Although the travel and tourism industry has been one of the fastest-growing industries worldwide, it is still recouping from the remnants of the COVID-19 nightmare.
The pandemic caused a significant shift in the industry, leading airlines, accommodation providers, and online travel agencies to rethink their growth strategies.
If you run your own travel business or are one of the decision-makers, this guide will help you uncover best practices to stand out in the competitive market.
Painting a picture of the travel industry.
To understand the trends, we'll break down the current state of the industry into three parts:
- Recent trends on key growth levers
- Share of total contribution to GDP in select European Union member countries
- International tourist arrivals across different regions
The current state of the travel industry.
According to a report by Future Market Insights Inc (FMI) on the tourism market, the industry was valued at US$10.5 trillion in 2022 and is expected to reach US$17.1 trillion, with a CAGR of 5% over the next ten years.
Table 1 | Source: Statista
Share of total contribution to GDP in select European Union member countries and the UK.
Table 2 | Source: Statista
Number of international tourist arrivals worldwide from 2019 to 2023.
Table 3 | Source: UN Tourism | World Tourism Organization | % change over 2019
For most regions except the Middle East, international tourist arrivals in 2023 remained below the pre-pandemic levels in 2019.
Uncovering the challenges in the travel industry
To better discuss some of the unprecedented challenges the industry is grappling with, we'll categorise them into four categories to help travel businesses better understand their impact and ways to overcome them with forward-thinking solutions.
- Fluctuations in exchange rates
- Global payment challenges
- Cash flow gaps
- Shifts in customer preferences
Fluctuations in exchange rates
Travel companies often transact in multiple currencies, leading to readjusting their prices in response to exchange rate movements and high transfer fees during conversion. If not hedged, this may impact their profitability.
Challenge #1. Economic landscape
The industry is susceptible to economic (inflation, recession, downturns) and also geopolitical scenarios (political instability, trade wars), restraining growth due to reduced spending and vice versa.
Challenge #2. Currency movements
The economic scenario may impact the price of the currency pairs. For example, when the destination's domestic currency appreciates, international travel becomes more expensive for foreign tourists, which may result in fewer bookings. In the reverse case, inbound tourism will spike but may increase operational costs.
Practical tips to optimise financial performance
1. Stress testing
can help you imagine scenarios if things go bumpy. This approach helps you prepare for the situation and adapt accordingly. It's a good idea to begin with a quarterly plan to get a real sense of different scenarios and how to prepare for them.
2. Reimagine pricing strategies
to be more resilient and agile to changing demand and supply. This is easier said than done, as overpricing can distance customers, and underpricing can kill profit margins.
3. Manage currency risk
with a sophisticated and systematic hedging program that suits your business needs and goals, such as static, layered, and rolling programs, to maintain financial stability and protect the budget rate. The choice of hedging program and products depends on your business needs, goals, exposure, risk tolerance levels, etc. Ebury offers wide-ranging products and customised hedging programs to suit your needs.
To design a bespoke hedging program for your business, get in touch with our team.
Want to manage FX risk like a pro for your travel business? Download the step-by-step guide to design your risk management framework and activate growth.
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Global payment challenges
According to a report by Amadeus Payment Checkout Experience on 'Frictionless payments across all your digital touchpoints,' 90% of customers now consider their payment experience important to their overall travel experience.
The industry is at a crossroads of changing travel preferences, industry shifts, and technological capabilities. It is imperative for travel companies to look at payments as a growth lever rather than a support function.
Challenge #1. Customers need choice
Customers need choice - including which airline to fly with, where and when to travel, where to stay and how to pay. Many travellers are challenged to offer standard payment methods or give too many options.
Challenge #2. Payment fraud
Many types of fraud plague payments, but one that needs a special address in case of travel companies is chargeback fraud. For example, a customer may make a false chargeback claim, which is especially more prevalent for businesses with high average transaction values.
Practical tips to simplify and secure global payments
1. Activate 4-eyes authorisation
with your existing banking platform or Ebury Online platform if you are an existing customer. This allows you to validate your payments securely.
2. Leverage open banking
to offer instant transfers during checkout, which offers strong authentication to minimise payment fraud without compromising user experience.
3. Enable your customers to pay in their currency
to lower the charges associated with conversion, reduce trade friction and drive revenue – helping you win customer trust. For example, with Ebury, you access local collection accounts in 11+ currencies to receive locally. This helps your customers save money on unnecessary conversion fees.
Cash flow gaps
Poor cash management is one of the most common reasons travel companies shut down. Here, we list some common cash flow challenges travel e-commerce faces.
Challenge #1. Advance payments to vendors
Travel companies often need to make bookings and reservations, for which they need to pay vendors or service providers in advance before they receive payments from their customers. If not managed, these upfront costs can affect their working capital.
Challenge #2. Managing seasonal changes
During peak season, businesses need to hire additional staff to meet demand, which can lead to additional expenses in the form of salaries, training costs, and overheads. Also, due to seasonal fluctuations, hotels and airlines face the challenge of managing perishable inventory, such as hotel room occupancy and airline seats.
Practical tips to address cash flow gaps
1. Build relationships with your suppliers
to negotiate extended payment arrangements or staggered payments. One way to win trust is to pay your suppliers on time or in their local currency so they can save on conversion fees.
2. Utilise trade finance line
to make advance payments and solve the gap between upfront costs and customer payments. It is important to look for credit lines that offer flexible repayment schedules to stay financially agile.
3. Streamline your inventory management
by implementing efficient monitoring and pricing strategies to optimise revenue and minimise losses.
Shifts in customer preferences
With COVID-19 bringing a new wave of challenges, travel companies are forced to rethink their offering, financial budgeting and operational models to remain relevant.
Challenge #1. Managing unprecedented increase in demand for travel
The pandemic led to revenue losses and redundancies in this sector. However, as the world opened up, demand surged to levels many businesses were unprepared for, partly due to pent-up demand. Businesses faced the taxing task of meeting the increased demand by scaling up operations or increasing staff.
Challenge #2. Changing travel preferences
Travellers have become more cautious and are now looking for convenience and experiences, prioritising health, safety, and sustainability more than ever. This includes flexible booking policies, refund options, a rise in wellness and nature-based travel leading to a surge in camping activities, and convenience within the same platform.
With this, the rise of remote work has blurred the lines between work and travel for many individuals. Digital nomads are taking advantage of this flexibility to work from various locations, opening new markets and opportunities for travel businesses.
Practical tips to adapt to changing customer behaviour and craft great experiences for them
1. Harness the power of technology
to offer more services on your platform by embedding financial services using APIs. This will enable your customers to access financial capabilities (such as currency conversion) without leaving your portal. Embracing digital technologies will help you improve customer experience, automate manual tasks like reconciliation and reduce administrative overheads.
2. Estimate demand fluctuations
throughout the year as they can impact budgeting. Forecast future trends using historical data, market trends, and customer behaviour patterns to understand resource estimation, including the decision to hire temporary staff vs. permanent employees. This will help you keep fixed overhead costs under control, budget staffing and deploy resources more effectively.
3. Manage cancellations and refunds
by implementing transparent booking policies, informing customers about changes to their travel plans and offering them credits for future travel or partial refunds instead of complete refunds. This allows you to retain revenue while providing customers with the flexibility to rebook their trips at a later date.
Getting started
The industry's challenges are pretty significant, but they are not unconquerable.
Navigating these roadblocks demands a deep understanding of customer behaviour, market dynamics, competition, cost structures, global trends, processes, technologies, risk management, and working capital management.
However, if you have a partner besides you who understands the nuances of the travel sector, it becomes easier to embrace these challenges and turn them into growth catalysts.
Contact us >>
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Disclaimer
The information provided herein is general in nature and should not be construed as financial or investment advice. The information provided here is not legally binding. The information, data or views expressed here is for the exclusive use of the recipient and is subject to changes without any notice. You may ask the support team or your dedicated relationship manager to provide additional information regarding Ebury products.
