Opinion article

Tourism after COVID: headwinds tailwinds and crosswinds

CEDA Chief Economist, Jarrod Ball, discusses the unique challenges facing the tourism sector. He says that while most operators in the sector face a difficult outlook, there are opportunities on the other side of the crisis for businesses that perservere. 

One of the sectors most eagerly awaiting National Cabinet’s decision on state borders last week was tourism.

Around a quarter of tourism’s $60 billion direct contribution to the economy comes from interstate travel. Adding international border closures, almost 55 per cent of the sector’s activity remains out of play for the time being.

Border closures and the general decline in mobility due to COVID-19 have drastically reduced demand for travel, devastating tourism-related sectors.

The ABS Payroll jobs and wages series shows an 18 per cent decline in payroll jobs since March for accommodation and food services, almost three per cent more than the next worst affected industry, arts and recreation. Further, ABS Business Indicators suggest that 71 per cent of businesses in the accommodation and food services sectors will find it difficult or very difficult to meet financial commitments over the next three months.


The outlook

Clearly then, a lot hinges on the reopening of state borders by the end of 2020 and the reopening of international borders in 2021.

Even when borders do open, the sector will likely recover more slowly than the general economy. For example, global air passenger traffic is not projected to return to 2019 levels until 2024 and globally, airlines are adding schedules and capacity quicker than passenger demand is recovering.

More than 70 per cent of Americans now consider flying to be risky and one in five US consumers are willing to drive 500 miles one-way for their next holiday. The early signs from China’s recovery are more encouraging – domestic flights there were about three-quarters full on average in July.

It is not surprising that consumer surveys show that Australians’ return to travel in the months ahead will be all about their level of COVID confidence and the time horizon.

In the short-term, Australians remain worried about travelling by plane, attending large events and crowded public spaces. But in the future when things do return to ‘normal’, many people want to travel more and get out to restaurants.

When global downturns hit, the Aussie dollar usually cushions the impact on tourism and international education. This is what happened in March when the dollar hit 17-year lows, but since then commodity currencies like ours have been on the rise, a trend which is expected to continue through the remainder of 2020. This means less when people can’t physically cross our borders, but it will increase the expense of forward bookings made now and influence choices for international study visitors.

Challenges and opportunities

As well as these immediate headwinds, there are also several crosswinds – that is, areas where the tourism sector will be adjusting in the months and years ahead.

For starters, COVID Safe will increasingly be a potential for value differentiation by tourism destinations and operators. Already, hotel chain Accor is providing free telemedicine as part of its guest offering, an example of the growing range of add-ons across the sector that aim to give people peace of mind. Australia’s relative success at containing the virus and excellent health system should be an advantage in rebuilding the confidence to travel.

This may well be part of a broader quality theme for post-COVID travel. If cheap flights are less plentiful and consumers are more hesitant, then they will want to make each trip count with a quality experience. Early evidence from the International Air Transport Association is that economy passengers are moving into business class.

There may also be an increased focus on sustainability – cities that depend on mass tourism from Bangkok to Barcelona are already reassessing their models for when tourism ramps up again.

COVID-19 may also affect Australian’s taste for overseas travel – will we roam more onshore at least in the short term to give domestic tourism a much-needed boost?

Australians spent $65 billion last year on overseas trips, half of which was holiday travel. The extent to which this spend is redirected internally will depend on factors such as when Australians assume that international borders will reopen and whether a domestic travel experience now makes it worth foregoing that dream overseas holiday which is now far off in the distance. It is also worth noting that the duration and daily spend on a typical domestic holiday is less than that of one overseas.

Despite the incredible challenges and adjustments ahead for tourism, there are some potential tailwinds.

As bad as Australia’s GDP numbers were last week, we’re doing far better than most advanced economies and this should help domestic tourism to recover. In the short-term, as borders reopen, we may also see some cooped-up Aussies with large leave balances who have been working from home shift their spending from household goods to travel. After all, ABS data shows that more than half of Australians changed or cancelled domestic travel plans in June.

The news gets a little bit rosier when you consider that the only countries doing better at limiting the economic damage than us are major visitor markets for Australia: China, Taiwan and South Korea.

Among this growing region, international education visitors to Australia spend more than other international visitors because they’re here longer and about one in four of them have friends and relatives come to visit while they’re here. The length of time they stay also makes safe quarantined travel to Australia more feasible for international students. South Australia has shown the way, and other states can follow their lead.

In the longer term, the pandemic has probably slowed but not stopped the rise of the Asian middle class, with two thirds of the global share expected in our region in a decade, boosting demand for Aussie tourism experiences

If Australian tourism can remain resilient in the face of unprecedented challenges and ride some of the bumps in recovery, the long-term tailwinds are still worth chasing.

About the authors

Jarrod Ball

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Jarrod Ball joined CEDA as Chief Economist in 2017 with over 15 years of experience as an economist across the public and private sectors. He has held senior roles at the Business Council of Australia, in EY’s advisory services practice and more recently at BHP. Jarrod also worked in the Federal Government and was a lead adviser on microeconomic reform for the Victorian Departments of Premier and Cabinet and Treasury and Finance. He is a member of CEDA’s Council on Economic Policy and the Melbourne Economic Forum. Jarrod holds a Masters degree in Economics from Monash University and undergraduate degrees in Business (Economics) and Arts from the University of Southern Queensland.

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