The COVID-19 crisis quickly brought the travel and tourism industry to a virtual standstill, as steep drops in demand forced unprecedented capacity adjustments by airlines, cruise lines, hotels, railways, car rental companies, and tour operators.
NB: This is an article from Boston Consulting Group
But when the inevitable recovery comes—perhaps in months, although it may take longer—this industry will confront a problem that few have ever faced: setting prices and generating revenue from scratch.
The crisis has rendered meaningless the typical reference points—including historical booking patterns and trends—that drive price optimization. This drastic change has essentially turned companies’ revenue management (RM) systems into blank slates. In addition, markets will probably be fundamentally reshaped in the aftermath of the pandemic. For an extended period, travel demand will be lower than precrisis levels, and travel patterns are likely to be very different.
Companies that move the fastest and remain the most flexible in understanding and adapting to these new conditions have the potential to gain significant market share and secure their positions. Amidst the high levels of uncertainty and volatility, travel and tourism companies need to manage pricing and customer relationships in the short term, while retuning their RM systems to optimize revenues for the economic recovery.
MANAGING PRICING AND CUSTOMER RELATIONSHIPS IN THE SHORT TERM
Demand for travel and tourism has fallen precipitously, at first fueled by a reluctance to travel during coronavirus outbreaks and later reinforced by government-issued travel bans. Previous demand shocks—such as those caused by deep recessions—have usually triggered corporate demand to fall off sharply and quickly, while leisure demand declined more gradually. But the COVID-19 crisis has caused all forms of demand to plummet simultaneously.
Massive capacity adjustments have quickly followed. Airlines and tour operators canceled about half-a-million flights from March through May, cruise lines moored numerous ships in harbors, and high-speed railways in Germany, Italy, Spain, and other European countries saw traffic decline drastically. Regardless of how acute this situation looks, no company can assume that price cuts will boost volume in the short term as they usually do under normal circumstances. Making any significant price moves now is dangerous, because a company’s RM system could overreact. RM systems were never designed and calibrated to handle the extremes of the current circumstances.
RM systems and analysts cannot make reliable recommendations in this crisis for several reasons. First, historical price elasticities are misleading; the data underpinning them came from a travel and tourism world that no longer exists. Second, analysts often optimize prices with a bias toward volume. If applied to the current situation, this tendency could trigger a race to the bottom that would harm revenue and price positions even more. Finally, the algorithms used by RM systems have the tendency to drop prices when demand declines in order to stimulate demand. That is fruitless when there is no demand to stimulate.
Companies must implement extra measures to avoid massive revenue dilution as the COVID-19 crisis persists. In fact, by taking three steps, companies can address these issues in the short term.
First, companies must put crisis pricing policies in place and develop criteria for mechanisms that can override the RM system.Companies should reduce their customers’ uncertainty by being generous with cancellations, refunds, and “rebookings.”
Second, companies should reduce their customers’ uncertainty and fear as much as possible by being generous regarding cancellations, refunds, and “rebookings.” This approach not only protects the company’s reputation but also helps preserve the customer lifetime value. Some companies may also extend premium advantages to loyal customers during the crisis as a sign of goodwill. Hotel chains, for example, are already relaxing requirements for their loyalty programs.
Third, companies should maintain contact with customers during the crisis by providing updates, helpful travel information, or anything else that will help customers make sense of how the crisis impacts them. Communication with customers—especially with loyal customers—should also be a two-way street. It is important for customers to have a means to make requests and provide feedback in an unbureaucratic way.
By taking these three steps, companies will have a head start in the direct marketing channel when demand returns and the recovery comes.
Moreover, companies should closely monitor both strong and weak market signals and then develop leading indicators in order to understand when a potential recovery may begin. RM teams need to understand the interplay of several factors to determine the nature of the recovery and how heterogenous it could be. Even if one assumes—purely for the sake of argument—that the first sign of a sustained recovery is higher domestic demand in contagion-free or recovering markets, some questions will remain:
- How deep will the full decline be from peak to trough?
- Will leisure travel recover faster than business travel because the latter is affected by budget reductions, event cancellations, and the use of collaboration tools?
- To what extent will job losses, reduced income, and lower consumer confidence make people more reluctant to travel?
From a strategic standpoint, companies will also need to understand what shape the recovery will take. A V shape means a direct and swift recovery, a U shape means a more gradual recovery with a longer period at the trough, and an L shape means that the market has seen a true structural break and will remain smaller than it was before the crisis.
OPTIMIZING REVENUE DURING THE REBOUND
Just as the trends and data gathered prior to the COVID-19 crisis have lost their meaning, so, too, may precrisis market share levels and market positions become irrelevant. The industry players that are properly prepared to optimize prices during the recovery will have the best chance of capturing significant share, especially if some companies in their markets rely too heavily on obsolete RM system recommendations, struggle to bring capacity back into service, or do not survive the crisis at all. We see five key priorities as companies prepare for the recovery.
