How the travel industry is coping with today’s recession

Riding out the storm

Editor’s note: Jim Quilty is vice president - travel and tourism research in the New York office of research company Ipsos.

According to recent data from the Commerce Department, for the first time since the terrorist attacks of September 11, spending on travel and tourism has declined. We’re of course deep into a recession - at the time of writing in February, unemployment had reached 12.3 million Americans and the unemployment rate hit 8.1 percent. Americans are reducing their travel frequency and spending, a strong dollar is keeping foreign tourists away and with every industry looking for cost savings, businesses are slashing their travel expenses.

Travel is a trillion-dollar industry in the U.S., employing millions of people. It is reeling, and searching for ways to lure travelers back with deep discounts and special packages. The effects are rippling through the industry, impacting boardrooms, marketing departments and their approach to market research. Indicators of public opinion show that the majority believe economic improvement will happen later, rather than sooner. How does consumer opinion translate to spending and when will it change? Faced with a public that’s fearful and reluctant to spend, what are businesses doing to cope? What does it mean for us as market researchers? 

Debated and answered

Each year, as part of any company’s annual planning process, questions regarding market research initiatives are debated and answered, including:

•   Should our tracking studies be renewed, consolidated or canceled?

•   Is it time to segment our customers again?

•   Do we test the market in response to planned advertising, innovation or new product launches?

•   Should we scale back on primary studies in lieu of more syndicated offerings?

•   Do we implement more automation to help us survey our own customers?

Then, every decade or so, a recession enters the picture and things change drastically. In recent talks with travel companies, it has become apparent that our current recession has added a new dimension to the questions being asked of and by market researchers. To help make sense of these changes, first let’s review current consumer behavior.

Significant pressures

Throughout 2009, consumers will be concerned about the economy. Some have already faced significant personal financial pressures and this uncertainty will continue to impact travel spend and frequency in the months to come.

In a recent Ipsos survey of 1,572 U.S. adults, a majority of consumers (59 percent) do not feel that the economy will show signs of improvement until more than one year from now. While another 29 percent feel improvement will occur between seven and 12 months, only slightly more than one in 10 (13 percent) think the economy will improve within the next six months.

The fallout from the credit crisis has impacted many Americans in a variety of ways. Approximately four in 10 (38 percent) say that they or their spouse have experienced one or more of the following economic event(s) in the past six months, including:

•   a reduction in their salary or a reduction in their work hours (19 percent);

•   loss of employment and are still unemployed (13 percent);

•   loss of employment and only working part-time (8 percent);

•   have become delinquent on mortgage payments of primary residence (6 percent);

•   an increase in mortgage payment for primary residence resulting from an adjustable rate mortgage (4 percent);

•   have sold or are planning to sell a second home or interest in a vacation home (3 percent);

•   primary residence has been foreclosed upon (2 percent).

Consumer spending comprises two-thirds of the U.S. gross domestic product, with travel and tourism comprising one of the largest components of a household’s discretionary spending. The uncertainty of potential job losses and residential mortgage pressures impacts how consumers perceive the economy.

More willing to plan

Consumers who are optimistic in the near term are more willing to plan vacations or conduct business as usual. Unfortunately for the travel industry, far too many leisure and business travelers do not feel good about the about the economy in 2009 or have recently experienced a personal economic hardship.

As shown in Figure 1, among those 39 percent of business travelers who plan to reduce their overall business trips and/or expenditures, 64 percent do not feel the economy will improve until next year, as compared to 13 percent who feel the economy will improve within six months.

By contrast, of the 54 percent of business travelers who feel the financial crisis will not have any impact on their overall business trips and/or expenditures, 33 percent feel the economy will improve within six months, and only 44 percent feel the economy will take more than one year to improve.

Among the 52 percent of leisure travelers who plan to reduce their overall leisure trips and/or expenditures, 64 percent also do not feel the economy will improve until next year, as compared to only 7 percent who feel the economy will improve within six months.

Contrast that against the 43 percent of leisure travelers who feel the financial crisis will not have any impact on their overall leisure trips and/or expenditures: 19 percent feel the economy will improve within six months, whereas 53 percent feel the economy will take more than one year to improve. Perhaps not surprisingly, of the 43 percent of leisure travelers who feel the financial crisis will not have any impact on their overall leisure trips and/or expenditures, some 73 percent have not recently experienced a personal economic event.

Faced with this economic uncertainty, many consumers are taking action on what they can control: the amount they spend on travel.

Significant differences

How will business and leisure travelers reduce their travel expenses this year? Of note, as shown in Figures 2 and 3, significant differences exist. For business travelers, staying at a less-expensive hotel brand tops the list (61 percent), while among leisure travelers, this measure ranks sixth (45 percent). In contrast, the top way leisure travelers intend to save on their expenditures is to spend less on meals and entertainment (66 percent). Among business travelers, this measure ranks last, with just 2 percent of travelers saying they intend to cut business expenses this way.

Despite some clear differences in how travelers intend to save on business versus leisure expenses, strong similarities also exist. Reducing the number of nights away from home ranks as the second-most common way travelers intend to reduce their leisure and business expenditures (58 percent and 57 percent respectively), while staying with friends or family more often ranks as the third-most common way travelers plan to lower their leisure and business expenses (51 percent and 41 percent respectively).

This data tells a story that travelers are looking for more options. They are challenging their existing brand loyalties, becoming more loyal to their wallets.

Unwavering commitment

So how are the travel brands coping? Two common themes have emerged among companies we have spoken with. The first is an unwavering commitment to deliver on their brand promise and value proposition. They see these uncertain times as a way to differentiate themselves from the competition.

The second is a desire to capture market share. Some companies have accelerated the launch of advertising campaigns because they feel their messaging will resonate with a wider range of value-seeking consumers. Once they get consumers to experience their product and service, and deliver a positive experience, they believe strongly in their ability to be in the consideration set of these consumers in the future.

It is very clear that, with few exceptions, all sectors of the travel industry are offering aggressive price reductions. If you have not traveled for leisure or business lately, either pick up the newspaper or go online to any travel provider or intermediary and you’ll see extraordinary offers. This helps explain the Commerce Department data showing that industry-wide prices in Q4 2008 fell 16 percent at an annualized rate, which more than reversed the third quarter’s gain.

Brands that initiate price reductions do so for a variety of reasons: to defend or gain market share; to respond to competitive offers, and to survive financially. Pricing, however, is only one part of the solution.

Travel brands understand that they must work through this recession together with customers. Their efforts to empathize with travelers and offer value packages have also been well documented. For example:

•   An airline offers a full refund to any customer who becomes unemployed after booking a flight.

•   A cruise line offers “travel protection,” providing cash reimbursement of cancellation fees to guests who cancel because of job loss.

•   Online travel agencies offer flights without booking fees.

•   Theme parks and hotels offer a free night for visitors who book a minimum number of nights - sometimes as low at two or three.

•   Hotels and airlines promote generous loyalty point giveaways and reduce or eliminate blackout dates on reward redemptions.

•   Car rental companies offer upgrades to higher-end vehicles.

•   Luxury hotel brands offer access to concierge clubs, brunch specials or tie-ins to local attractions.

•   Destinations, seeing a reduction in out-of-town visitation, are launching outreach programs to residents to encourage participation in local attractions and events.

Other solutions

Among the travel-industry companies we’ve spoken with recently, other solutions are being implemented across a spectrum of corporate, employee and market research initiatives.

Travel companies have a good read on future bookings in comparison to prior years, and those bookings have been off significantly. Therefore, most companies started moving aggressively to align cost structures with reduced revenues. At a broad level, this has meant headcount reductions, deferment of capital expenditures and reorganizations designed to streamline operations and drive efficiencies.

On the labor front, leisure and hospitality establishments shed 300,000 jobs during the recession, reducing total employment in the industry from 13.5 million to 13.2 million, according to the Labor Department.

Companies are turning to their chief procurement offices with mandates to leverage buying power, renegotiate contracts and source lower-priced goods and services. One company reported that “no stone has been unturned” in their quest for cost savings. Common examples travelers have noticed include hotels which have removed free coffee from their lobbies or have removed some room amenities. Rather than provide complimentary services up front, some hotels encourage guests to call the front desk if anything is needed.

From a marketing standpoint, companies are adjusting their advertising. Many are moving away from selling over-the-top or indulgent experiences and instead are shifting toward a more subdued value offering, appealing to the more thrifty and discerning consumer of today.

Other companies view today’s environment as an opportunity to help them really focus on their message and who they are as a company. In the view of one brand we spoke with, consumers who travel in today’s economic environment are considered core travelers and therefore marketing and service initiatives are being implemented to give these travelers a reason to select their brand for the next trip.

Calm the anxiety

Employers are having frank discussions with their employees on the state of the business, trying to calm the anxiety inherent to an industry that is laying off workers yet needs a motivated workforce to deliver quality service to guests.

Most companies we spoke with continue to offer rewards and recognition to their employees. In fact, they’ve made these programs more visible. Employers consider it an essential part of keeping employees motivated in these stressful and uncertain times. This especially holds true for frontline employees and all those who interact with customers. Company leaders are communicating the need to treat all customers with extra care, knowing they may only get this one opportunity to deliver a satisfying experience.

And guess what: Some companies are actually reporting increases in satisfaction scores during the recession! Four distinct dynamics are at play here. The first is a function of reduced prices across the board for travel services, which, whether we like it or not, impacts customer satisfaction these days. Second, reduced volumes mean that customers are being offered, or have available to them, upgrades (first-class on an airline, a hotel suite, larger rental vehicles or higher-end cruise cabins, etc.), which translates into a better-than-expected experience. The third relates to the perception that customers feel they are being better attended to and are receiving greater appreciation by travel and hospitality employees. Finally, for customers who are experiencing a brand for the first time (for example, an economy or midscale hotel brand in lieu of an upscale brand), their experience may prove satisfactory and worthy of repeat business.

Some travel-related companies have reduced or eliminated their 401(k)-matching programs to help conserve company cash, and for the most part employees understand this decision. Both within and outside the travel industry, many employees hold underwater stock options, and more and more companies have or are considering a re-pricing of the options to current stock prices.

If layoffs occur, companies are finding ways to do so in the most thoughtful and dignified manner, by offering severance, outplacement services and contracting opportunities. The perspective is that companies want to rehire these laid-off employees when business returns.

Must cope

Market research practitioners must cope with measuring the new advertising, operational and service changes their companies are implementing to reduce costs. The questions being asked include:

•   To what degree are customers accepting our service-level changes?

•   What promotions appeal to consumers in today’s recession?

•   Do our price reductions produce an unintended consequence of introducing a different competitive set?

Many travel and hospitality companies have reported that guest expectations are not declining - rather just the opposite. Consumers today are stressed due to lack of job security, decimated investment portfolios and declining home values. They view travel as a brief and needed respite from all the pressures around them. Throughout the entire travel experience consumers want to be treated better than they ever have been. The challenge for the market research practitioners is to determine - very quickly - whether their brands are delivering on these ever-increasing customer expectations.

Companies within the travel industry span the range of having significantly reduced their marketing and research spend, to holding the line on research, to actually adding supplemental studies. As a result of the operational and service changes made, many organizations feel their need for knowledge has intensified.

Significant reductions in research can be a function of a company’s balance sheet and cash flows. Highly leveraged organizations find it most difficult to fund marketing programs when their immediate priority is meeting interest payments and pending debt obligations. For other companies, depending on their exposure to market share and rate declines, tracking studies are being consolidated to focus on only the core insights needed to survive this recession.

Examples where investment in marketing and research is slowing down include more long-term projects involving innovation or new product launches. Companies are not abandoning these efforts, they are just being more thorough with customer feedback, and they are being patient for demand to rebound - all in an effort to justify and demonstrate ROI. Other firms are maintaining current tracking studies but mining the data for insights to a greater degree than before, in hopes of stretching the value of their investment.

In what areas is market research investment actually increasing? Some companies are:

•   Adding a qualitative element to quantitative studies to learn the whys behind consumer decision-making.

•   Adding companion studies to existing loyalty trackers to determine whether operational and service changes are within tolerance levels or are resulting in defectors.

•   Considering more active and visible monitoring of the linkage between customer satisfaction and employee satisfaction. Companies are keenly interested in knowing if the operational or service-level changes recently implemented impacted what customers felt was very important to them or if the service commitment was not communicated or delivered effectively. By evaluating employee satisfaction alongside customer satisfaction, companies are able to better assess where to make critical changes given limited resources.

•   Investing in platforms to allow for more frequent and flexible online surveying of their massive customer databases. This helps companies better justify the marketing and research dollars they do spend.

See the risks

Market research practitioners see the risks and opportunities afforded in today’s recession. Take business travel as an example. Technology could replace a percentage of the business travel market as companies get more comfortable with Web-based meetings, or it could force venue changes for a sustained period of time. For example, will more companies book their corporate meetings at local venues in lieu of resort destinations or cruise excursions?

The “unmanaged” traveler is a customer segment not bound by corporate travel mandates, one with more flexibility to select different brands. If these travelers were accustomed to staying at an upscale hotel brand, for example, they may find their experience at a midscale brand very appealing and satisfactory, even surpassing what their expectations were. This opens the door for market share shift. The upscale brands therefore must decide whether or not to compete on price. The midscale brands must decide whether to adjust their advertising to more directly compete with the larger brands.

On the opportunity side, market researchers realize that any new research program or technique they implement may very well gain familiarity and traction within their companies. Practitioners feel the added pressure to quickly produce reliable results, even if new market research approaches are being implemented. However, they view the renewed debate and focus on the value of market research as worthwhile and say it helps create an invigorating and dynamic environment in which to work.

Bright sides

There are bright sides to this recession. Travelers are being afforded promotions and offerings today that are normally not available, and many are trying new brands or enjoying their favorites at much lower price points. This helps add to the enrichment of the travel experience.

Also, travel companies are becoming creative and implementing changes to their business models. These changes require measurement and monitoring. As a result, market research is becoming the recipient of greater appreciation and relevance throughout the travel industry.

Although the current recession has dampened the travel industry, it has presented the market research practitioners with fascinating challenges.