Practical considerations

Agents, clients, suppliers – time to change the rules

RICHARD VANDERLUBBE

In the second part of a three-part series, Richard Vanderlubbe considers how consumers will behave once COVID-19 is behind us. One thing he makes abundantly clear is that the industry is going need the government’s help (at all levels) to make sure people know that it is safe to travel.

As for what’s to come, the former ACTA-Ontario president writes: “We have no idea how individual and aggregate indifference curves will change post COVID19. What I can observe, is that whether consumers can articulate this or not, the perceived price of travel just rose.”

Before COVID-19, says Vanderlubbe, “consumers were narrowly focused on flight ticket costs when deciding to book travel. If there was a “good deal,” they might book non- refundable tickets to a destination without first checking accommodation costs.”

Now, he says, “COVID19 has brought additional costs to mind,” with consumers asking: What if I am “stranded” abroad? What if my plans are cancelled? Will I lose my money? What if I am not able to travel during the time a future travel credit is offered? What about proper insurance coverage? How would I get back if something happened? How much would that cost? Will I get kicked out the hotel? Is the airplane sanitized properly? Is the hotel sanitized?

Consumers will be asking themselves all of these questions when they’re flying and those questions will add to the “cost” or “price” of travel.

Says Vanderlubbe: “I feel certain that the vast majority of travellers will price this in without realizing it. Lowering prices to stimulate demand will not necessarily work.”

He continued: “I feel as though the elasticity of demand is about to change, and for certain segments of the market who participated in mass market travel, their demand may be lower and highly inelastic. That is, no matter how low a cruise price goes, it will not result in an increase in demand necessary to fill a ship. That certain airfare and hotel rates alone may not do it.”

And he asks: “Can we ‘price our way’ back to higher mass demand? I wonder. People could be so bored after being cooped up and roar back into restaurants and bars. Or not. Perhaps even basic local social engagements will not be the same for months or years after. Will people return to malls at the same rate? Will there be 20% of people who become permanent germ-a-phobes and shut ins? Or will the short memory set in? If 20% or 30% of our former market makes a permanent alteration, supply will need to be adjusted or pricing will be below anyone’s ability to break even, let alone make a profit.”

As for the future, Vanderlubbe wonders about the outlook for those destinations (like China and Italy) and industry sectors (like cruise) that have been the focus of ongoing COVID-19 reporting.

Going forward, Vanderlubbe believes that governments around the world will have help the the industry reset the message.

Yet says Vanderlubbe, experience shows that governments are concerned more about their domestic and inbound travel industry than those of us in the business of sending people out of the country.

To that end, he says the industry must lobby globally because the world’s economy is interconnected.

As for Canadians, many expect their annual sun vacation to escape winter, and this may be more resilient than other segments, he notes.

Although, he believes that corporate travel may be curtailed due to video conferencing in the short term, but experience shows that collaboration over distance breeds more demand in the long term for business travel – the more you collaborate by conference call or video conference, the more you are likely to get together in person.

As for the industry’s current advance purchase, non-refundable model, that’s something that Vanderlubbe says the industry needs to wean itself off.

He observes: “[This] cannot happen overnight, and it may require Government regulation as the free market may not be disciplined enough to see the long term for the short term. Sometimes, regulatory action is required to rationalize the free market in the short term by applying the rules of the game required for long term health and profitability.”

He continues: “I believe the days of taking bookings months in advance or even weeks in advance – with full payment and ‘gotcha’ rules – is dead. And if it’s not dead, it soon will be because consumers will feel that the rules won’t apply anyway – not because of government regulation, but because of mass consumer backlash – a revolt if you like.”

“While the industry has no legal obligation to even offer future travel credits,” Vanderlubbe points out, “it did so because of long term goodwill. And as one industry participant offered flexibility, just like the domino effect of a seat sale, competitors followed (albeit slowly) as we saw the industry order crumble. I believe the same will happen with advance payments.”

He points out that “holding a reservation, or an ‘option’ to travel on a given itinerary should have a price,” explaining that “the price of that option to travel in the future should reflect the opportunity cost of the travel supplier to sell that service to someone else.”

“We have a bevy of advance purchase data as an industry,” he continues, “We know when people are looking but not booking. And we know when the mass numbers book, and how different market segments have different elasticities of demand in advance of travel.”

For example, he says corporate travel demand is “mostly inelastic for price, but highly elastic on schedule and choice to make changes,” while VFR markets are most elastic.” As for cruise and tour markets, because they are planned further ahead, they’re less likely to cancel. The same is true for group travel.

For consumer, the option price is intuitive – not conscious. It’s weighed against the risks of purchase and whether that purchase can be executed.

The lower the option price, the more likely people will book. But zero isn’t a good price for an option. No deposit is a lot of work and will result in cancellations. It is better to have a nominal price on this option to eliminate transient bookings.

Not surprisingly, travel agents don’t like zero deposits because they’re a lot of work with the potential for extra work when a customer cancels.

Writes Vanderlubbe: “The industry needs to test various levels of advance deposit amounts, and I strongly believe the term should change to Option from Deposit. You purchase options on stocks. And in our business, customers are purchasing the Option to travel on particular dates.”

And he adds: “I also believe that the option should be to the supplier and the fare level – if we allow consumers to change dates without penalty so long as the inventory is available, it will be a much easier sell. So, I could move my option from a November departure to an October departure without a change fee, or a nominal change fee – not high – only the actual cost of the change. The difference in fare would apply.”

He also suggests that: “The price of an option should differ by advance purchase. Maybe this is even a dynamic price based on inventory, demand, etc., and not a fixed amount. Complex systems and AI have been developed to change market prices, but if options were dynamically marketed and priced, I believe there would be less complaints about price drops after booking.”

The bottomline for Vanderlubbe is that “the customer needs to know that there is a cost and a price to hold a reservation and take it out of the market for sale, and if they cancel, it must be resold.”

Yet a ‘one-size-fits-all’ approach isn’t the solution, as some destinations and travel services will “have a more volatile and price sensitive last-minute market.”

In fact, he suggests that a second deposit – that reflects the new price of holding the reservation as well as the cost of reselling at a discount – may be required.

As for travel products booked a year in advance, a third deposit may be needed, with each deposit increasing the cost of cancellation.

Vanderlubbe argues that the issuance of a nominal deposit should eliminate the current risk of fare not guaranteed until ticketed.

He also believes that as soon a consumer pays money to the travel advisor, pricing should be firm and not subject to change, except for taxes imposed by applicable Governments.

But he adds: “If there are provisions for increases in prices due to oil prices or exchange rates, they need to be crystal clear and not buried in fine print.”

Vanderlubbe is convinced that suppliers need to “think carefully about how far in advance it is necessary to collect funds.”

He points out that: “With today’s speed of payments, wiring money, virtual credit cards, why is it necessary to collect funds so far in advance. Let’s park the fact that our businesses rely on advance money to fund operations – that problem is dead right now. We need to start bookings.”

He urges: “The final payment date should be as late as possible, allowing the risk of cancellation to be reflective in option pricing.”

On a personal level, Vanderlubbe writes that he believes it’s “immoral to hold funds if the service was not provided, beyond the amount of the cost of resale at a lower price.

These one-way contracts and bullying ‘gotchas’ are not helpful to our industry right now.”

Next week: Paying the piper … the role of agents in a Post-COVID-19 world.