A coronavirus vaccine in 2021 could hold the promise of seeing the world again. Emerging from long confinement periods is something many look forward to. Specialists believe, however, that the opportunity to go back to the pre-covid lifestyle will come at a price given the outlook for businesses in the travel and tourism industry.
Consumers in the travel industry had become used to a trend over the past 20 years: prices in real terms had declined year-over-year. In the first day s of 2020, travel firms in the UK were predicting collective profits of around 20bn euros. In 2021, some experts estimate that the same companies might be forced to raise their prices by 25% or more. Investors have shown confidence and invested to keep these companies alive. But for how long?
Since the start of the pandemic, the focus of companies such as Jet2 and Tui, as well as airlines including British Airways and easyJet, has been to look after their staff and customers as best they can. They have also tried to manage down the cash burn that is currently affecting nearly if not all of them.
Travel has been traditionally a low-margin business with high fixed costs. Airlines in particular are extremely capital intensive with high fixed costs: each aircraft on the ground costs around 5,000 euros each day in leasing fees alone. Maintenance fees come on top. In 2020, the average daily usage for a plane has gone down from an average of 12 hours per day to just one or two.
Travel firms will be keen to keep the supply of airline seats down to keep prices high. They will try to benefit as much as possible from whatever demand is out there. For the first three months of 2021, individuals may be able to find some bargains out there. For example, a Ryanair seat from Luton to Athens in March is currently available for just roughly 9.99 euros. Some forecasters believe that by early April, a significant amount of people will have been vaccinated for countries to become more relaxed about the movement of people.
A particular financial aspect of travel is the fact that for much of the time, companies are prepared to sell below the average cost of providing the product. Holiday firms run at a loss for much of the typical year, but they over-compensate during the summer.
The media teams of holiday companies are busy releasing encouraging surveys that seem to indicate an enormous accumulated demand to travel. Many will be older travelers who may not necessarily have had the benefit of a vaccine, or who intend not to take anything they consider risky until they can see others traveling safely.
Even those wanting to travel as soon as possible face many uncertainties. People have found themselves stranded in the South Pacific or the Caribbean, waiting to be able to go back home. They have experienced frustration by the sudden closure of frontiers across Europe and the world to people from the UK because of the new Covid-19 variant.
In 2021, at least in the short term, flights, transfers and accommodation, will need to provide flexibility, which more often than not increases the price. Companies will need to build in a certain percentage of “waste” and leeway: people who decide to postpone their trips at perhaps one months notice, leaving the holiday company either with empty seats and rooms. Others will try to catch those bargains that might pop up as traveler confidence drops down.
There is also the backlog of vouchers and credits that will need to be used sometime this year. People will be buying travel because they don’t want to lose the value of their trip. The algorithms that drive up prices in response to strong demand do not differentiate between actual money and vouchers. In its full year results, Tui revealed average selling prices for its holidays in 2021 running at 14% higher than in 2019.
