Economic and Financial Market Update: Up, Up & Away

Summary: 

• Tourism is about 3% of Australia’s GDP; 
• Intra-state travel is most important, particularly for the four most populous states; 
• Domestic spending by Australians not going overseas won’t make up for the loss of international visitors; 
• The power of the economic recovery and the path of the virus will determine how quick the tourism sector recovers.

“Up, up and away” was a song written in the 1960’s by Jimmy Webb that reached number one in Australia and Canada (and number 7 in the US). It was obviously a big song. But its place in popular culture was cemented when the airline TAA (anyone remember them) used it as their marketing jingle in the 1970s. That was a time when the high cost of fares meant that air travel was an unusual event for most people. Getting on a plane (or train or car) to visit other places has again become unusual, although this time it has nothing to with fares. 

Background

Perhaps it is because we are an island but the first image most have of tourism is getting on a plane and heading to some exotic overseas locale. But Victorians escaping a dreary winter to sunny Queensland are also tourists. As is the city-dweller who heads out to the country for a weekend. Indeed, domestic tourism in Australia is by some distance ‘bigger’ than international tourism by both the number of visitors and total spend (international tourists though spend more per day). 

The ‘tourism industry’ actually comprises a wide range of sectors that also provide goods and services to the locals. The ABS deems that a bit over half of all sectors in the economy earn at least some dollars from tourism. And some they exclude (such as finance and utilities) almost certainly do too. The accommodation and food services, transport and recreational sectors are particularly impacted by tourism.

Some states rely on tourism more than others. As would be expected tourism is a bigger part of the Queensland economy than it is for WA. But it is actually most important to the Tasmanian and Northern Territory economies. The source of visitors also varies. Intrastate tourism is particularly important in WA (and why they are less impacted by the closure of state borders). The NT has a higher weighting towards interstate tourism, Tasmania and South Australia towards international tourists.

Tourist venues are often in pretty places, and can seem (at least from the outside) to be a dream business. But it can get very busy during peak times. And financially it can be tough. Profit margins for the food and accommodation sector are on average about two thirds of that in the wider economy. And over the past three years the proportion of firms in that sector making a loss was about twice that across all industries.

Tourism is currently about 3% of the total size of the economy, although it was a little less than that when the economic going was tougher during the GFC. By global standards Australia’s tourism industry is not an unusually large part of the economy (and only slightly bigger than the size of the US industry). It is more important for some developing countries (reflecting cheap food and accommodation, and the lack of development of other industries) or Europe (ease of travel to other high-income countries). Tourism is less important for China or Japan.

Outlook

The social distancing policies have hit the tourism industry hard. A recent ABS survey indicated that the two sectors with the largest number of job losses since the quarantining started have been accommodation/food services and recreation. 

The pace of the recovery for the tourism sector will in the first instance be determined by the ending of the social distancing policies. Intrastate travel is already opening up in most states, and will likely to be fully so across all states by end-June (barring no widespread infection breakout). 

The opening up of interstate travel will take longer. The Federal Government has suggested an aspirational date of the start of July. But a number of states are taking a more cautious approach. There has been suggestions that the border could at first be opened up between the less populated states, and then in time be extended to NSW and Victoria. At this stage it seems probable that inter-state travel will be running with few restrictions by end-September.

International travel will take longer still. It looks very likely that Australia and New Zealand will be in the same ‘travel bubble’ by year-end. There has been talk of extending that to the Pacific Islands, although that will take longer. Next the ‘bubble’ will likely be enlarged to encompass other countries that have got on top of virus (such as South Korea or Vietnam). 

‘Bubbles’ (or ‘travel corridors’) are already opening in other parts of the world. There is one already amongst the Baltic countries (Lithuania, Estonia and Latvia). The Scandinavian countries are talking about another (although they look like excluding Sweden). South Korea and China are looking to create a fast lane for business travellers that would involve no quarantining of arrivals. Europe is slowly re-opening its internal country borders. It will be interesting to see how long they can keep the borders open given the differing new case path amongst countries. 

Differences between how countries have handled the crisis will limit international travel until a vaccine or treatment becomes widely available. Travel to and from emerging markets could be particularly crimped given their lower testing and tracing capability, and the generally poorer state of their health systems. The United Nations World Travel Organisation (UNWTO) thinks that global travel will fall 60-80% this year. Almost 40% of the panel of experts to the UNWTO thinks a tourism recovery won’t begin until next year. A full recovery of international travel might be three years away.

This means that the tourism industry will have greater reliance on the domestic market. Getting travel within the state going will be a big first step (particularly in WA). The dollars that Australian’s spend holidaying at home instead of offshore will be very helpful. But it won’t fully compensate for the large reduction in overseas travellers. 

There is a lot of focus on China. It is a very important tourism market for Australia, and will remain so once the COVID crisis passes. But even before the advent of the virus the number of Chinese tourists coming to Australia was starting to slow. Mostly that reflected a weakening of the Chinese economy (Australia’s market share of Chinese tourism has been broadly unchanged). India is becoming increasingly important (and would have been even more so later this year with the arrival of the Indian cricket team). New Zealand is likely to again be Australia’s most important source of travellers over the next year. 

Even when social distancing restrictions are fully removed the industry will face both supply and demand constraints. The economic fallout from COVID has hit airlines pretty hard. Stronger airlines (such as Qantas) can add back capacity quickly once signs of demand returns. But overall capacity might be lost for a time as airlines initially concentrate upon the most profitable routes at the most profitable times. That was the case in Australia in 2001, when airline passenger movements flat lined for a couple of years following the collapse of Ansett (although a weaker Australian economy and September 11 also played a role).

Even more important is the economic outlook. A sustained weak economy would set back any tourism recovery. Consumer confidence has recovered in recent weeks although it remains well below ‘normal’. The underutilisation rate is currently close to 20%, a record high. The RBA is forecasting an unemployment rate of 7.5% by end-2021.

The good news though is that high-income earners (who comprise about 40% of all spending by households on tourism) are still likely to take a holiday. Indeed, the top 60% of income earners account for around 80% of all holiday spending. And the forced time at home will mean more than a few will want to go and explore ‘the wide outdoors’.

What can firms do during the quiet period (apart from hoping to survive until things pickup). Tourism firms have historically marketed themselves well on both social media and the internet. But they could do better at using the internet to make or receive orders. Doing so would improve efficiency and could lead to increased revenue growth. But it could also involve some IT investment dollars that may be hard to come by for cash-strapped firms. 

A less expensive task would be to incorporate benchmarking within their business on a more widespread basis. A survey by the ABS indicated that less than half of the firms in the accommodation and food services sector were major users of a range of benchmarks. Extensive use of HR was particularly low.

Over the longer term, tourism remains an attractive industry. The desire to travel increases with incomes, and the domestic and global economy will grow again. Australia’s aging population means there is a large group of retired people with both wealth and time on their hands. Before we know it we will have returned back to the days when the discussion was whether tourism had reached over capacity in some of the most popular spots!

TAA was an Australian airline that was bought by Qantas in the early 1990s. That was our last very deep economic recession, when airlines (and the wider tourism sector) was struggling. This is also a very tough time. But the sector will re-emerge to eventually be in a bigger and stronger shape.

We live in interesting times!

Regards,

Peter Munckton - Chief Economist