Skift Global Travel Economy Outlook 2020

by Seth Borko and Wouter Geerts + Skift Team - Dec 2019

Skift Research Take

We head into 2020 with more question marks than any year of this cycle. Risks are rising and the global economy is slowing. But, crucially, we are still growing and our base case forecast travel growth to continue next year.

Report Overview

What’s top of mind for Skift Research heading in 2020? Be prepared but don’t panic.

We forecast another good year for international tourism flows in 2020. After what we estimate to be 1.3 billion international tourism departures in 2019, we expect about 40 million new trips in 2020, growing the total by 3% to 1.34 billion.

Across the board in hospitality, online travel, and airlines, we anticipate further expansion throughout 2020, though key metrics are slowing, both as a result of a step down in economic growth and due to changing consumer tastes.

Downside risks are still ever present, perhaps most importantly, escalating trade wars across many regions. This could lead to a decoupling of growth where some regions slow more dramatically as others accelerate.

What You'll Learn From This Report

  • Global economic growth forecasts
  • International arrivals growth forecast and tourism’s contribution to economic growth expectations
  • U.S. consumer and corporate economic expectations
  • European economic growth expectations for key regions and countries
  • Sales, earnings, and key metrics growth estimates for the hotel, airline, and online travel industries

Introduction

What’s top of mind for Skift Research heading in 2020? Be prepared but don’t panic.

Clouds are gathering on the horizon and it is only prudent to plan for what to do in case of emergency. But not every cloud will turn into a full-blown storm; a direct hit, even today, seems unlikely.

In fact, while the global economy may be slowing, it is still growing. The fundamentals of the global economy, political risks aside, are buoyant and pushing us in the right direction and it is more likely than not that we will continue to grow in 2020 as well.

We forecast another good year for international tourism flows in 2020. After what we estimate to be 1.3 billion international tourism departures in 2019 (latest historical data is 2017), we expect about 40 million new trips in 2020, growing the total by 3% to 1.34 billion.

Most of these new trips will come from the Asia Pacific region. We expect that international departures growth will only continue to accelerate, on a path toward our 2024 forecast of 1.54 billion trips.

Across the board in hospitality, online travel, and airlines, we anticipate further expansion throughout 2020, though key metrics are slowing, both as a result of a step down in economic growth and due to changing consumer tastes. Industry leaders are rising to meet these challenges by evolving their product offerings. Be it hospitality leaders shifting towards alternative accommodations or online travel agencies hoping to deepen direct customer relationships.

Downside risks are still ever present, perhaps most importantly, escalating trade wars across many regions. This could lead to a decoupling of growth where some regions slow more dramatically as others accelerate. A breakdown in international ties could also drive domestic tourism over international exploration.

Our base case is for a rebound, but management teams would still be wise to heed these risks. For every 10 risks you prepare for, perhaps only one will materialize, but that does not make a cautious planning exercise for the other nine a waste of time.


2019 Year in Review

2019 was a turbulent year in travel, but then again, when has it ever not been? On the geopolitical stage we are seeing a worsening of the U.S.-China trade conflict, which in the U.S. can sometimes seem as only a minor distraction from the happenings in Washington D.C., but which is having real effects on travel in both countries, and their neighboring regions.

The Hong Kong unrest remains contained to the city state for now, but might start to spill over as the UK’s historical ties to the city potentially impact its and China’s responses moving forward.

The UK is for now mostly preoccupied with developments closer to home. Brexit continues to drag on and a December 12 general election in the UK might not provide the clarity that is needed to solve this problem. All this while Europe’s economy is slowing down, with the first signs of a recession in Germany sending shockwaves through the region.

The Greta Thunberg effect went global in 2019, as climate change is moving towards the top of the agenda. Companies and governments are grappling with the best response forward, and while flight shaming is a popular buzzword, for now it seems to be just this, a buzzword. It is undoubtedly true, however, that over the coming years climate change will increasingly impact customers’, companies’ and governments’ decision-making processes.

That consumer expectations are always in flux was clear when one of the oldest travel companies worldwide, the UK’s Thomas Cook, buckled under the pressure of mounting debts. While package holidays remain popular, especially as economic uncertainty popularizes all-inclusive pre-paid packages, Thomas Cook’s overreliance on high street stores, an aging clientele, and gross mismanagement meant it was unable to dig itself out of the hole it created in the preceding decade. Europe’s low-cost carrier EasyJet is moving into 2020 with big plans to fill the gap left by Thomas Cook’s demise, while many other airlines have struggled and seen their end in 2019.

Unchanged in 2019 was the increasing dominance of Google in all aspects of travel booking and distribution. Also continuing at a seemingly unchecked pace is the increasing demand for international travel, which puts the industry in good stead for 2020, albeit with so far unanswered questions on how to make the practice of travel more economically and environmentally sustainable.


Outlook 2020

The Global Economic View

‘Slowing but still growing’ is how we would characterize the current state of the global economy.

After a solid 2018, world economic output, measured by GDP, continued to rise in 2019. But an accumulating set of challenges across the globe knocked that growth rate down a peg from where it might otherwise be. The International Monetary Fund (IMF) expects that when we close the books on 2019, the world economy will have grown by 3% this year.

That doesn’t sound too terrible, and at least we are not seeing economic output contract, but to put that figure in the proper context, it’s the slowest year of economic growth since the Great Recession a decade ago.

 

Exhibit 1: World GDP Still on the Rise, but Growing at Slowest Pace in a Decade.

 

The downgrades as a result of deceleration occurred across many different regions. Advanced economy GDP growth fell from 2.3% in 2018 to 1.7% in 2019. In emerging and developing countries, GDP growth slowed from 4.5% in 2018 to 3.9% in 2019. Within the emerging world, the slowdown was broad-based as growth softened in China, India, Southeast Asia, Latin America, and the Middle East.

 

Exhibit 2: The Growth Slowdown is Affecting Both Advanced and Emerging Economies.

 

That’s not how this year was supposed to play out. The IMF began with a rosy outlook, calling for 3.9% growth in 2019 in its World Economic Outlook of July 2018. But that initial optimism was revised down a further five times since to get to our current situation. What went wrong?

We would primarily attribute our current difficulties to political changes and challenges that are manifesting themselves in various ways across the world.

In the U.S., the Trump administration has ratcheted up trade pressure across the globe. Most notably, China, but trade partners in North America, Latin America, and Europe, have also been affected. The resulting tariffs and trade slowdown have directly affected businesses in the U.S. and China.

China has faced additional internal struggles as its government seeks to rightsize large public and private debt burdens. Plus, political unrest in Hong Kong sent the city into its first recession in 10 years.

The European picture remains clouded as well. The German economy has slowed markedly in the past few months. Germany is an export powerhouse with large trade ties to China and the U.S., and has therefore become entangled in Trump and Xi’s high-stakes game of chicken. Britain, on the other hand, has suffered a bit of an ‘own goal’ as it continues to be consumed by ongoing Brexit planning (or lack thereof).

Neither has Latin America been exempt from this economic turmoil. Argentina, Latin America’s third largest economy, fell back into recession this year as inflation soared and its currency collapsed. The primary election win of a Peronist government there poured fuel on the fire of an already weak economy. Unrest in Chile, Ecuador, Bolivia, and Venezuela continue to pressure the outlook for those nations as well.

It’s not all doom and gloom though. These rising barriers to trade are primarily making themselves felt in the global manufacturing sector. But standing in sharp contrast, the global service sector remains strong. It continues to expand, buoyed by confident consumers who are in increasingly healthy financial positions.

The Global Purchasing Managers Index demonstrates this divergence well. This series of surveys polls business managers about whether their businesses are expanding or contracting and turns the multiple, global responses into a single index reflecting the level of activity in the manufacturing and services sector, respectively. Any value above 50 reflects expansionary activity by degrees, while anything below is contractionary. This survey indicates that global manufacturing slipped into a contractionary period in May of 2019 and has continued to shrink since. In contrast, the service sector, which moved in lockstep with manufacturing in late 2017, has diverged and continues to expand even in today’s environment.

 

Exhibit 3: Manufacturing and service economic activity is diverging; manufacturing is shrinking, while services continue to expand.

 

The service sector is being supported by consumer confidence which is at near-record high levels amongst shoppers in both the advanced and emerging world. That’s good news as consumer demand, primarily for services, makes up, on average, 80% of the global economy. That means that as we try to decide how to balance manufacturing weakness with service strength in our final estimates, the consumer-led services segment weighs more heavily in our math, tipping our view towards the more optimistic.

 

Exhibit 4: The global consumer is doing the heavy lifting to keep economic growth rolling.

 

This calculus is reflected in the International Monetary Fund’s estimates for global GDP growth to reaccelerate in 2020. This should come from a stabilization on advanced economy growth and a reacceleration of emerging and developing economies back to 2017 and 2018 levels of growth.

 

Exhibit 5: In a base case, growth is expected to rebound next year, driven by emerging markets.

 

This is our base case as well, and Skift Research expects 2020 to be, for the most part a year of reacceleration. This V-shaped rebound is reflected in many of our estimates for the coming year.

But there are also more downside risks to this base case than in any of the previous yearly outlooks we have published (see here and here).

In our view, there are few structural or fundamental imbalances that should cause the global economy, and by extension the travel economy, to collapse from within (as was the case in 2008). The risks all come from external shocks: trade wars, political tension, tougher migration policies, and large-scale protest movements, among others both known and unknown. And let’s be clear, those risks are steadily rising.

Each of those risks in and of themselves might not bring down the global economy, but as they compound upon each other the downward pressure grows greater. It also means that, after several years of synchronized global growth, this year is likely to look a lot more idiosyncratic. We expect that we will see economic and tourism growth driven a lot more by regional and even country specific factors this year with corresponding winners and losers. Whereas in past years, a rising tide tended to lift all boats equally.

The Big Picture Travel View

How does travel fit into this bigger global economic picture? The good news from our industry’s perspective is that travel sits right at the convergence of many lines of global growth.

Travel is primarily (~75%+) a consumer leisure good and so stands to benefit from high consumer confidence. Even on the business side of things, many corporate customers come from service business which fall into the still-expansionary section of the global economy (i.e., a lot more frequent flyers are consultants than steel workers). Plus, as an aspirational purchase, global tourism taps into skyrocketing demand from rising emerging market consumers.

We see another good year for international tourism flows in 2020. After what we estimate to be 1.3 billion international tourism departures in 2019 (latest historical data is 2017), we expect about 40 million new trips in 2020, growing the total by 3% to 1.34 billion.

Most of these new trips will come from the Asia Pacific region. We expect that international departures growth will only continue to accelerate, on a path for our 2024 forecast of 1.54 billion trips.

 

Exhibit 6: Continued rise of international travel a long-term trend.

 

Exhibit 7: Growth of international travel may have slowed in 2019, but we expect reacceleration.

 

Travel and tourism’s direct impact on the economy continues to grow as more individuals travel, take more trips, and spend more per trip. The World Travel and Tourism Council estimates that the industry directly contributes $2.8bn of economic output to the world economy, representing 3.3% of all global GDP. Counting indirect impacts and induced spending would boost these figures even higher.

Based on the economic picture, we estimate that travel’s economic output will grow 3.2% in 2019 and 3.5% in 2020, ultimately contributing $3.0bn to the global economy next year. Further, we expect employment in the travel sector to grow and for the industry to contribute 341 million jobs by 2020, up from 323 million in 2018.

 

Exhibit 8: The tourism industry is a significant contributor to global GDP.

 

United States in Focus

Economic growth in the United States continues to decelerate, down to 2.4% this year and estimated to slow even further to 2.1% in 2020. While it seems unlikely that we can regain the 2018 peak growth rate of 2.9%, that is a better growth rate than the overall pace of expansion in advanced countries (estimated 1.7% growth in 2019 and 2020), and higher than levels seen as recently as 2016.

 

Exhibit 9: The U.S. economy continues to grow but seems to have peaked in 2018.

 

We attribute the relative strength of the United States compared to other advanced countries like Japan and those in western Europe primarily to the strength of the U.S. consumer as well as the diversified and global nature of U.S. businesses.

Consumer Strength Remains the Key to U.S. Economic Performance

The retail consumer in the U.S. has long been in the driver’s seat of their country’s economic performance. How the U.S. consumer is feeling (and spending) determines, far more than any business or government action, how the overall economy will react in any given year.

The good news is that in a year when business sentiment has fallen and U.S. government policy has been at best neutral and at worst counterproductive, the consumer once again pulled through.

Underpinning the state of the U.S. consumer is the U.S. labor market which remained tight throughout 2019, sitting at record or near-record low levels of unemployment. The most recent jobs report as of publication, which provided data for October 2019, shows that only 3.6% of the U.S. labor force was unemployed; near the lowest levels since 1969.

 

Exhibit 10: A tight labor market underpins U.S. economic activity.

 

Wage growth has been slow, but steady, building over the past few years to reach levels of 2.5–3.0% year-on-year gains for the better part of 2019.

Wage gains were, frankly, subpar for most of the period of 2010–2015, given that the unemployment rate fell from 10% to sub-5% in that same time period. It’s good news to see that wages have begun to inch up over the past few years, suggesting that negotiating leverage has slowly shifted towards workers.

Recent data, though choppy, suggests that even these modest gains have plateaued somewhat in recent months. This is disappointing, but hopefully temporary. Still, even if wage gains level out at the 3% level, it suggests real salary increases above the cost of inflation for all of 2019 and into 2020. Higher wages should translate into higher consumer spending on travel and other discretionary leisure products and services.

 

Exhibit 11: U.S. wages are slowly gaining, but not as fast as we would like to see.

 

When trying to balance how much U.S. consumers will spend on travel, one part of the equation is how much money flows into households — primarily this is salaries and is therefore well proxied by unemployment and wage growth. The other side of the equation is how money flows out of the household — money that goes out towards non-discretionary purchases and debt service.

We measure this by comparing consumer debt — mortgages, credit cards, and other liabilities — and disposable income — cash earned after non-negotiable purchases like groceries, rent, etc.

The good news here is that household balance sheets continued to de-lever throughout 2019, giving the consumer more breathing room to spend on discretionary purchases such as travel.

In aggregate, absolute levels of consumer debt — mortgages, credit cards, and other liabilities — now represent 89% of annual disposable income, down from highs of 124% in 2008.

But perhaps more important than the outstanding amount of the debt is how much interest (also called debt service) consumers need to pay as these represent actual cash outflows month-to-month. We find that debt service payments have fallen even faster than notional debt levels, a function of both reductions in nominal debt levels outstanding and the lowest interest rate environment in living memory. Consumers are only spending 10% of disposable income on debt service at present, well off of the 13% peak, and the lowest such rate in over 20 years.

These low interest payments crucially free up cash for spending and have important positive implications for leisure travel. That said, trends in interest rates have reversed and are now entering an upward cycle. It is very positive to us that consumer interest payments have remained manageable even as the interest rates rose modestly this year. We expect that the consumer credit situation will remain benign throughout 2020.

 

Exhibit 12: U.S. household leverage remains low in the wake of the Great Recession, giving them more room to respond to new shocks.

 

In addition to income and expenses, the other key ingredient in determining consumer spending is their sentiment. Numbers or not, how do American’s feel about their personal financial situation and the state of the economy looking forward into the future?

The answer here is: pretty good. Consumer sentiment, as measured by the Index of Consumer Sentiment created from polls at the University of Michigan, stands at an optimistic level of 93. For context, that’s down about 5% from highs of 98 achieved late last year, but well off the lows of 58 established during the global financial crisis. The picture, to us, is one of positivity, though not exuberance.

 

Exhibit 13: U.S. consumer sentiment remains high, a positive sign for travel spending.

 

One of the best ways to sum all these moving pieces up is to look at personal consumption expenditure, which measures U.S. consumer spending in dollars directly (There are many metrics that do this with varying methodologies. Personal consumption expenditure is widely followed and favored by the Federal Reserve as a measure of consumer expenditures).

U.S. personal consumption is currently growing at a 2.6% year-on-year pace, as of September 2019, the latest available data. That is pretty good but a clear step down from levels we saw earlier at the start of 2019 and the end of 201.

 

Exhibit 14: Consumer spending growth continues to expand at a moderate pace.

 

Overall, we believe this data paints a mostly positive picture of the U.S. consumer headed into the next year. Unemployment remains low and wages are growing, though not as fast as we would like to see in an economy at full employment. Debt levels are falling and more importantly, interest payments on that debt are falling even faster relative to disposable income. Confidence is still high, but has pulled back from the peaks as new concerns emerge. Consumer spending is accordingly growing, but not as fast as it was 12 months ago.

The net result is that the consumer sector remains strong, though not perhaps as strong as we would hope to have seen at this stage in an economic recovery. The picture continues to improve, but at the same, or in some cases even slower, rate as last year. Confidence is still high, but off the peaks as uncertainty grows. Still though, the consumer seems far from entering a contractionary environment. And that fact alone should support modest growth in the U.S. next year and is likely to keep the country out of a generalized recession in 2020.

Businesses Struggle with Global Trade Wars

After a strong 2018, corporates saw global geopolitical tensions take some of the wind out of their sails.

2018 was one of the strongest years for corporate after-tax profits of this entire economic expansion, fueled both by the Republican tax cuts and a strong economic environment.

The hangover hit in 2019, however, as tough year-on-year comparisons and heightened trade and political tensions meant corporate profit growth stagnated.

 

Exhibit 15: After a strong 2018, U.S. corporate profit growth weakened in 2019.

 

The stark increase in trade and political risk can be seen in the Economic Policy Uncertainty Index. The Index was created by professors at Stanford, Northwestern, and the University of Chicago with the goal to quantitatively measure how economic and political uncertainty shift over time.

The data shows that uncertainty over U.S. economic and trade policy is near the highest level seen since the very first index readings in 1985. At its peak in the summer of 2019, uncertainty surrounding the U.S.’s approach to economics and trade was as high as immediately following the events of September 11, 2001.

 

Exhibit 16: U.S. policy uncertainty is highly elevated, due to current political environment.

 

Note: An increasing trendline implies more uncertainty. A decreasing trendline implies less uncertainty. The Economic Policy Uncertainty Index was created by professors at Stanford, Northwestern, and the University of Chicago. The U.S. index is constructed using newspaper coverage of policy-related economic uncertainty, the number of federal tax code provisions set to expire in future years, and disagreement among economic forecasters for CPI and federal/state/local purchases expectations as a proxy for uncertainty.

These concerns have undoubtedly influenced corporate CEOs, whose confidence has fallen more so than the average U.S. consumer. Coincident with the peak in economic policy uncertainty, CEO confidence, as measured by polls conducted by Chief Executive Magazine, bottomed in the summer of 2019. But levels have been recovering in recent months.

 

Exhibit 17: Economic uncertainty is in turn weighing on CEO confidence, though it is slowly on the mend since this summer.

 

The overall result is that many businesses are in a holding pattern. Profit growth is flat, uncertainty is high, and accordingly, confidence is waning. This is reflected in forward indicators of U.S. business health such as fixed investment and industrial production, the growth of which are trending back towards zero.

 

Exhibit 18: Forward corporate activity indicators are flat, suggesting businesses are in wait-and-see mode.

 

Overall what we see is that businesses are taking an increasingly cautious wait-and-see approach. Very few companies (other than export-driven manufacturing businesses) are pulling back and are outright contracting, but then again, few are willing to invest large amounts of capital until they have a better sense of what the economic future holds.

Ultimately, we see U.S. businesses treading water until they get more clarity, or until the U.S. consumer forcibly pulls them forward.

The Recession Obsession

“Are we going into a recession next year?” It seems to be one of the obsessive concerns on everyone’s mind. Our view is that it is more likely than not that the U.S. economy will continue to grow in 2020. But downside risks are certainly multiplying. A running Wall Street Journal survey of more than 60 economists pegs the odds of a recession next year at 40%, while a recent paper by the Federal Reserve puts that same figure at 30%.

So to be sure, the odds of a U.S. recession are rising, but it is still not the most likely scenario in our view. Business cycles are not living beings and do not die of old age, and so though this expansion is now the longest in U.S. history, that does not mean that we are ‘due’ for a new recession.

Neither does the fact that the U.S. manufacturing sector may be in recession necessarily foretell a wider U.S. recession.

One of the great strengths of the U.S. economy is its diversity. Unlike some other nations where one sector dominates the entire economy, in the U.S. few industries can single handedly control its economic direction. Manufacturing makes up just about 10% of the U.S. economy. Other similarly sized sectors, such as energy in 2016 or airlines in 2011, went into a localized recession that did not spread to the broader economy.

What we need for a recession to ‘catch’ is for a systemic sector (such as financial services) to be affected, for consumer confidence to collapse, or for an external shock to knock us off our current course. We see few major imbalances in either systemically important institutions or the U.S. consumer balance sheet. That leaves, in our view, the biggest risk as coming from an outside political event, such as an escalation of the Trump administration’s trade wars or a surprise result in the upcoming U.S. election.

That is certainly a risk, but not our base case. As such we expect the economy to continue to muddle through into 2020. The result should be a slow, but still positive expansion of the travel industry as American consumers continue to plan and book trips both domestically and abroad.

International Markets in Focus

Beyond the U.S., and as we already highlighted earlier in this report, all sources point towards a decelerating growth in 2019 for advanced economies. Although on a global basis, strength in emerging markets and developing economies helps to offset some of this. 2020 expectations are for a return to 2018 growth performance, mainly driven by a stronger recovery of emerging and developing economies.

 

Exhibit 19: Economic Dip in Developed and Developing Economies in 2019.

 

A global slowdown in industrial output, especially in the production of capital goods, is affecting GDP growth in 2019 compared to previous years. Growth in Germany, Japan, China, and the UK is impacted by this. Investment spending was down considerably in 2019, and in China the trade war with the U.S. was a main factor in a slowdown of imports and exports. A decline in demand for consumer goods including cars and mobile phones impacted many economies, including India. Brexit uncertainty continues to dampen growth in the UK, but more on that later.

 

Exhibit 20: Key countries and regions may see continued deceleration in 2020.

 

2020 is expected to see continued slow growth in developed countries, with growth further slowing in Japan, and remaining basically level in the Eurozone and UK. A continued and expanding U.S.-China trade war is expected to further decline Chinese growth.

 

Exhibit 21: Growth in key European countries remains low.

 

In Europe, Germany has been the beating heart of growth for the continent, but 2019 has showed signs of a slowdown. The reduction in car production has hit the country hard, as have reductions in investment in the construction sector. The German government remains positive about the country’s economic forecasts and has ruled out fiscal stimulus for now. The European Central Bank, however, has responded by cutting interest rates to ultra-low levels and has restarted the practice of quantitative easing. All this sets the region up for a continued dampened performance in 2020.

 

Exhibit 22: Europe worries about Germany’s performance.

 

Impact of European economic slowdown on travel

Europe is the largest travel destination globally, and an important source market, especially for European destinations. At 710 million international arrivals in 2018, Europe dwarfs Asia Pacific at 348 million and the Americas at 216 million trips, as per UNWTO data. Europeans also account for 48% of all international trips taken.

 

Exhibit 23: European countries shape tourism leaderboards.

 

The latest UNWTO Barometer shows that travel performance in 2019 closely tracks economic performance, albeit from a higher base rate.

 

Exhibit 24: Slowing growth in tourism follows a weak economy.

 

In Europe the data is painting a similar picture. European arrivals are down, with especially northern and western Europe registering slowing growth. Growth in southern Europe is also declining, although this comes after a few years of very strong growth. Data by Oxford Economics is in line with this. The company forecasts European arrivals growth to be 3.5% by the end of 2019, with a further reduction in growth for 2020 to 2.1%.

 

Exhibit 25: Europe growth is stagnating as economic pressures take toll.

 

European destinations will hope that the German economy will rebound from its flat performance in 2019, with Germany the most important source market for travel in Europe. Eurostat data from 2017 shows that Germans spend the most on international travel amongst European countries (€78.8 billion in 2017), followed by the Brits (€63.2 billion), and French (€36.7 billion). Just looking at a few countries, German visitors account for around 30% of total visitors to The Netherlands, 16% for Spain, and 14% for France. Germans account for about 13% of tourists to Turkey, and 11% for Greece, although these countries have experienced strong fluctuations already in past years as they struggled with geopolitical unrest and economic malaise.

In terms of UK travel, which is another extremely important source market and embroiled in Brexit uncertainty, the countries that would be hardest hit by a long-term decline of outbound travel are Ireland and Spain. The island of Ireland (Republic of Ireland and Northern Ireland) saw 44% of visitors and 25% of spending come from British residents in 2017 — that is residents from England, Wales, and Scotland. Any sustained downturn in outbound trips is likely to be felt hard.

Spain, likewise, relied on the UK for 23.1% of its total arrivals in 2018, the single largest source market. Spain is arguably a more resilient market than Ireland and will be less impacted than the former, but a double whammy of UK and German slowdown would hit the country hard.

Let’s have a closer look at what is happening in the UK with Brexit, and how it might impact travel from the UK over the coming years.

The UK in turmoil

After multiple attempts and now years of negotiations, the UK has not yet exited the European Union or reached a deal to do so in the near future. At the time of writing (November 2019), the UK is gearing up for an election on December 12, which for all intents and purposes is an election on Brexit and the way forward.

After years and multiple votes to try and get a deal through parliament under the Conservative leader Theresa May, the new Conservative Prime Minister Boris Johnson called for an election at the end of October. He negotiated an updated deal with the 27 EU members, and while parliament was willing to vote on the deal, the PM felt that the deadline of October 31 (as agreed with EU member states) was unattainable, forcing an end-of-year election.

The Conservatives are backing Johnson’s deal, and if the party wins a majority, will get the deal signed as its first priority. The deal would initially mean very little change, as it has a built in period for renegotiations of trade agreements. The Brexit party, headed by divisive figure Nigel Farage, is in an unofficial collaboration with the Conservatives to bolster the leave vote, although it wants to leave the EU without a deal.

The Conservatives’ main opposition is the Labour party, headed by Jeremy Corbyn, which wants to renegotiate the Brexit deal with the EU member states. While the party is looking to leave the EU Customs Union, it wants to renegotiate another customs union which would be very similar to the current situation, but does not require EU membership. Once this deal is agreed, the party will have a referendum where UK nationals can vote whether they agree with the deal or would rather remain in the EU.

The third block is led by the Liberal Democrats, and mostly supported by smaller parties like the Greens, the Scottish National Party (SNP), and Plaid Cymru (a Welsh party), in favour of remaining in the EU by cancelling Brexit. The Brexit situation is also unearthing other fault lines in British politics, with renewed calls by the SNP and Plaid Cymru for a referendum on Scottish and Welsh independence.

An extensive discussion of the Brexit situation can be found in our UK Traveler Profile and Key Statistics: The Brexit Effect, but we will look briefly at the possible impact of Brexit on the travel industry over the coming years.

UK travel performance since the Brexit vote

The vote in 2016 was expected to throw the country in an immediate recession, but this did not happen. Instead, GDP continued to grow and unemployment continued to decline. Q2 2018 is the first time since the Brexit result that the economy showed signs of contraction, with Q3 only just registering a positive figure.

To put this performance solely down to the Brexit negotiations would be too simplistic. What we can say with certainty, however, is that the pound has fluctuated and fallen strongly since the Brexit result, as the political situation can only be described as chaotic, and an investigation of the economic performance of major economies shows that UK growth, albeit largely positive, has fallen behind other countries.

 

Exhibit 26: Performance of the pound and GDP have suffered since the Brexit vote.

 

In terms of tourism, we are seeing a similar situation. In the direct aftermath of the Brexit vote, tourism did not seem to be impacted, but as the uncertainty lingers, the first cracks are starting to appear. Again, it is impossible to contribute a fall in tourism solely to Brexit, but it is likely to be one of the contributing factors.

In the first six months of 2019, international arrivals to the UK have fallen by 1%, while spending fell by 2%. This is on the back of 2018, which saw significant declines as well. This is especially interesting as we would normally expect that a falling pound would make the UK more attractive to foreign visitors (cheaper holidays), and while this seems to have boosted performance in 2017, since then there has been a steady fall.

The latest results from the domestic travel survey, the Great Britain Tourism Survey, show increases in domestic trips and spending, and while outbound figures are not available yet for 2019, this might indicate a continued shift away from outbound holidays in favor of staying closer to home by UK residents.

 

Exhibit 27: UK Travel Starting to Feel the Strain of Brexit.

 

Skift estimates of future UK travel

There are many economic scenarios being produced, and these are continuously changing as the political landscape keeps evolving, but the general position is that there will be a period of economic decline after the UK leaves the EU. The Institute for Government states that “the vast majority of the Brexit impact studies suggest the UK economy will grow more slowly after Brexit than it would do as a member of the EU.”

According to the Institute for Government, which analyzed 12 different Brexit scenarios, predictions range “from a negligible cost to an 18% [decline in GDP] in 2030 compared to a world in which the UK remained a member of the EU.” The latest analysis by the national bank, the Bank of England, from September 2019, asserts that a no-deal Brexit would see a decline in GDP by 5.5%, while a study by the National Institute of Economic and Social Research (NIESR) found that the UK will lose out on £70bn by 2029 with Boris Johnson’s deal versus remaining in the EU, which is a dampening of growth by 3.5%.

There is, of course, major uncertainty with all these forecasts as the political landscape shifts on a weekly basis, but we can use these GDP forecasts to provide an insight into the future outlook for travel.

By correlating past GDP growth with tourism performance, Skift Research has found a strong correlation between the two variables, especially for inbound arrivals, inbound receipts, and outbound expenditure. There is a more moderate correlation between GDP and domestic spending, and relatively weak correlations between GDP and outbound departures (positive) and domestic trips (negative).

These insights allow us to forecast travel performance over the next five years based on the expected economic impact of three different scenarios. The three scenarios are as follows:

Remain in a single market: This could involve revoking Article 50 as proposed by the Liberal Democrats party, or a second referendum as proposed by Labour finding in favor of staying in the EU. Before this happens though, the Labour party will renegotiate the deal and will hope to be able to remain part of a single market system.

Boris Johnson’s deal: The deal that Boris Johnson agreed with EU member states is built upon the framework of Theresa May’s deal, with a few tweeks, especially around the Irish backstop, which up to now has been a major sticking point. If the Conservatives win the election with a clear majority, getting the deal into law will be at the top of their agenda.

No-deal exit (WTO terms): Boris Johnson’s deal should be understood as an extended period of transformation, where both sides have more time to discuss a new trading agreement. Importantly, in the renegotiated deal of Johnson, an unchanged feature was the deadline of this transition period, which still stands at December 2020, and Johnson has indicated he does not want to ask for an extension. This would mean that there remains a real possibility that a year or so after the deal is triggered, the UK and EU do not find common ground for a new trade deal, and the UK will need to start trading with the EU member states under WTO terms.

These three scenarios provide the following forecasts:

 

Exhibit 28: Three Brexit Scenarios and Their Impact on Travel Performance.

 

An immediate no-deal is currently off the table, and therefore a major uncertainty for European travel is alleviated for now. UK residents are showing a hunger to continue to travel, and after the election there might be some additional clarity about the direction the country will take, boosting consumer confidence and travel spending.

Nevertheless, it is likely that, whatever the scenario that will eventually play out over the coming years, the UK travel industry will feel a hit, as it is indeed already experiencing today. A deal would come with a ESTA type visa system, which although a small investment, would add a barrier to traveling for both EU nationals visiting the UK and vice versa. No-deal would not immediately impact air travel, but would likely impact British and European ports, especially where freight is involved. Car holidays and traveling with pets will also become more cumbersome with new and additional requirements between the UK and EU.


Key Sector: Hotels and Short-Term Rentals

Global Hotel Trends

Given hotel performance is generally tied to GDP growth, the economic slowdown in 2019 had an effect on hotel performance as well. Skift Research estimated 2018 RevPAR growth of 3%, and according to different sources the actual performance came in just below that at 2.9%.

2019, however, has been a year of downgrading expectations. In the U.S., RevPAR remains positive but has taken a significant hit with growth for 2019 and 2020 expected to fall below the 1% mark. This does not seem to be down to a decline in demand, which is actually at record levels. It is instead a result of rapid increase in total room supply, including short-term rentals, leading to uncertainty around pricing. Average daily room rates (ADR) growth has been strained, growing below inflation according to STR.

 

Exhibit 29: U.S. RevPAR Taking a Hit in 2019, Expected to Continue in 2020.

 

Also in other parts of the world, hotel performance has been struggling, and in most cases RevPAR is actually in full contraction mode.

Asia Pacific relies heavily on Chinese tourists, but outbound travel from China has been hit by the U.S.-China trade war as we have explored earlier. Japan and South Korea, meanwhile, find themselves in their own trade war. The unrest in Hong Kong adds to this downturn.

Occupancy stands out as a clear winner in the Middle East and Africa for the first nine months of 2019, and this is despite rampant oversupply in markets like Dubai as it gears up for Expo 2020. The stronger dollar impacted ADR in the region and would have made the region less attractive to non-dollar visitors from Europe and Asia.

The strong dollar also impacted the hotel sector in Europe, which followed a similar trend as the Middle East and Africa. As traveling outside Europe got more expensive, it is likely that hotels in the region benefited slightly from more intra-regional travel. Europe also benefits from a stronger base of source markets within its region.

 

Exhibit 30: Americas Only Region with Positive RevPAR by Q3 2019.

 

The slowdown in RevPAR, in most cases driven by lower ADR, means a squeeze on revenues while supply continues to outperform room sales. We expect to see a slight slowdown in supply in 2019, although this is likely to pick up in 2020 with the expectation that supply increases to 18.5 million rooms by the end of 2020.

Note that this figure is based on definitions set by hotel data company STR, containing only hotels with 10 or more rooms. The actual available supply in the market will therefore be larger.

 

Exhibit 31: Supply Expected to Outperform Revenue.

 

Room revenue, meanwhile, is also set to slow down in 2019 and 2020, but will break the $540 billion mark in 2020.

 

Exhibit 32: Hotel Revenue Growth Set to Slow Down.

 

Public Hotel Chain Performance

Up to Q3 2019, public hotel brand companies have been on par with the U.S. market in terms of RevPAR growth. On average, comparable system-wide RevPAR for the seven brand companies we included in our analysis has grown 0.8% year to date, although there are some significant differences in performance between the companies. AccorHotels, for instance, which has a much larger market share in Europe and Asia Pacific, has seen 2.1% growth year to date. Choice Hotels, however, which has a much greater exposure to North America, has seen a decline in RevPAR of 0.5%. In all cases, RevPAR has taken a significant hit compared to the first nine months in 2018.

 

Exhibit 33: RevPAR has declined significantly in 2019 compared to 2018.

 

For 2020, companies have downgraded expectations on the back of more gloomy forecasts. Marriott’s CEO Arne Sorenson said during the company’s Q3 2019 earnings call that comparable systemwide RevPAR will be between 0% and 2% for 2020, with North America RevPAR increasing “around the midpoint” of that range.

Hilton CEO Christopher Nassetta mirrored this sentiment in Hilton’s earnings call: “As we look to next year, uncertainties in the macro environment make it difficult to forecast. Most indicators suggest continued economic growth for all major global regions but at a slower pace. As a result, at this point, we would expect full year 2020 RevPAR growth to be around flat to 1%.”

Despite the less optimistic outlooks, there are no signs that companies are cutting back on developing out their pipelines. On average, pipelines as a percentage of the companies’ existing portfolios increased to 32.1% as of Q3 2019 results versus 31.7% at the end of 2017. This was mostly driven by InterContinental Hotels Group and Wyndham Hotels and Resorts.

As of Q3 2019, Marriott expected its 2019 full year net rooms supply to increase by 5% to 5.25%, with a similar forecast for 2020. Hilton expects to register between 6% and 7% in net unit growth in 2020. IHG indicated expectations of around 5% growth in net supply for full-year 2019, and a similar or better performance in 2020.

 

Exhibit 34: Major brand companies are not slowing down their pipelines.

 

Global Short-Term Rental Trends.

Skift Research estimates that the total consumer market for short-term rentals totaled $107 billion in 2018, and is set to grow 7% to total $115 billion in 2019. In 2010, the five largest companies functioning as market intermediaries accounted for only 4% of gross bookings, as offline bookings, travel agents, and local connections accounted for the vast majority of business. In 2020 we estimate these five players accounted for 84% of all gross bookings in the sector.

With the influx of more professional property managers and master lease players, it is expected that gross bookings will see a renewed uptick in 2020, with the total market forecast to be worth just short of $124 billion in 2020.

 

Exhibit 35: Strong growth for short-term rentals continues.

 

The sector’s poster child, Airbnb, is gearing up to go public in 2020, and has made commitments to verify all listings on its platform after the Orinda, California shooting in an Airbnb property. Airbnb will need to put significant resources towards this process, but it might turn out to be a money tree as hosts can pay for priority verification.

In terms of market capitalization, Airbnb outperforms most hotel chains, although as the company is privately held, this is an estimate only. Airbnb has collected a total of $4.5 billion through different funding rounds, and in May 2018, Forbes estimated the company to be worth $38 billion. This makes the company more valuable than major travel players such as Hilton, Expedia Group, and IHG.

 

Exhibit 36: Only Booking and Marriott have a higher market cap than Airbnb.

 

Airbnb has continued to encroach on hotels’ core business, with the March 2019 acquisition of HotelTonight a big statement of intent. Skift Research estimates that Airbnb’s total revenue has overtaken that of Hilton in 2018, and is on par with Marriott’s in 2019.

 

Exhibit 37: Airbnb now has higher revenue than Hilton, on par with Marriott.

 

We should note, of course, that Airbnb is the anomaly in the sector. While the major hotel chains will look closely at its next steps, there are many smaller players in this fragmented landscape which will not be seen as a threat at hotel headquarters. Marriott easily outcompetes players like Vacasa, Novasol, BelVilla, or Sonder, but as the short-term rental sector continues to outperform the hotel sector, more hotel companies can be expected to follow Marriott with their own short-term rental brands in 2020 and beyond.


Key Sector: Online Travel Agencies

Perhaps the most important trend in travel over the last decade has been the shift away from brick-and-mortar retail to online e-commerce. The travel industry, led by the online travel agencies, was one of the first major industries to grapple with this secular shift, and its notable early adoption of the web is still visible in the data. For instance, in the U.S. 46% of travel agency revenues were derived from e-commerce in 2017 (the latest year for which government data is available). The number is a similarly high 44% for airlines. Contrast those figures with the service economy at large, of which only 7% of business is conducted online.

 

Exhibit 38: Travel leads the broader U.S. in shift to e-commerce.

 

While our e-commerce data is from the U.S., this trend holds in the rest of the world. Globally the shift to digital travel bookings will only continue to grow in Europe, Asia, Latin America, and beyond.

The biggest beneficiaries of this shift have been the online travel agencies which have cemented a major foothold in the world of online distribution. We can see this in top-line industry growth rates which are some of the fastest in the entire travel landscape. We estimate that globally in 2018, online travel agencies booked $365 billion worth of travel — inclusive of accommodation, airfare, car rentals, activities, and any other businesses — up 20% from the prior year.

We believe that this year, growth slowed from 20% year-on-year in 2018 to 7% growth in 2019. This should take gross bookings to $393 billion by the end of this year. We see a modest recovery in gross bookings growth in 2020 back up to an 11% growth rate, which would put online travel gross bookings at $435 billion globally by the end of 2020.

 

Exhibit 39: Online travel agency bookings growth expected to rebound in 2020.

 

This slowdown in gross bookings growth is coming from two sources. The first is the macroeconomic pressures we discussed earlier. The slowdown in global growth has led to a corresponding impact on online travel agency bookings. Lower business activity simply means relatively less travel on both the corporate and leisure sides.

But even if we assume a stabilization of global growth in 2020, it seems unlikely that online travel agency booking growth rates can perk back up to the 20%+ growth rates of years past. This is largely due to the second source of pressure on growth rates, the secular downshift in the pace of online travel growth. The online travel market is becoming increasingly saturated, especially on the leisure side, where online travel agencies dominate.

Finally, it’s a result of increased competition from large hotel chains which have spent the last several years consolidating brands and building up direct booking infrastructure; all with the end-goal of better competing with the online travel agencies. Those initiatives now appear to be paying modest dividends.

The trend is clearly visible if you look at the long-term series of room night growth at Booking Holdings and Expedia Group, the two largest OTAs in the world by revenue. There was a solid run of time from 2014–2017 when both agencies were booking 20–30% growth of room nights sold every quarter. In the case of Booking Holdings, there was even a time when it saw rooms nights consistently grow 30%+ per quarter.

But those days now appear to be behind us and for the last eight quarters, both Booking and Expedia have seen room night growth decelerate in tandem from the high-teens to the low-teens. They are now at risk of dipping into the high-single-digit room night growth with Booking’s latest guidance calling for 6–8% growth in 4Q 2019.

 

Exhibit 40: Room night growth at online travel agencies is slowing over time.

 

The online travel agencies have responded with several growth initiatives including international expansion and a broader product offering.

Unsurprisingly the fastest growth in the online travel space has come from emerging markets with Trip.com (formerly Ctrip), MakeMyTrip, and Despegar all posting above average revenue growth figures. The two big western players, Expedia and Booking, have tried to tap into this growth source both organically and through strategic partnerships and investments. Most notably, Booking Holding’s tie up with Trip.com, and Expedia’s partnerships with Traveloka and Despegar.

Many online travel agencies have also looked to new product offerings to cross sell. In recent years, one of the biggest bumps to bookings growth has come from expansion into short-term rentals.

Take Booking Holdings as an example. We have tried to untangle how fast revenue from its alternative accommodations business has been growing compared to its core hospitality business.

 

Exhibit 41: High growth in alternative accommodation revenues have been pulling up overall company sales while core revenue growth is mostly stable at Booking Holdings.

 

We estimate that the short-term rental portion of its business has been notable pulling up its overall company top line for many quarters now. And in fact, if we were to isolate Booking Holdings’ core hospitality business ex-alternative accommodations, the growth trend has been much more stable — and lower — than the figures would otherwise suggest. The implication is that the mid-double-digit growth rates Booking has been achieving were primarily by scaling its alternative accommodations unit.

Both Expedia, Booking, and others saw success with this short-term rental strategy. And after seeing success with these units, we expect for the online travel agencies to continue to build out their alternative accommodation offering in 2020. Further, we expect that online travel agencies will continue to push out into even more travel product offerings, such as tours and activities.

In theory, these businesses earn their keep by acting as two-sided marketplaces, aggregating supply on one side and consumer demand on the other. And the online travel agencies seem to have as strong a hold over the supply side of the hospitality market as ever. But there have been mounting challenges to OTAs’ ability to cost effectively aggregate consumer demand. The number one challenger with the OTAs for consumer eyeballs has been Google.

Despite these challenges, we note that online travel agencies are still expected to be one of the fastest growing segments in the entire travel industry. After taking into account commissions across their many product offerings, revenue is expected to grow 6.4% to $40.3 billion in 2019, according to Skift Research analysis of consensus estimates from S&P Capital IQ. We expect that this growth rate will tick up to 9.7% in 2020, bringing total industry revenue to $44.2B.


Key Sector: Airlines

2019 was a strong year for airlines globally, though perhaps not as strong as initially estimated. Passenger air traffic continues to grow secularly, as more people than ever before travel by air, in both emerging and developing economies. That led to $589 billion of passenger revenue in 2019, a 5% growth rate, according to the International Air Transport Association (IATA).

We estimate that next year the growth rate can tick up slightly, bringing 2020 passenger air revenues to $621 billion.

 

Exhibit 42: We forecast steady expansion of airline passenger revenue globally.

 

Much of this revenue gain will come from volume increases due to more passengers flying and those passengers flying further distances, on average. This should show up in the data as an increase in revenue passenger kilometers flown (a revenue passenger kilometer, or RPK, represents one paying customer transported one kilometer and is a common measure of airline volumes). There may also be some modest help to boost revenue from unit pricing, or increases in the cost of the average ticket.

Ticket yields got a major boost in 2019, as the unprecedented worldwide grounding of the 737 MAX forced airlines to cut their scheduled services. Some airlines with major expansion plans in 2019 even wound up reducing capacity this year out of logistical necessity.

The benefits from this cut were felt unevenly. Big users of the 737 Max mostly got hurt, despite the rise in yields. But those airlines that did not operate Maxs while still flying in the same markets were able to maintain, or even grow capacity at elevated industry-wide yields and pocketing a pretty penny along the way, and so we expect to see the supply-demand imbalance close even further in 2020.

 

Exhibit 43: Demand continued to outpace supply in 2019, a supportive environment for airline revenues and profits.

 

Moving down from the top line to expenses, we saw slow but steady increase in costs. Oil prices remain as volatile as ever. Prices mostly fell this year to an average crude price of $57 in 2019 from an $65 in 2018, down 13%. This has benefitting U.S. carriers that mostly run their businesses un-hedged, fully exposed to swings in the market price of jet fuel. Many European and Asian carriers prefer to minimize uncertainty and hedged expected fuel consumption. Unfortunately, as oil prices fell in 2019, these airlines found themselves with these contracts locked in at above-market levels and took a series of charges to reflect their hedge losses. The strong U.S. dollar also led to a series of financial charges at foreign airlines from the foreign exchange impact of booking sales in U.S. dollars which then turn into a loss when those dollars get converted into weaker local currencies.

Other than these charges, which are mostly out of the hands of airline management teams, non-fuel unit costs crept up slowly. At certain airlines, like British Airways which suffered a pilot strike, labor costs were a major expense. But on the whole, global commercial airlines appear to have kept non-fuel costs mostly in check this year.

 

Exhibit 44: Fuel costs growth is diminishing while non-fuel costs remain steady.

 

Overall, we expect for the global airline profitability streak to continue into 2020. While operating profits were a little weak this year, at $44bn, we expect for them to perk up and for the industry to earn a $46bn operating profit in 2020.

 

Exhibit 45: We expect that global airline operating margins can be sustained into 2020.

 

Looking specifically at U.S. airlines, which are some of the healthiest in the world, we are optimistic heading into 2020.

For the major U.S. airlines, revenue is expected to grow 4.2% to $188 billion in 2019, according to analyst consensus from market intelligence firm S&P Capital IQ. In line with many of our economic assumptions, we expect U.S. airlines to deliver a 5.1% growth rate into 2020 for revenue of $197 billion.

EBITDA margin (earnings before interest, taxes, depreciation, and amortization) is expected to fall by 50 basis points to 17.7% in 2020 as cost pressure grows slightly.

 

Exhibit 46: U.S. airlines expected to see a modest recovery in revenue growth next year.

 


Conclusion

Thinking forward to 2020 has been a complex and challenging task. We head into this year with perhaps more question marks than in any past year of this economic cycle.

Travel as an industry tends to grow faster than the overall economy in the good years, but is conversely even more sensitive to a retraction of economic activity than most other sectors. Leisure demand from tourists is purely discretionary and can quickly be cut as part of a household belt tightening exercise. Meetings and events and other forms of business travel are important drivers of company growth but can similarly be scaled down in bad times. That means that if the overall economy sneezes, travel will be one of the first to catch a full blown cold.

These risks put us on guard, but ultimately Skift Research stops short of calling for a recession in travel or the global economy in our base case outlook. That doesn’t mean business leaders shouldn’t take the start of this year to prepare for a worst-case scenario, and make sure their companies have the needed flexibility to roll with any unexpected punches.

Finally, we take comfort in looking at the global consumer who remains mostly confident and continues to show a great affinity for travel, both domestic and abroad. We forecast 40 million more international trips in 2020 and over 500 million new outbound trips over the next decade. Travel businesses need to make hay while the sun shines while simultaneously planning for multiple sources of potential disruption.