When ex-US defence secretary Donald Rumsfeld came out with his gem about known knowns, known unknowns and unknown unknowns in 2002, he can’t have been thinking about the travel industry.
And yet, it seems to sum up current market sentiment. We know what is happening, we can guess what might happen and we can draw lessons from what has happened before. Anybody who could predict what is going to happen would be rich, but the only indicators we have to go on are previous recessions.
The fundamental flaw here is that we now have to factor in the web. Steak Media director Duncan Parry says: “There will be lessons from the last recession but this is the first where digital is central.”
Already companies have been switching offline advertising budgets to online, with some players abandoning offline altogether – proof in itself of how important online distribution has become.
When times are tough, certain forces come into play, such as consumers leaning towards trusted, big brands as well as a return to face-to-face deals for reassurance. A series of reports from eMarketer and Ascent MI’s Leisure Travel Monitor recently highlighted a general dissatisfaction with online travel agencies.
During the spate of airline collapses, according to Google Insights for Search, there was a spike in searches on the terms ‘ABTA’ and ‘ATOL’, although this was followed by a return to normal levels.
This suggests that either consumers have now forgotten about the failure or have become more aware of the symbols and what they stand for.
However, there has been plenty of talk about a ‘renaissance’ for the travel agent, offering advice, protection and specialist knowledge. Advantage Travel managing director John McEwan said recently: “The high street still commands 58% of travel in the UK. It’s about personal experience and expertise and creating the right retail environment.”
A few days later at the Advantage Conference, his comments were echoed by senior figures from Hoseasons and Gold Medal who said there had never been a better time to be an independent agent. But, as consumers’ holiday budgets are squeezed and suppliers become more aggressive about pushing product direct the agent renaissance may be short-lived.
Another key force at work during a downturn, most believe, is that consumers become more price conscious and are prepared to search around. This is a view supported by the price-comparison sites, which believe they are ideally placed to benefit from the current economic climate. Sites such as Dealchecker and Travelsupermarket are seeing healthy volumes of visitors to their sites, but the question is whether they convert to real purchases or are just being used for research.
Dealchecker managing director Alex Saint says: “The impact of the credit crunch is that people are going to be looking harder for deals and want to make sure they are getting the best deal. The volume of searches is there but people will struggle to maintain conversion rates. Agents will find they are doing more work for the bookings.”
Saint believes that as a result the industry will start to look at how to make marketing budgets work harder. This is now taking place. A recent WhatsonWhen/Travolution survey revealed online ad spend will not be cut, with 50% of travel companies planning to increase it.
“People need to be careful about optimising campaigns and looking for the best targeted sources of traffic. They need to be savvy about where they spend their money and get rid of the bits that are not making money,” says Saint.
ASAP Ventures director of online strategy, Doug Scott, believes price-comparison stands to gain because conversion rates are higher compared with paid search activity on the search giants.
“Some PPC prices are silly because the analysis is not being done. The accountants will start looking at numbers and what the ROI is, the breakdown of spend on channels and whether a channel can be removed. You may get sales through PPC but will it be enough to pay for the cost-per-click?”
Rising PPC costs play into the hands of meta-searchers as companies seek alternative ways to acquire customers.
Global Travel Market chief executive Dave Simmons says: “Google has forced the industry to look for alternative options to CPC to get to free listings so there will be a far greater focus on that space.”
Scott also believes there will be a surge in affiliate activity with travel companies getting over misconceptions about its value. “We might pull out of the search market and let affiliates do it. Affiliate marketing is a paid-on-results model so there is no risk. People spend fortunes on search engine marketing agencies and trust their £1 million a year budget to them but won’t talk to an affiliate who could drive a £1 million a month in sales.”
Although high-street independents and price-comparison sites are potential winners in the current climate, there is still room for other channels to do well. Online travel agents such as Expedia, Opodo and ebookers have invested heavily in establishing their brands and developing technology.
“They will come under pressure and there will be a gradual movement to more of a media-type model for them to protect and maintain margins,” says Simmons.
Expedia has already introduced Google ads against many of its results, pitting itself directly against rivals within its own site. Parry believes we will see similar deals but that OTAs need to monitor it very carefully. “If people click off it means they are not finding what they want. It’s an easy revenue win but hopefully they are doing their numbers and if it’s significant then questions need to be asked about optimising searches.”
Other online agents have not ruled out similar moves. But, if established players move towards more media-style deal sites, could the pioneers such as TripAdvisor find themselves squeezed? It could be that if there are fewer people travelling, then fewer reviews are posted and therefore the value of those sites for advertisers is reduced. There is also the possibility these sites will lose out as travel providers try other models.
Frosti Sigurjonsson, chief executive of global flight planning service Dohop, says: “My first instinct was that everyone would pull advertising and that it would be the most expensive first, such as TV, radio and billboard with the internet last.”
He believes the clear winners will be those that are flexible, with no huge overheads, so they are better equipped to adapt to unexpected circumstances.
Kane Pirie of Travelrepublic, on the other hand, does not believe there will be many winners in the coming months and the industry is likely to see a significant number of failures. He admits even the Travelrepublic style model will find it difficult in the light of capacity cuts from the big two alongside the collapse of XL and its seat-only subsidiary Freedom.
“That’s the challenge all the OTAs who are dynamically packaging are going to have next year. The best thing about 2009 is going to be 2010. It’s a case of surviving and getting through to better trading conditions. It comes down to how robust your balance sheet is and how you respond in terms of cost cutting if revenues do come down.”
Most agree some will be squeezed out, particularly those that sit in the middle ground with neither big brand nor lowest price, or those that do not add value – a theory advocated by lastminute.com chief executive Ian McCaig for two years.
Cosmos commercial director Stuart Jackson says: “Retail will come back at the expense of non-existent brands. It comes down to price and their price proposition will change because they will have access to the right level of capacity for the right level of demand. The difference is their model was reliant on very cheap prices but now it will have to stand up on brand.”
With every layer of distribution coming under pressure, it seems travel companies will be in the hands of accountants and financial directors. Many will be reviewing the marketing and distribution channels and putting more robust tracking in place. The purse strings will be tightened.
Parry says: “Online and offline integration is key. There will be better tracking, which leads to better informed buying decisions and more effective use of budgets. It won’t happen overnight but anything that brings cost efficiencies will have the weight of the FD behind it.”
It is often when times are toughest that creativity comes to the fore and companies try out ideas that have been on the backburner. Parry adds: “Ideas to generate revenue that people were going to try but never had the time to will move up the priority list.”
Ironically, talent being released to the market through redundancies can also be conducive to a start-up environment.
Sigurjonsson says: “Clever people get laid off. A crisis can be very fertile for innovations.”
Simmons also believes that the current situation with Adwords could create room for a new model.
“The Adwords type model is becoming uneconomic and it’s not sustainable. Either the search model will evolve and become a CPA model or other models will come to the fore.”
There is no denying that it is going to be tough year. Simmons says: “There’s going to be quite a bit of forced change within the UK distribution environment.”
The industry itself is not completely despondent and most believe a more efficient industry will emerge the other side.
Pirie says: “People will still travel. Next year will be smaller but it’s not going to collapse.”