2019 US Travel And Hospitality Outlook - Deloitte

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2019 US Travel andHospitality Outlook

2019 US Travel and Hospitality OutlookContentsOverview: A decade of growth,2the onset of growing painsA steady outlook for travel spending 5at least in the near term2A view across the segments6Hospitality: Sustaining momentum6Cruise: Niche experiences hit the high seas8Airlines: Finding opportunity in commoditization backlash9Ground transportation: The next wave of evolution10Industry imperatives11A focus on the future of work11Cognitive permeates the travel space12A path to a redefined guest relationship14

2019 US Travel and Hospitality OutlookOverview: A decade of growth,the onset of growing pains2019 marks a decade since the US travel industry emerged from the depths ofeconomic recession. And what a decade it’s been. Over the past ten years, therecovery collided with an economic turning point in global emerging markets—fueling a historic burst in travel demand felt by segments across the travel industry.The numbers tell the story well. From 2009 to 2017,US hotel gross bookings grew from 116 billion to 185 billion (see figure 1). Airline revenue jumped from 155 billion to 222 billion.1 Other sectors, from cruiseto ground transportation and restaurants, also benefitedas US consumers reconnected with an inherent love fortravel, international travel demand flourished, and morecompanies leaned on the power of business travel tohelp their organizations connect and grow.2But growth was not limited to traditional players. It’salso been a remarkable decade for travel tech. Digitalinnovation helped form a lattice for entirely newsegments to enter the market—and thrive. Some privateaccommodation and ride-hailing brands just finding theirlegs in 2009 now sit side by side with the titans of travel.It’s easy to lose perspective on just how much technologyhas shaped travel in such a relatively short time. In 2009,the first hotel and airline apps were just hitting themarket. Instagram and iPads didn’t exist. Most travelersscoured newspapers and magazines for vacation rentals.Taxis were hailed by hand, and small luxury hotels wereamong the only businesses that could attempt to createa personalized experience for every guest—and eventhen, mostly in the physical realm. Perhaps even moreremarkable, ten years of travel innovation could bedwarfed in the next three or four.Unprecedented growth, driven by a robust economy,rising global consumer purchasing power, and digitalinnovation, however, comes with strings attached. Whilemarket conditions are generally expected to remainstrong in 2019, significant challenges capable of throwingthe US travel industry off its growth trajectory loom onthe horizon—many the unfortunate growing pains of anexpanding industry.Figure 1. US travel industry gross bookings and revenue, by segment (2009–2017) (US B)800 799700600500 556400300 222 185200 155100 116 200 122009Airlines2011RestaurantsCar rental2013Hotels2015 29 182017CruiseCAGR r rental4.6%Source: Airlines: Bureau of transportation statistics (Operational revenue), Restaurants: NationalRestaurant Association, Hotels: IBIS, Car Rental: Auto Rental News, Cruise: Phocuswright.Cruise5.2%2

2019 US Travel and Hospitality OutlookCompeting for tomorrow’s international traveler:As the global traveler pool grows, so do the numberof attractive destinations competing for their dollars.Hotels and airlines continue to expand supply inpromising growth markets while destination marketersfine-tune digital and social strategies, helping themtap into rising global demand for “off the beaten path”experiences. Popular destinations like New York arecompeting with a crop of rising stars like Portugal andVietnam—some of which are growing visitation by 20–30percent annually.3 Inbound tourism has always been abright spot for the US travel industry. But competitionfor the lucrative international travel segment is rising—and the United States is feeling the pressure. Whileinternational arrivals into the country increased by0.7 percent in 2017, the global share of long-haultravel is dropping, down to 12.2 percent in 2017 from13.8 in 2015.4Driving demand through infrastructureinvestment: Smooth-running airports and evenwell-paved roads and waste management are integralto keeping the United States competitive as a globaldestination. But recent travel growth, combinedwith other factors like urbanization, has US travelinfrastructure bursting at the seams. The problem istwofold—capacity and modernization. According to theAmerican Society of Civil Engineers, the United Statesneeds 4.5 trillion in infrastructure investment by2025—before the problem potentially impacts GDP andjob growth. Key travel infrastructure, including airports,parks and recreation, rail, ports, roads, and transit,requires some of the biggest improvements.Absorbing demand while improving security:Improving security, particularly at airports, is a challengeof its own. Doing so while absorbing growing traveldemand, creating a more seamless experience, andstaying ahead of evolving threats is a true test facingthe industry in 2019. A community of stakeholders,from transportation and aviation authorities, to airlines,government agencies, and technology players mustcombine efforts around promising security solutionssuch as biometrics, e-visas, and advanced cyberreconnaissance and analytics. Balancing traveler safetywith traveler experience will continue to define thechallenge throughout 2019.3Expenses threaten margins: Rising operating costsare putting travel brands under immense pressure—even in an era of record-breaking revenue. Fuel costsare rising. Labor gaps drive wage increases. Real estateappreciates. Finding relief won’t be easy. Travel brandsare already leaning on a mix of cost-cutting strategiesto rein in expenses, including improved revenuemanagement practices, supply chain optimization,and higher airline load factors. Creating leaner, moreefficient businesses may require bolder thinking in 2019.The evolving field of cognitive technology may offer theindustry a valuable lifeline (see section 3).The travel industry can’t grow without talent:Labor gaps are not new to travel, but the magnitude ofthe current workforce shortage certainly is. In 2009, theUS Bureau of Labor Statistics estimated 353,000 jobopenings across the leisure and hospitality sector.5 Asof 2018, with the travel industry surging, that numberswelled to 1,139,000. 6 In fact, travel leads all industriesin open positions.7 While a multifaceted problem, rapidindustry growth and an evolving workforce remain keydrivers. And the problem doesn’t just center aroundunskilled labor. In the airline industry, for example, pilotshortages are constricting growth, even threatening theviability of some smaller, regional carriers. How doesindustry tackle the problem? Forward progress might belimited without collaborative effort from travel providers,industry associations, and the public sector all aimed atattracting tomorrow’s talent to the industry, improvingemployee retention, and exploring ways to use emergingtech to empower smarter workforces (see section 3).In 2009, the US Bureau ofLabor Statistics estimated353,000job openings across the leisure andhospitality sector. As of 2018, with the travelindustry surging, that number swelled to1,139,000.

2019 US Travel and Hospitality OutlookEyes up for a downturn: At some point, all expansioncycles come to an end. With the hospitality industryreaching almost 10 years of consecutive growth, andthe potential of broader economic slowdown looming,brands must prepare for the possibility of softeningdemand. While many proved their ability to drivegrowth in favorable market conditions, downturns,while typically short-lived, create the environment forloyalty programs, revenue management, and productand customer experience initiatives to prove theirworth. Brands that can weather any potential stormwhile keeping perspective of the long term can be wellpositioned in the next cycle (see section 2).Bigger businesses, bigger risks: Decades of industrygrowth and consolidation have created travel brandsof unprecedented size. They’re operating in morecorners of the globe, leveraging extended enterprisepartnerships for growth, and increasingly connectedthrough new digital platforms. Ultimately, the strategiesthat underpin brand growth also create vulnerability torisk—from cyberattacks and fraud to natural disastersand geopolitical tension. Recent Deloitte research foundthat roughly half of US CEOs (across industries) felt theylack robust plans to develop or acquire tools to addressreputation risks, including crisis response capabilities.8Fortunately, risk-sensing tools and processes to monitorand predict risks are maturing, opening new doors forrisk management in 2019.A steady outlook for travel spending. . . at least in the near termWith rumblings of potential economic downturn gainingsome momentum, travel brands must keep eyes onconsumer spending and sentiment. The last downturnserved as a stark reminder of the strong connectionbetween economic insecurity and discretionary travelspending in the United States. Unlike their Europeancounterparts, US consumers are well known for cuttingvacations out of their budgets entirely—rather thandowngrading accommodations or destinations. Casein point: Nearly half of US adults went the entire yearwithout spending on a vacation in 2008.9Overall, consumer spending should remain strongfor the majority of 2019 (see figure 2). Over the pastfew years, the household sector provided a steadyfoundation for US economic growth. Even whilebusiness investment remained a bit weak, exports facedheadwinds, and housing stalled—consumer spendinggrew steadily.10 Job growth provided a strong foundation.Even with a relatively low uptick in wages, those jobs putmoney in consumers’ pockets and helped householdsspend. The continued (if modest) growth in house pricesis helping, too, since houses are most households’ mainform of wealth.Figure 2. Consumer spending 052010HistoryForecast20152020NondurablesSource: Deloitte economic analysis.4

2019 US Travel and Hospitality OutlookFor all the daily speculation about how politicaldevelopments might impact spending decisions, politicalnoise seems to be just that—in the background—amongconsumers who seem focused on their own situations.As long as employment holds up and housing remainsstrong, consumer travel spending should be robust. Andthe tax cut, while modest for most consumers, will likelycontinue to bolster confidence. More importantly, thetax bill’s fiscal stimulus may tighten the job market evenfurther. If wages begin to rise, travel spending is likely toget a further boost.The medium term presents a slightly less optimisticpicture. Many American consumers spent the 1990sand ‘00s trying to maintain spending even as incomesstagnated. But now they are wiser and older, whichpresents new challenges. Many Baby Boomers faceimminent retirement with inadequate savings, whichmay limit vacation splurging for some. And althoughAmerican households seem to face fewer obstacles intheir pursuit of the “good life” than just a few years ago,growing income inequality also poses a significant longterm challenge. Low unemployment hasn’t alleviatedmany people’s economic insecurity. Four in ten USadults can only cover an unexpected 400 expenseby borrowing money or selling something.115International trade, particularly the trade policy of boththe United States and its current trading partners, isalso a source of growing uncertainty. The magnitude ofthe impact of the administration’s tariffs depends onwhether they turn out to be temporary or permanent.Temporary trade restrictions might slow growth fora year or two; permanent restrictions could havesubstantial impact on the economy. In the long run,permanent tariffs would reduce aggregate output: Theeconomy would simply be less efficient and companiesoverall less profitable. Deloitte assumes that tariffs willreduce GDP growth by about 0.4 percentage points in2019, offsetting some of the stimulus from 2017’s taxcut and budget agreement.12 Tariffs by themselves areunlikely to be large enough to create a recession. Butgrowth is likely to slow as costs rise, shortages appear,and businesses slow investment due to trade policyuncertainty. Overall, these forces make the economyand its impact on discretionary travel spending morevulnerable to other shocks.The combined potential impact of some of these factorscontributes to a 25 percent probability of a recessionscenario playing out in 2019.13 That’s still quite unlikely,but it does indicate that risks are rising, and businessesshould be prepared.

2019 US Travel and Hospitality OutlookA view across the segmentsHospitality:Sustaining momentumThe hospitality industry approachesnearly 10 consecutive years of growth.At this late stage of the cycle, it should come as nosurprise that years of prolonged optimism finally begangiving way to some caution. Historically, hotel upcyclesgenerally burn for roughly a decade before the industryexperiences a period of soft demand.Similar to broader economic forecasts, most indicatorssuggest the current expansion cycle still has legs—eventhough those legs may be tiring. Industry forecasts—leaning on continued GDP growth, low unemployment,and recent tax cuts—remain positive for 2019.14But, while all major industry metrics are projected toremain in the green, they do suggest a slight loss ofmomentum. 2019 forecasts for Average Daily Rate(ADR, 2.4 percent), Revenue per Available Room(RevPAR, 2.4 percent), and Occupancy ( 0.2 percent)are expected to slip compared to 2018 levels.Hotel industry downturns often begin with an externalcatalyst. The previous downcycle was triggered by thefinancial collapse of 2008. The one prior was sparked byeconomic recession and exacerbated by the September11 terror attacks. Given the current strength in theeconomy, it’s difficult to forecast a hospitality marketreversal without a significant force acting on traveldemand. At best, the potential of a broader economicslowdown could lead to some level of softening traveldemand, but that scenario still seems unlikely for 2019.Given the late stage of the cycle, the industry shouldremain alert for downturn indicators, but so far, the fewexisting traces are weak at best. Late in 2018, nationalhotel RevPAR dipped into the red, ending a 102-monthrun of growth.15 While the event could represent asignificant indicator, a single underperforming cityacted as an outlier, dragging down an otherwisestrong national RevPAR average. Across the country,only 25 percent of hospitality submarkets arecurrently experiencing negative RevPAR—far fromthe 40–45 percent threshold that typically signalsa broader downturn.166

2019 US Travel and Hospitality OutlookRegardless of “when” or “if” a downturn materializes,hospitality leaders can always benefit from earlyplanning. In the event of softening demand, the pressurewill be on for revenue managers to maintain rates aspricing power shifts to the consumer. Effective strategiesused in the last downturn included a mix of price-basedand non-price-based strategies, including leveragingopaque distribution channels and product bundlingto mask any significant rate cuts that could tarnishconsumer brand perceptions in the long run—as wellas competing on the basis of quality, leveraging loyaltyprograms, managing costs, and developing additionalrevenue sources and market segments.Hoteliers should also consider historical maneuversagainst the backdrop of today’s market—because thehospitality landscape has changed significantly sincethe last downcycle. The arrival (and quick maturity)of the private accommodation space is an importantdevelopment to consider. It’s difficult to predict howthe rental space will react to a broader economicrecession—mostly because it’s never happened before.A recession could entice more consumers to supplementtheir income by renting their apartments and housesonline—in turn flooding markets with low-cost supplyattractive to travelers on tight budgets. This scenariocould also create more competition across the flood ofeconomy-priced limited-service hotel supply added tothe market in recent years.Overall, it’s important for hoteliers to plan for the longterm. Looking back over the past 30 years of up- anddowncycles proves that downturns are typicallyshort-lived. Hotel owners looking to cut costs willinevitably clash with operators looking to maintainservice levels. But those able to weather any potentialstorm without drastic reductions in service qualityand rates will be better positioned for profitabilitywhen the bull market returns.Relevant experiences transcend the cycleRegardless of an up or down market, competition fortravelers’ hotel dollars will remain stiff. Hotels will likelycontinue to introduce innovative concepts, products,and loyalty strategies to cut through the noise of themore than 270 trademarked brands (and virtuallyinnumerable independents) that currently existworldwide. The rollout of new lifestyle, boutique,7and contemporary brands in recent years demonstratesthe sector’s unrelenting willingness to adapt toan evolving traveler. However, given that travelerpreferences are ever-changing, opportunities willalways remain. Private rentals, from adversary to ally? Hospitalitymight stand to benefit from rethinking a resistanceto private rentals. While regulatory hurdles remain,rental demand is proven. The core rental experience,however, isn’t without flaws—flaws hotels may be wellpositioned to improve. For all their guest-attractingattributes, rentals can often lack the amenities,consistency, and service quality of the traditional hotelexperience. With some creativity, hotel brands havean immense opportunity to combine the best of bothworlds and create something new. Some hospitalityplayers are already experimenting, fusing new rentalinventory with hotel-style amenities such as conciergeservices, elevating product quality with more stringenthost selection processes, and even integrating rentalsinto loyalty programs. Do well in well-being: Hotel brands withouta well-being strategy may already be behindthe curve. Travelers have two distinct needs aroundwell-being travel—using trips as a primary meansto focus on their health versus maintaining healthyhabits during typical vacations and business trips.Hotels should consider acquisitions, partnerships,and programming to gain exposure to eitheropportunity—or both. Fitness and lifestyle brandsare already establishing a beachhead in well-beinghospitality—but industry outsiders lack the experienceof hospitality veterans. Tap into destinations: The in-destination activitiesmarket, from local wine tours to surf lessons, isundergoing a digital revolution similar to that whichtransformed hotel and airline distribution decadesago. The reasons for the delay? An extremelylongtail of suppliers and lack of content and bookingstandardization. But the space is maturing quickly.Plugging into vast inventories of real-time, local activitycontent is getting easier by the month, and with theglobal in-destination activities industry poised to hit 183 billion by 2020, in-destination activities representan opportunity for hotels to connect guests to uniqueexperiences and drive incremental revenue.

2019 US Travel and Hospitality OutlookCruise: Niche experienceshit the high seasThe cruise industry is yet anotherbeneficiary of solid travel demand.From 2009 to 2017, US cruise passengers grew from10.4 million to 12.4 million—helping drive industryrevenue growth from 12 billion to 18 billion.17 Whilestrong, the growth trajectory for cruise falls just shortof its close hotel cousin—and for good reason. Cruiseis simply a more specialized experience. Consumerperceptions around spending extended periods oftime at sea tend to be polarized.Travel

The travel industry can’t grow without talent: Labor gaps are not new to travel, but the magnitude of the current workforce shortage certainly is. In 2009, the US Bureau of Labor Statistics estimated 353,000 job openings across the leisure and hospitality sector. 5 As of 2018, with

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