The 10-Minute Take: Can Canada's Travel Industry Keep Up With the Post-Pandemic Boom?

Speaker 1 [00:00:02] Hi. It’s John here.

Speaker 2 [00:00:03] And it’s Theresa.

Speaker 1 [00:00:05] Hey, Theresa. I’m sure you’ve heard all about the delays and issues at Canada’s major airports lately. I flew west this week and the security lines were crazy.

Speaker 2 [00:00:14] Yeah, I have been hearing that from all over the place. Last weekend, Amsterdam’s largest airport asked airlines to cancel flights or divert them to other airports because of staff shortages. Passengers, and I’m sure you’ve experienced this to have to queue for hours. It’s being felt all around the globe as more Canadians are traveling for leisure again, they’re facing challenges between COVID screenings and labor shortages. And questions are being raised about whether airlines, airports and the broader travel industry will be able to keep up.

Speaker 1 [00:00:44] Yeah, I mean, let’s admit it. These are largely privileged problems, but they’re causing serious disruptions in the economy. We know travel’s back. We’re all eager to get out and enjoy summer. I flew to Vancouver, then to Calgary and back to Toronto in the last week. Really impressed with the way that staff were keeping up with large crowds and a pretty high variability of crowds. But it’s going to be a real bumpy summer if we don’t iron a few things out. The biggest concern for Canada’s travel industry may very well be supply. A historic labor crunch has left the sector short of 177,000 workers.

Speaker 2 [00:01:22] A lot of turbulence, you might say.

Speaker 1 [00:01:25] This is disruptors. The ten minute take where we dove into the latest innovation, tech and economic buzz.

Speaker 2 [00:01:31] This week’s take is on the travel industry’s post-crisis boost. Can the industry keep up with all of this demand?

Speaker 1 [00:01:38] Today, we’re joined by Claire Phan, economist at RBC, who just wrote a fascinating proof point piece called Canadians Are Scratching the Travel Rich Again. But can the industry meet demand? Clare. Welcome to the ten minute take.

Speaker 3 [00:01:53] Thanks, John.

Speaker 1 [00:01:54] Love your report and wonder if we can start with a bit more insight into Canadians travel spending. We know it’s already well above pre-pandemic levels. What more are you seeing?

Speaker 3 [00:02:03] So like you said, obviously demand for travel has been incredibly strong. Funding will travel. Spending typically predates actual travel activities because many of us tend to pay for those trips ahead. So. But just by where things are going, where those spendings are going, we can sort of expect a really robust path for recovery, for travel activities later this summer into next year.

Speaker 2 [00:02:25] I’m really surprised by those findings. The robust travel ahead, considering that inflation is at an all time high and cost of living has gone up tremendously. What does the data show in terms of who in Canada can actually spend on travel?

Speaker 3 [00:02:38] Well, to your point, inflation has definitely been surging and it was due to, you know, extremely elevated demand for goods at the moment, because a lot of these services, including travel, largely just simply wasn’t available for purchases for many of us. But now, you know, with a lot of these activities resuming back to normal, we’re seeing more price increases in airfares. It’s getting more expensive to dine out and to, you know, spend a night at a hotel. These things are all going to be more expensive. So the implications for travel demand were as to what we’re expecting in the near term. We do expect some level of resilience for travel demand, and that’s because Canadian households overall have accumulated a huge stock of savings over the course of the pandemic, and that amounts to roughly $300 billion. And to put that amount into perspective, that’s basically worth more than three times the tourism spending in 2019. So it’s a huge amount of money. And that, combined with just the pent up desire to really go somewhere, is why we’re expecting, you know, at least in the near term, a lot of Canadian households will probably be spending through higher inflation and rising costs.

Speaker 1 [00:03:48] Claire I’m sure a lot of people hearing this understand the challenges, but also see this in pretty much every sector, the great resignation is leaving no sector untouched. How is the travel and tourism industry different than other sectors in terms of how labor shortages are impacting?

Speaker 3 [00:04:06] So the broader labor shortage issue really is underpinned by aging demographics, and that’s been a challenge that faced by the Canadian economy and many other economies like for many, many years, and that’s largely been expected. What’s different for travel related industry, and that includes accommodation and food services, travel or accommodation that includes, you know, air transport. It’s like many of these jobs are client facing are high contact. And over the past few years, these were particularly the jobs that faced the most turbulence in terms of rising instability and uncertainties as to where their careers could be going. So a lot of workers within these industries actually have switched careers over to other sectors, and it’s going to be really hard to convince them to come back.

Speaker 2 [00:04:50] If I just think about my own travel browsing experience in the last a while and seeing lots of deals on flights and hotels as these industries are trying to recover from losses experienced during the pandemic. And yet, as you’ve just mentioned, as we keep hearing these labor shortages, these cost pressures and all this consumer demand driving up prices. So if you scan across the travel tourism industries, can you tell us specifically which parts or subsegments are getting hit hardest in terms of costs and therefore prices?

Speaker 3 [00:05:19] Well, from a consumer’s standpoint, as we all know, car rental prices have been going way up year over year. Just in April, the sort of inflation for car rental was around 20%. And that’s eroding a lot of purchasing and spending power on travel just because with more budgets being allocated to renting a car, you might have left to find out other travel related expenses and sort. So but from a business standpoint, inflation has been widespread across all industries, but more particularly these days for food and energy related items. So that from an industry perspective, means things are getting harder for restaurants and for airlines as well, just because of rising food and energy prices, which accounted for half of inflation actually in April.

Speaker 1 [00:06:03] Claire, I wonder if you can cast your eyes a few months or several months down the road. Certainly a lot of talk of recession or slowdown or soft landing out there. And I’m curious how that plays out for the sector, because normally travel is something we all tend to fall back on when times are tight. It’s typically a part of what people see as disposable income. Or discretionary spending. And yet having been locked up for a couple of years, probably most people don’t see it as discretionary. They see it as essential. I got to get out of here and enjoy summer and maybe fall while I can. So with these sometimes contradictory forces of play that probably muck with traditional economic models, I’m wondering how you’re thinking about the travel industry going through summer and into fall and which corners may bounce back more than others and which ones may be slower to recover?

Speaker 3 [00:06:58] That’s a loaded question right there. How we’re framing it essentially right now is just given where we are in the economic cycle, which is the peak of the peak. So things are heating up. We’re short of labor. Inflation is rising, and that’s particularly true for the goods sector. And that’s why central banks are acting really, really fast. Right now, Bank of Canada just hike interest rate by another 50 basis point. And the whole purpose of that is to tame consumer demand in order to tame inflation. And what does that mean for the travel sector? Well, demand for travel has just been coming back. So we’re not we have not been seeing the same level of inflation for travel services when we’re comparing to goods inflation. So I really like your point about, you know, how many, many households these days probably see travel to some extent with their savings as a discretionary item. And just anecdotally speaking, a lot of my coworkers, including I’m sure you guys as well, and my friends are all like, it’s all it’s on everyone’s agenda, going somewhere near or far this summer. So at least in the near term, again, going back to the point, just like really strong level of pent up demand, a lot of savings, all of those are expected to support activities. But our further in the longer run, there is the question of whether rising inflation and rising interest rates. With that comes rising debt payment activity, whether that’s servicing costs, rising debt servicing costs. And those are all expected to start to hit lower income households first and work their way through higher income households and less in demand in the longer run. So that’s our take on the whole recession earthquake, which I’m sure will not play out as the way we sort of expected. But then as of currently what we’re seeing right now in terms of weaker spots in the travel. So, you know, activities in North America and Europe are quite strong by parts of Asia, including China, are still seeing some like more stringent quarantine and testing requirements. And China pre-pandemic being the largest source of international departure that’s slowing sort of recovery over there is going to drag on global travel recovery into next year as well. And on top of that, this is related to travel, which anecdotally has been coming back more. But overall to leisure travel is still relatively weaker and we could reasonably expect it takes longer for that to come back as well.

Speaker 1 [00:09:25] It’s a fascinating story of economic disruption and one that we’re all playing a role in in different, different ways. Claire, thanks for being on the ten minute take.

Speaker 3 [00:09:33] It’s such a huge pleasure. Thank you, guys.

Speaker 2 [00:09:37] So, John, I have some travel planned for later the summer. And this conversation with Claire is making me think that I’ll have to cut back on every other spending category to be able to afford it. And I mean, it’s wild to me that demand for travel is as high as it is, given everything that’s going on, interest rates and fuel prices and all of the things that we don’t want to hear anymore. Although that makes me think that it makes sense if people want to escape for a little while to just get away from these maddening conditions in our day to day lives.

Speaker 1 [00:10:05] Yeah, one assumes this is temporary, but temporary is a kind of an expandable word. This could go on for many, many months, even as the economy slows down, just because there is that pent up demand we want to get out and what better time to travel than summer? So it’s in general a good problem to have, although in specific cases, especially for the operators, a big challenge.

Speaker 2 [00:10:28] Well, that is it for this week’s ten minute take. Join us again next week for another episode. Until then, I’m Teresa Do.

Speaker 1 [00:10:35] And I’m John Stackhouse. Talk to you soon.

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