Preview 2013: The Executive View
In the final weeks of 2012, Travel Weekly Editor in Chief Arnie Weissmann spoke with industry leaders in several travel verticals — aviation, cruise, hotel, car rental, technology, retail, river cruising, packaged tours and destination marketing — to get their sense of how 2013 might shape up. “Economic uncertainty” was the phrase of the moment, though most executives assumed that “fiscal cliff” issues would resolve before we went to press. In the end, however, “uncertainty” carried the day.
Richard Anderson, CEO
[The “fiscal cliff” uncertainty aside], 2013 is shaping up to be a good year from Delta’s perspective. If you look at global economies — China, Brazil, Mexico, Latin American countries and Africa — you see good growth, with underlying macroeconomic fundamentals [in good shape].
Europe obviously has its challenges, but [it’s] stronger [as a] group of countries than they would be on their own. The transatlantic business is the strongest part of our business when we manage it properly with the right capacity and the right markets. When we look at forward bookings, both bookings and yields are quite strong.
Fuel prices have moderated because demand continues to fall in the U.S., and the pressure on supply has abated because of all the shale findings. Raw crude prices continue to stay at what is a manageable level. If we do go off the fiscal cliff, or if there are other economic issues around the world, we’re hedged: When you have economic problems like we had back in 2008, we saw fuel prices go from $150 [a barrel] to $45. Economic difficulty will cause the single largest cost input for an airline to go down pretty precipitously.
[Delta bought a refinery in 2012], and the refinery is really about making sure that we don’t treat any part of our enterprise as uncontrolled. Fuel has to be part of the price of the ticket. [With] other energy-intensive industries, they get a fuel-cost adjustment every month on their bill. So what this industry has to do is do the same thing so that we can continue to invest and buy airplanes and provide the levels of service that fuel our economy. Overall for the industry, investing in fuel-efficient airplanes, managing capacity to match demand and having a business model that properly captures the cost of goods sold is ultimately the key to success.
If you think about how the industry in the U.S. is positioned today, it’s much more financially stable. Consolidation has helped. Airline networks have restructured to manage through the volatility of the economy. Industry margins are approaching historically high levels, when adjusted for fuel prices. Airline capital expenditure is fairly disciplined.
And lastly, the U.S. [commercial aviation] industry now maintains quite high liquidity levels. Between [that] and the national hedge against fuel, I think 2013 shapes up to be a good year. The dynamic — the basic, underlying dynamic — is good.
[As regards American Airlines merging with U.S. Airways], I think there’s a certain logic to it, and when we read the sell-side analysts’ reports, there seems to be an inevitability to it. I think it will be good for the industry [because having] American in bankruptcy points to the instability of the organizational construct. And so if you read the analysts and everything coming out of American and US Airways, it seems inevitable and, overall, it will be good for the industry.
Adam Goldstein, CEO
Royal Caribbean International
Everybody in business would always love for macroeconomic conditions to be more robust than they are, but the economy here is big enough, and there are easily enough people wanting to go on vacation and who love cruises that, with the right marketing and sales techniques, travel agents can be successful in 2013 and beyond.
We have long-term faith in the business and are optimistic that cruise vacations can grow on a global level. The satisfaction of the product delivery that we offer is so compelling, and the long-term picture of income and wealth generation around the world is so likely, that we are optimistic.
[Regarding the impact of the Costa Concordia tragedy on 2013], I think the main thing is that there’s a tremendous commitment in the cruise industry to take an industry that already had a wonderful safety record and do tangible initiatives that make it even safer. We said right from the beginning that we didn’t know how long it would take [for the industry to recover], or at what pace it would occur, but clearly, with the passage of time, the influence of the tragedy would diminish and that it would probably take longer to diminish in Europe than anywhere else.
But on the whole, I think the public accepts that the cruise industry has reacted very responsibly to the tragedy. Our relationships with all the relevant authorities remain very robust, very positive. They all seem to be very appreciative of the speed with which we’ve worked together on the operational safety review that’s been occurring in the industry this year and that so many tangible policy recommendations have come out of it and been adopted by the industry.
We’re working very well with the International Maritime Organization, the United States Congress and the European Union. We’ve promulgated a number of policies that are above and beyond compliant, and I’d like to think that both the distribution system and the public at large take confidence from those measures.
CLIA will be amalgamating most of the industry’s associations together to enable the industry to speak with one voice, and that voice should accelerate even further our ability to work with the authorities.
The intention within the new CLIA is to retain the focus on and support for travel agents and very much to retain their inclusion.
In fact, the way in which travel agents in the U.S. have affiliated with CLIA is not only something that we want to preserve, it’s something that the [new structure] may enable us to replicate in other markets in a more profound way.
CLIA training is evolving, and a lot of it is moving into the online world. That’s not only true for CLIA but for other types of online training in travel and tourism. It’s more efficient, and it’s very likely also more effective over time because there’s so much to be put in front of the trainee in terms of imagery and data, and it can be very interactive and rapidly respond to changing conditions and changing facts. I don’t see any possibility that we’ll do less training, but I certainly do believe it will evolve.
Katie Taylor, CEO
Four Seasons Hotels and Resorts
For 2013, we’re seeing continued growth in the [hotel] industry. We’ve seen a steady increase in business following the recession, and 2013 will continue, on a high level, those trends.
Supply tends to be very moderate, which has a good impact, and demand is continuing to increase in most markets. It’s difficult to generalize about the entire world, because on top of the optimism, there are clouds in the sky: the fiscal cliff, the continuing European economic crisis and turbulence in the Middle East. Taking all those as a given, I think we still are optimistic about 2013, relative to consumer sentiment and corporate sentiment, and are looking forward to continued strong performance.
We’re feeling very good about business in the Americas. There’s strong demand, both corporate and leisure, and a good business environment, subject to fiscal issues sorting themselves out.
In Europe, most major markets will continue to perform extremely well, and secondary markets will be OK, but not as bright as in the U.S.
The Middle East can be divided into “affected” and “unaffected” [by instability]. The unaffected is very strong, and we’ve seen an increase in outbound, regional travel.
American outbound travel is also continuing to grow. We’re seeing an increase in lead time on the consumer side for the “big trip”; people are getting back to the idea of going to Africa, Asia and other parts of the world.
Mexico is continuing to improve. South America is very strong. We don’t have a lot of hotels there, but we do have a lot in development.
The Asia-Pacific region is a real bright spot. Business continues to grow very steadily. Although people worry about tempered growth from China, overall Asia looks very good.
Rates go hand in hand with occupancy, and occupancy rose through 2012, and we’ll continue to see even more lift in 2013 in certain markets. Overall, hotel supply growth is quite temperate. You can see people are continuing to forecast that it will be constrained, which allows existing hotels to improve occupancy.
Having said that, Four Seasons continues to grow. [In 2013], we’ll be opening in St. Petersburg, our first hotel in Russia, followed by Moscow next year. That’s exciting. We’ll be opening in Shenzhen, China [in 2013], and I just signed to open in Baku, Azerbaijan, as well as a resort in Cesme, Turkey.
The greatest concern for me is around uncertainty. Uncertainty creates caution. In the course of the next few months, I expect the fiscal cliff, the ongoing European financial crisis, the outcome of the war in Syria — these things will start to resolve and certainty will return. But those clouds are there, and we need to work with them.
Mark Frissora, CEO
In the U.S. overall, conditions should be pretty decent from the rental car market point of view. Hopefully, the fiscal cliff will be a slope, and we’ll see modest growth, maybe 2%. I don’t think we’ll be back to 4% or 5% growth unless we solve the underlying issues, which are tax code changes and entitlements. It’s got to be both, and hopefully bipartisanship will help.
In Europe, forecasting is for zero-to-1% growth [in gross domestic product], and some are forecasting negative [growth]. Pricing is weak, and volume is weak. France, Germany, Italy and Spain are under a lot of pressure; the exception is the U.K. The leisure market is in Southern Europe, and that’s where a lot of the pressure is. The good news in Europe is fleet trends are getting better.
While the economy in Brazil has slowed, we’re still seeing decent growth there.
China is pretty much on fire. There’s dramatic growth, and we’re expanding rapidly. They want to prevent congestion and pollution, and they’ll be controlling licenses in cities to discourage car buying and encouraging car renting. It’s a nice dynamic, and we’re investing more in China.
In general, the car rental industry is very competitive. We think market share is something we’ll earn with better value, not with pricing. For years, we’ve invested in technology to rethink the customer experience. For about 30 airports, we’ll text customers as soon as they land and tell them what stall their car is in and give them a choice of two other cars, if they’d rather. They’ll get a PIN number, and the door locks will pop up and they can drive away; it’s all virtual. The only person they [interact with] would be through a video kiosk.
Hertz wants to be viewed as the fastest, and there will be absolutely no debate on that. Our mantra has always been speed, and technology allows us to take it to another level.
We’re growing infrastructure off-airport. We’ll grow that to 4,000 in a year or two, up from 2,500. Only 50% of registered drivers have rented a car, and the others don’t realize how economical it is. With more locations, and with making people aware of what a value rental is, we can grow the market for Hertz on Demand rent by the hour. Not just in cities but in suburbia, as well. Car sharing is not a niche play.
Six years ago, there were some predictions that travel agents would be less important, but we have, historically, strong partnerships with them. We do business with about 27,000 agents. We’re trying to grow our leisure business, and we want to make sure they feel they are an important part of our strategy.
They will now have more brands than Hertz to sell. We were disadvantaged having only one brand; it’s been like we’ve been fighting with one arm behind our back. With the Dollar Thrifty acquisition, we now have two fists. Many of our travel agent partners are dying to get Dollar Thrifty, and we just have to figure out how to do that without cannibalizing the Hertz brand.
Mark Rabe, CEO
Big data provides the ability to use data in a real-time fashion. We have over 100 million traveler profiles, individuals we know a lot about, and we can share that information with our partner airlines, car rental companies, tourism boards, hotels. Our ability to segment consumers into specific groups and target very relevant offers to them is the application of big data. (Note: Sojern uses data that does not include personal identifiable information like name, telephone number, address and email address.)
We’re seeing that some of the cloudiness around the economy is creating opportunities for companies like ours, focused on user acquisition and making distribution strategies more efficient. We’re tucked away in a fun little digital medium, and we’re seeing rapid acceleration of our industry in terms of revenue growth and proliferation of other companies like ours. It’s happening globally.
Through our databases, we’ve seen what consumers have done in the past. We know their preferences and intentions. For instance, we may know someone’s interested in a certain hotel brand and prefers to stay in the city center. But we also know that he’ll be traveling from San Francisco to Chicago over a specific date range. Meshing this together, the efficiency in getting him an appropriate message has gotten tighter.
We know where and when he is going because we get that from travel partners — airlines — who pass search, booking and check-in data to us.
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Our clients agree to share data and get data. That’s how the ecosystem works. There are competitive locks in place, of course. We won’t promote to a competing airline with that information, but we could provide it to hoteliers, car rental companies, etc.
So we ingest information into our big database, curate it and activate it. Then, if we serve a specific offer to a traveler, it hits home. And if they don’t respond, we’ll add that information into our optimization level moving forward.
Consumers, by and large, are looking for efficiency as well. They’re looking to book in the most cost-effective way, particularly for personal travel and for unmanaged small business travel — managed, corporate travelers can have a very different profile. So we help unmanaged travelers by serving relevant offers, based on their profiles, past behavior, intentions and real-time travel data.
What we’re seeing overall is that the booking windows are getting shorter and that all aspects of purchase behavior for these travelers appear to be collapsing. There’s an increasing awareness of last-minute deals. There’s the expectation that if you’re not wedded to a specific brand or experience, there will be distressed inventory and deals to be had across the hotel industry. That has played out with airlines for quite some time. Car rental is the last piece of the puzzle. That’s a broad trend that we’re seeing with our data set.
Van Anderson, co-president
Even with all the uncertainty and issues that the global economy is facing, unless things change significantly, 2013 will be better than 2012. We’re already ahead of where we were on forward bookings, and this year has been an extraordinary year, our best ever. I could make that statement going back to 2001, so we’re very optimistic.
There is a lot of conflicting economic information, but I think something that was very significant was that Black Friday sales in stores were down but that Cyber Monday online sales were 26% higher. What that says to me is that companies, travel or otherwise, that have adapted or innovated can be successful. The market is bigger than ever, and the opportunities to be successful in travel are far greater than ever. The Cyber Monday and Black Friday sales figures tell it all.
Uncertainty has driven some businesses under a rock. They made decisions that were, with hindsight, too conservative. They held back on marketing, while others were marketing more than ever.
The irony in our business is that the tougher things are, the more suppliers need us — and the better things get, the less they do. So there’s a benefit for innovative, nimble companies in tough times to improve supplier relationships.
I don’t think our relationships with suppliers have ever been better. That’s not to say we wouldn’t like more commissions. It’s in their interest to achieve results by paying us less, and it’s in ours to achieve results by being paid more. Given that basic understanding, you have to find innovative ways to grow your business.
My favorite definition of innovation is changing before you have to. When we started, we focused on cruise sales. But about seven years ago, I sent an email to our network, and the subject line was “Land ho!” and I wrote of the need to sell land products. It wasn’t long before I received a phone call from a cruise line executive who asked if that meant we were not going to focus on cruises. I said no, that we were going to sell more cruises because we were going to expand the reach that we had. And that’s exactly what happened. Our cruise business continues to grow — it’s still more than half the business — but the land side has grown at a very fast pace.
I don’t know if we’ve reached equilibrium. Part of what determines the mix depends upon what suppliers are going to do. If some suppliers continue to increase noncommissionable fees, and land and river don’t, the mix might be different. Our plans are to be working the channels that are, long term, most profitable for our network of independent agents.
So, we’re looking forward to 2013, fiscal cliff or otherwise. I’m optimistic our politicians will figure this out. We don’t have too many options, but focusing on the things we can change, like making calls to customers we haven’t spoken to in six months, is a much better way to spend time than worrying about the fiscal cliff.
Torstein Hagen, chairman
Viking River Cruises
I think the view most people have is that 2012 has not been such a stellar year in the cruise business overall. It’s been a so-so year. But we have been delighted with what’s been happening with the riverboat sector.
When we look at our business in 2012, all our sailings have gone full, and business is up 30%, which is quite phenomenal. As regards passengers, our 2012 business, year over year, was up 36%. Compared to other travel sectors, that’s quite exceptional. The river space is very good.
And the good news is our business for 2013 is up a similar amount. We are 80% sold for next year, and bookings are up 46% over 2012. And I expect that when it comes to the second half of 2013, the American economy should be in even better shape.
The vast majority of the business is North Americans, over 80%. We pulled out of the German markets a while back due to economic conditions over there. And it’s not so interesting to be in the European market. The Rhine is more exciting to Americans than to someone living in Dusseldorf.
We’re in Europe, Russia, Asia, and we charter on the Nile. We may explore other destinations, but I can’t talk about it now.
We looked at South America many years ago, but to my mind, I don’t think that’s the preferred way of seeing South America. The Amazon’s not really a river, it’s more an ocean. I’m happy with what we have, and with the ocean and coastal cruses, we’ll be able to go to South America in due course.
We asked our passengers what they do when they’re not with us, and they like ocean cruises. What they don’t like is how large the new ocean ships have become. That’s what led us to decide to get into the ocean, coastal cruises in the Mediterranean and Baltic. [Very few companies have built ships] for between 500 and 1,000 passengers in the past 10 years, and our research indicates these should sell like hotcakes. If we are lucky, and the economy turns, this will be even easier to sell.
I don’t think the oceangoing cruise lines will get into riverboat cruising. All the cruise lines know that small ships are very difficult to make money on. And, as a sector, riverboats are still tiny compared to ocean, 350,000 vs. 11 million. It’s really nothing. We make a little money, but we’re not a public company, so we don’t need to make a lot of money. But when we get to the ocean sailings, our margins will be better so we can make some more.
I don’t think you’re going to see consolidation in the riverboat sector. I don’t see that happening. They’re small companies, they’re family-owned, and I think most people are happy. Why the hell should you create more complications in life?
Ray Snisky, executive vice president
I think there is a concern, especially with the coming taxes, fees and regulations that are mandated by the new healthcare, that this is going to lead to potentially higher unemployment, a shift toward part-time employment and higher costs passed on to the employee. So our fundamental concern from a macroeconomic standpoint is the shrinking of discretionary income for the middle class.
I think our current domestic situation is causing our company to reassess how much we can really rely on the U.S. consumer for growth. We’ve all operated in the last couple of years under the impression that there’s a tightening of discretionary spending but that it was temporary, due to the recession. I think there’s a growing realization that the impact of these actions may have dramatically changed some of the U.S. consumer buying habits.
So going into next year, I think that uncertainty will limit some of the growth in the industry, and there will be a fight for market share, particularly within the 90-day window, when everyone, including suppliers, is going after the consumer. In that window, there’s a lot more commoditization and pricing action being taken. When everyone’s going after market share, well, you know, efforts to steal business from one another can be very, very expensive.
My concern is that suppliers or other distributors will make poor decisions to gain market share, causing even smaller margins for a low-margin business. I think next year will be a lot about deals, and the customer will demand deals in order to book. Playing the price game irresponsibly will put a few people out of business.
This is going to be a long-term trend. How we do things and how we provide value in the distribution chain is changing forever.
Many of our competitors are hanging on and grasping to an old model, but you’ve got to find ways to add value to the supplier. You’ve got to find ways to lower costs. We may see gravitation from domestic, packaged travel to international because there hasn’t been as much pressure on the business model in the Mexico and Caribbean and maybe Hawaii markets as there has been [in the mainland U.S.]. But if companies aren’t re-engineering themselves for the long haul, the same problems they found in the domestic market are going to catch them in the international market, as well.
And barriers to enter the packaging business are very low. There are a lot of people getting into our space now because there are so many clusters of inventory that they’re able to gain access to.
When we look at how we’re working with hotels and airlines and so forth, I think suppliers are primarily looking for three things:
What can we do to get them new customers by marketing their product differently? In other words, what marketing or distribution can we bring to them uniquely?
Secondly, they’re looking for ways to lower their distribution costs. So, how can we dynamically access their inventory and pricing content? If we give them a dollar in revenue, they keep a small portion. But generally, if we give them a dollar in savings, it goes to the bottom line.
And I think the third and the last one is, how well do we directionally sell? Can we shift the consumer to their product, when all other factors are equal?
I think the companies that can do those three things well will be successful and win.
All that said, some advance business has been solid and strong for us.
What travel agents sometimes underestimate is the effort a tour operator has to go through to compete against an [online travel agency] to provide them with competitive pricing and compensation. Someone like Funjet has to buy 10% to 15% better than Expedia to get them the same Expedia price. In cases where they can’t do that, which are many, it’s a combination of buying a little bit better, pricing slightly higher and adding some value.
Our brands’ (Funjet, Blue Sky Tours, Southwest Vacations, Brand G) engagement of the consumer and our ability to market to the consumer in a manner that brings them to travel agents well-educated and knowing what they want will be very, very valuable.
And I think how we continue to enhance technology for the travel agency community will also be a differentiating factor for us. There are going to continue to be more enhancements and more investment and increased content and information that’s going to empower the consumer. As a result, the travel agency community is really going to be pressured on how they can further enhance their value proposition and clearly communicate it to consumers, because it’s going to be a lot easier for consumers to get access to information and make decisions on their own.
[Channels competitive to travel agents] are going to continue to make enormous investments in capabilities and content to enable consumers to research a destination more easily, increasing pressure on travel agencies. So it’s vital that agents embrace the right tools to overcome this and ensure that they’re reinforcing their unique value. Absent that, they’re going to continue to have pressure because what used to be large obstacles for consumers are getting smaller and smaller.
Travel agents are vital for our organization, and they will be in the future. But I think the industry has really got to look at the next generation. We may have a unique opportunity now, with pressures on other industries and people having a harder time finding jobs.
But we’ve got to add a little bit of sizzle. To appeal to the best and the brightest, we really need to make the travel agent part of the business more enticing. We may need to pay people a larger share of the return. They won’t wait a year or two to build up their clientele.
Eduardo Santander, executive director
European Travel Commission
The European Travel Commission was founded in 1948 as part of the Marshall Plan. And we’re in a similar situation, in terms of economic crisis.
We have just launched Destination 2020, exploring the opportunities from the U.S. outbound market to Europe. We understand that Europe is losing market share compared to the U.S., Caribbean, Asia and Latin America, and we have to stop this trend.
The state of mind is that Europe is expensive, far away and too complicated. And that’s not true. There is a Europe for every pocketbook. It’s diverse, it’s safe.
Destination 2020 is a pilot project for 18 months. The most important goal in the U.S. is to create a think tank focused on outbound tourism to Europe. We’ll hold an event in New York and bring together tour operators, airlines, European Travel Commissioners, high-ranking European Union officials, CEOs of tourist boards, the United Nations World Tourism Organization and the Organization for Economic Cooperation and Development. We’re looking at doing this in late spring or the beginning of June.
We’ll also bring in small and medium-size enterprises, perhaps a small hotel in Tuscany, a little restaurant in Seville that nobody knows. And we want to partner with our counterparts here in Brand USA.
We want real issues to be discussed, perhaps problems related to taxation and CO2 emissions. We also need to identify problems marketing Europe as a whole, rather than just Greece, Italy or Spain.
And though it’s not related to the beauty and attractions of Europe, we will create a risk management committee to come up with plans to decrease damage to tourism in case of riots, terrorism, bird flu or something similar.
And we need to better understand the behavior of American travelers.
We need to confront the reality that baby boomers are getting older, and the older you get, the more difficult it is to make an overseas trip. The problem becomes mobility rather than budget.
We need to start thinking about the upcoming generation and take into consideration social media. What are people saying about Europe? We can’t manipulate minds or create a fake image. People will tell you the truth.
The VisitEurope.com portal has wonderful content, but it’s just parked on our website. So we’re packaging it and providing it for free to media and travel sellers with an XML feed. We’re launching a social media campaign, “My Dream Vacation,” to engage with people in their aspirational stage.
We’re also launching the Trip Inspirer app.
And we’re working with the London Film Academy, sending young filmmakers around for a month to film what makes Europe different. Most travel videos are so boring, but this will be very visual.
For 2013, we expect to see an increase again in American visitors after a drop following the recession. It’s a slow recuperation, but there is light at the end of the tunnel.