services provided by a third party - insurance, car hire, hotel rooms - is also growing and is not just confined to airlines, but also to cruise companies.

The report says that worldwide airline ancillary revenues were some 11bn euros (£9.2bn, $14.3bn) in 2009 - up from just 1.7bn euros in 2006.

But one estimate suggests that airlines could easily make another 10% in revenues from each passenger.

Passenger preferences for meals, entertainment, and internet access could all be improved - and charged for.

More could be done to form closer partnerships with technology companies such as Apple and internet service providers to improve in-flight communications.

There could even be greater physical separation on aircraft between, say, family travellers and lone passengers.

"One interviewee suggested that there may be as many as 20 effective cabin classes on some flights in the future," said the report.

This may already be having an impact on aircraft design.

Boeing's new 787 Dreamliner has cabins that are more flexible, so that airlines can reconfigure the seating beyond the traditional economy, business and first-class options.

Brand dilution

However, many interviewees felt the growth of ancillary revenue has its limits.

Some thought it was more appropriate to short-haul, low-cost carriers.

Long-haul customers, baffled by a string of extra charges, may simply switch to airlines offering an all-in fare.

Ryanair has expanded and promises to continue expanding ancillary options.

Yet the report notes that Ryanair was "starting to face the limits of their own ancillary revenue policies".

"There has been a discernable reduction in checked-in bags for Ryanair flights, which has limited this as a source of revenue."

Image caption Using websites to organise complex travel arrangements can leave customers in a spin

Thinking laterally will be key to securing revenue streams in the next decade.

The report asks: Why should airlines not invest in other modes of transport or, say, video conferencing companies?

Why should the passenger disembarking from the airline be the cut-off-point, and not just part of the total offering?

Just as the film industry came to see DVDs, VCRs, and the internet as money-making opportunities, not threats, so airlines will have to see its own "foes as friends", the report argues.

This sort of cross-investing is starting to happen. British Airways has a stake in the Eurostar rail service, whose cross-channel operation has eaten into airline revenues.

Airlines needed to be more actively involved in end-to-end transport, several interviewees said.

For instance, said James Woudhuysen, professor of forecasting and innovation at De Montfort University: "Ground transfers to and from airports could be greatly improved for the traveller - something for which many would be willing to pay."

Travelling can be tiring, confusing, disjointed and unpleasant. The opportunities to build brand loyalty - and revenues - by easing the process are still untapped.

Agents

Received wisdom has it that in the age of DIY travel using the internet, agents are increasingly redundant.

But agents are repositioning themselves, the report found.

For example, one major travel company said it was considering a move into offering video-conferencing facilities.

As with airlines, interviewees recognised that agents would have to be more involved with the seamless travel experience.

"Easing the stress of airport environments and providing 'trusted traveller' services will provide opportunities for airlines and agents respectively," said Jim Mann, of TUI Travel.

Websites are poor at organising more complex itineraries beyond A to B.

Not only will there always be a demand for personalised services, these demands are growing as travellers venture to more exotic and unfamiliar locations.

Travellers are not just seeking out destinations. They want an experience.

According to Rohit Talwar, of Fast Future, a consultancy specialising in industry trends: "Face-to-face agents will prove their utility into the future by acting as 'experience centres' and supporting the development of adventure travel and the 'silver' traveller."

It means that airlines and agents will no longer be able to think of travel as a functional A-to-B process.

The report says: "We are rapidly reaching a point in time whereby seamless travel is not only an opportunity, but will indeed become an expectation."

Emerging markets

A word of warning: the report found that the products and processes of airlines and agents are broadly geared to the habits of Western travellers.

Catering for travellers from emerging markets - particularly Brazil, India, Russia and China - will be a huge revenue stream, but Western companies particularly will have to be more attuned to their needs.

This will be especially difficult to plan, as there is no clear picture yet as to the preferences and most popular destinations of travellers from emerging markets.

"India's growing middle class is travelling to more distant destinations," said Manoj Chacko, executive vice-president at Kingfisher Airlines.

"However, as yet there is less desire for the 'adventure travel' experiences as currently favoured by Westerners," he said.

The travel industry will change radically over the next decade. It seems that only those executives who can think "differently" will profit from it.

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