Is a Recession Emerging? Four Ways Travel Executives Can Build Resilience Today

March 31, 2023

Many of us have watched signals that indicate a recession could be on the horizon and remember how closely the economy impacts the Travel & Hospitality industry. Since the last major economic downturn in 2008, hotels, airlines and cruise lines have seen unprecedented growth in revenue and supply. In fact, the global travel and tourism sector grew by a record 3.9 percent in 2018, marking the eighth consecutive year it outpaced the world GDP growth rate.¹

At the same time, economic tailwinds have created a surge in development pipelines and labor costs. For example, the U.S. hotel development pipeline forecast had 203,890 rooms in construction as of April 2019. That’s a 10 percent year-over-year increase in the number of rooms in the final phase of the development pipeline.² Meanwhile, hotel labor costs are outpacing revenue growth. For the year, labor costs equaled 50 percent of operating expenses—the highest this ratio has been in the past 60 years (excluding 2009).

While a decade of growth has generated enormous benefits, larger supply and labor costs coupled with changing guest behaviors and new competitive models will make simply reacting to the next downturn much more difficult. And at a time when signals of an economic decline are only getting stronger— including the Federal Reserve’s first interest rate cut since 2008—travel executives must ask themselves whether they have built resiliency that will find competitive advantage when consumer spending on hotel rooms, flights or vacations halts as it has in past economic declines.

Shifting mindsets

During a cycle of tremendous growth, it is easy to lose sight of the potential impact of negative market conditions no matter if they are unpredictable or obvious. RevPar plunged 23 percent after 9/11 and 16.8 percent in 2009 in the midst of the sub-prime mortgage crisis.³

But given the jury is still out on a broader downturn—just 25 percent of U.S. hospitality submarkets are currently experiencing negative RevPAR growth compared to the roughly 45 percent mark that usually indicates a wider downturn—investments favor the present.

Still, regardless of when a downturn hits or its significance, the sheer volume of growth within the industry alone means travel executives will need resilient portfolios. Consider that higher supply like the development of hotel rooms or cruise ships—which continues to rise to keep up with demand—is contingent on consumer spending. In the case of hotel rooms, more rooms help cover the cost of the real estate investment during a booming economy. In a downturn, that strategy becomes difficult to manage. For the hotel and resort industry, development remains strong with nearly 6,000 construction projects in 2019 alone and another 4,000 expected to start in the next 12 months.

The situation gets even more complex when factoring in rising labor costs. Wages further hamper the ability for a company to react because those costs have also significantly increased.

Four ways to build resilience now

Given the shifting dynamics and the pace of today’s modern environment, it is no longer about strategizing for the future but taking action to ensure viability. It is now time for travel executives to proactively arm their business and portfolios with resiliency that thrives in an economic downturn.

1. Accelerate direct booking via next-generation loyalty.

Enabling a direct relationship with customers is one area legacy travel and hospitality brands can’t afford to ignore.

For the modern traveler, the first stop while planning and booking is often an online travel agency (OTA), marketplace (e.g., Airbnb), metasearch (e.g., TripAdvisor) or simply a Google search. When guests choose this route, not only can it limit profits but it also hampers the ability to interact and provide value-added services throughout the journey.

Many travel executives today believe customer loyalty is about the strength of a loyalty program. As a result, many lose sight of the customer relationship. Winning back direct customer relationships starts with reducing friction at every digital touchpoint. That means creating a mobile-first digital experience that enables a modern retail commerce capability. This approach leverages capabilities such as flexible search and shopping cart functionalities, as well as personalization capabilities such as recommendation engines or dynamic offers.

In addition, the mobile app experience must be seamless and relevant. Recently, 69 percent of hotel executives said they were not confident in their organization’s ability to deliver mobile experiences that improve guest experiences and loyalty. App enhancements, as enabled by third-party technology, also build upon the guest experience. For example, CarTrawler’s software development kit enables airlines to offer pre-booked or on-demand transportation from Lyft, Cabify, Gett, Careem, MyTaxi, Grab and others to help own more of the “first and last mile.” Features like these and others, such as offering local activities and tour packages, will be differentiators. Already more than one third of U.S. tours, activities and attractions bookings are made through a mobile device, according to Phocuswright.

Executives will need to rely on personal profile data (from both first and third-party data sources) in real time to provide customers with offers, incentives, content and in-venue experiences that help forge meaningful, ongoing digital and personal relationships with the customers.

2. Unlock value across the travel journey.

While the industry continues to innovate, guests still face a disjointed experience full of friction and anxiety. Today’s customer is forced to orchestrate their own travel journeys, stitching together various interactions from OTAs, airlines, hotels and ground transportation.

Customer friction creates business opportunity. In 2018, Marriott International expanded their offering into cruises with the Ritz Carlton Yacht collection. Digitally-native brands like Uber and Airbnb have added food, tours, experiences and adventures. And one would also be hard-pressed to find an airline earnings call without a focus on ancillary revenue like branded credit cards. Unlike profits and losses from uncontrollable variables (e.g., fuel prices), such programs can provide a steady, passive revenue stream—and even help save an airline in a downturn, as Citibank did with American Airlines by pre-purchasing $1 billion worth of miles in 2009.

Still, the challenge remains that while traditional brands are great at their core business, they struggle to reimagine the future of their business from end to end. Many have tested the waters and failed. In 2017, Royal Caribbean shut down their new company, GoBe, which aimed to provide tours and activities alongside their vacations. Royal Caribbean’s failure highlights the difficulty that legacy companies have in shifting operating models end to end in order to embrace new business models and ways of working.

Today’s leading brands are finding themselves leveraging the platform of their brand to extend their reach and add greater value to customers and, in turn, shareholders. For many, the opportunity is endless. However, the evolution of a core business model can be challenging and many travel executives find themselves weighing the pros and cons of the age-old paradox of ‘build, buy or borrow.’ Adopting a value-driven approach can help can help executives win now with customers and keep them coming back when growth is slow.

3. Augment your workforce and infrastructure.

Labor is becoming increasingly more expensive, occupying an even larger portion of operating expenses.

Indeed, this year alone hotel labor costs accounted for 50 percent of operating expenses. In an industry that prides itself on hospitality and service, the thought of alternative or lean workforce solutions can be counter intuitive. For example, Marriott International faced a strike of more than 7,000 workers in 2018, reflecting at least a negative $7 million revenue impact during one quarter alone.

Modeling and building scenarios around workforce planning in different economic environments is one way executives can take action. Leveraging technology to build more automation into the workforce and replacing commoditized actions is another. Research from Colliers International shows artificial intelligence (AI) could increase hotel revenue by more than 10 percent and reduce costs by more than 15 percent.

Many brands still rely on large, antiquated call centers to handle routine customer service queries. Other industries, such as Financial Service, have evolved by applying technologies such as natural language processing (NLP) and AI to develop web-based chat applications. These so-called chatbots help reduce costs, shrink wait times and increase customer satisfaction. Likewise, hotel kiosks provide customers greater convenience when checking in or out, freeing up staff to focus on more personal customer service requests. Although atypical of the traditional hospitality model, many guests are receptive or prefer this kind of approach when speed-of-service is top of mind. For example, a recent Travel Leaders Group survey found 78 percent of consumers want to see more self-service kiosks at check-in.

Leading innovators in the hotel industry are also using technology and automation with much more variety and differentiation while cutting back on labor costs. For example, Alibaba’s Flyzoo Future Hotel is pushing the envelope by offering facial recognition rather than keycards. Smart assistants bring fresh water or new pillows to a room. Organizations willing to rethink labor in this way and evolve their on-property experiences with technology, including automation and AI, will find themselves in a more flexible position to scale back resources without sacrificing guest experience.

4. Align business evolution with customer evolution.

The face of the modern guest is changing, hence the ability to serve more customers is critical in a downturn. While many modern travel companies have been built on the principle of hospitality, the application of this ethos in their digital interaction leaves many customers wanting more.

Driven by omnipresent technology and shifting demographics, tomorrow’s customer will have much different desires and habits. This has already forced many companies across industries to transform how they approach their business and customers.

For travel executives, expanding across leisure and business categories and embracing new international markets can help unlock opportunities as travel behaviors shift across generations. But it can’t simply be a reaction. These organizations must embrace the shift to a new generation of travelers and become a customer-focused business in an age that’s completely digital.

As millennials and Gen Z make up the vast majority of spending power across the globe, it is critical for executives to grasp the differences in how these generations view brand loyalty, experience travel, are influenced by social media and allocate a greater share of wallet to travel as economic conditions fluctuate. Equally important will be how these consumers shop and engage with travel brands and what they find truly valuable while traveling.

These customer segments will be an important building block, as will targeting both business and leisure crowds as the line between these two segments becomes increasingly blurred. Aligning business evolution goals to tangible changes in guest demographics and preferences will keep travel and hospitality brands ahead of legacy competitors, and in-line with technology companies as they encroach on the industry.

The future is now

History has shown a direct correlation between economic declines and the ability to generate revenue. In an industry that’s becoming increasingly competitive, travel executives need every inch they can get to win with customers—especially when the economy turns. A data-led approach will be vital to better understanding customer reactions in different market conditions, as will innovating technologies that build around new behaviors and recognizing the shifting makeup of the next generation of traveler.

However, none of this is possible without augmenting ways of working that emphasize speed to market and purely focus on the outcome for the customer. Executives who can activate these changes now will form a foundation of resiliency and win with customers before, during and after the next economic downturn.