What will it take to go from ‘travel shock’ to surge?

The COVID-19 pandemic has indelibly affected the travel industry. Until recently, it suffered severely. Spending on tourism isn’t likely to return to precrisis levels until 2024. But though the long-term effects may appear overwhelming, industry leaders are finding that many lessons from the COVID-19 crisis could help travel companies come back stronger than they were before the pandemic.

As COVID-19 concerns begin to subside, a silver lining emerges: according to a 2021 McKinsey survey, travel is the second-most-desired activity among respondents, behind dining out. Hotel reservations and rental-car bookings are on a major rebound.

Axel Hefer, CEO of Trivago, a global accommodation search platform focused on comparing hotels and alternative accommodations, has some insights to share. Since the pandemic started, Hefer has seen travel philosophies and plans shift to local and weekend travel and to broader needs, including safety, value, and the travel experience—not just the lowest available price. “We’ve seen a big shift toward travel domestically and to neighboring countries,” says Hefer, “and a shift away from continental and intercontinental travel. This shift was predominantly driven by the restrictions in place and the uncertainty of travel. Travelers want to know that if they can get to a location, they will be able to return home and not get stuck due to rapidly changing travel restrictions.”

McKinsey’s Nina Wittkamp talks with Hefer about the biggest travel trends affecting the industry, what the future may hold for leisure and business travel, and the bold moves his company has taken to diversify beyond its traditional offerings. The following is an edited excerpt from their conversation.

Travel trends for 2022

McKinsey: What’s your outlook on tourism in the short and long term?

Axel Hefer: Travel patterns changed significantly during the COVID-19 pandemic, with customers shifting toward domestic travel or trips to neighboring countries, more beach and nature destinations over cities, and shying away from continental and intercontinental travel. More recently, as we see many restrictions lift, we can see the return of travel to cities, such as London, Amsterdam, Berlin, New York, and Chicago, to a name a few.

I’m less optimistic about long-haul, intercontinental travel, even in the long term. The opening up of the transatlantic routes can lead to significant demand for international tourism, but travel across geographies is more complicated because of the need to implement safety measures that are in sync between the departing country and the country of destination. For instance, if one region is investing heavily in hygiene and safety measures but there is still a quarantine restriction on a return from another region, that becomes prohibitive.

The farther away from home you travel, the more uncertain it might feel. Barring any new variants, my hope is that by the middle of 2022, travel measures will normalize between countries as COVID-19-vaccination levels rise in most key markets and travelers become used to some level of restrictions and deem them acceptable. But regaining the trust we had before the pandemic—when overall travel was deemed less risky—may take years to rebuild.

McKinsey: What are some of the business-travel trends that might continue into 2022?

Axel Hefer: The rise in COVID-19 cases in the summer of 2021 caused many businesses to rethink opening up their offices this fall, with some now looking to reopen in 2022. The lack of open offices has affected the expected business-travel recovery and put things on hold.

Plus, the ongoing use of remote videoconferencing, especially for transactional updates, contributes to business travel stagnating in the short term. As soon as offices open up again, we expect to see a jump in bookings for business trips that are more focused on maintaining or building relationships, as more leaders realize the value of face-to-face interactions. For travel providers, it’s important to note that the business-travel implications are hitting certain travel destinations more severely than others. For instance, New York and London have seen some uptick. But Singapore and other Asia–Pacific cities, including Sydney, have responded to more recent COVID-19-infection spikes with additional lockdowns and restrictions. Travel and hospitality companies operating in these destinations will have to adapt their capacity and offerings accordingly, which could include altering their products or messaging to meet the area’s changing situation. This could become an opportunity for some companies to capture a greater share of spending over the long term as the business-travel market slowly returns.

McKinsey: What are the business implications for travel companies amid ongoing uncertainty and changing consumer behavior?

Axel Hefer: The pandemic has opened our eyes to a few things. Most notably, it has shown us that the travel market can undergo abrupt change, going from major growth to no activity in a matter of days. In 2019, we experienced a record year in travel; then in 2020, it was the worst it had been in a very long time. We also saw an immediate market response to an easing of travel restrictions. For instance, in Germany, when the lifting of restrictions was announced, there was a massive increase in bookings on the very same day.

The first implication for travel companies’ operations is that variable costs come at a huge premium. The more fixed your company’s cost structure is and the more assets you have, the more difficult it is for you to deal with this kind of volatility. If we’re looking at a future when we may see frequent waves of pandemics similar in scale to the COVID-19 crisis, then most companies will need to look at adjusting their cost structure.

The other big challenge was the refunding of prepayments. Many merchants that had collected prepayments found themselves having to pay out—in some cases billions of dollars—very quickly. That type of hit on the cash flow of a company can be a struggle.

Lastly, a majority of the partners we help are asset heavy. For many of them, moving everybody into a completely new work setup while being hit by a wall of refunds that had to be processed operationally and then funded—this was the perfect storm.

Trivago’s response to the pandemic

McKinsey: In what ways has Trivago been innovating out of the COVID-19 crisis?

Axel Hefer: For consumers, we’ve spotted a trend that I think will stay—learning to really like your surroundings and do shorter trips that are closer to home. In response, we’ve launched a product that addresses the need for inspiration for local travel. Almost everybody knows the top three or four destinations around them that are within driving distance. But what about the lesser-known places? This new product addresses those spots that are a bit more niche and that you may have heard of but maybe never been to. Through the platform, there will be new ways to book different local activities and not just trips.

On the business side, the biggest opportunity for a company like Trivago is to offer more services that help our business partners to reduce costs from their existing offering, improve their offering, and realize economies of scale while keeping their strategic focus. To do that, we’ve started to invest more in reevaluating our understanding of the global hotel and accommodations market, particularly the process of availabilities.

We’ve spotted a trend that I think will stay—learning to really like your surroundings and do shorter trips that are closer to home. In response, we’ve launched a product that addresses the need for inspiration for local travel.

During the pandemic, we soft launched one offering that gives our partners access to our core connectivity—our metasearch at scale—which constantly assesses the specific hotel-related needs of both travelers and hoteliers, providing data that’s fresh and in depth. This offering is particularly attractive to our smaller partners that would otherwise not have access to this level of information at scale. In times of uncertainty, partner collaborations are becoming increasingly valuable to leverage.

McKinsey: How are you managing the organizational challenges around employee burnout and attrition?

Axel Hefer: At the start of the pandemic, it felt like the world was falling apart, and there was a lot of panic, which unsurprisingly led to paralysis, especially if you are losing 90 percent of a given market within one week and then, the week after, another 90 percent. And like many other companies, we moved to a completely different working environment almost overnight, with a fully remote setup. Many colleagues struggled with all the change and the pressure of working from home in full isolation and full lockdown. These circumstances pushed us to introduce our “trivacation” concept: we instituted a mandatory vacation, on top of the normal vacation days, to make sure that everybody’s getting some rest in a coordinated way.

To counter the fear and paralysis, we also adopted an extremely transparent communication program. Every week, anybody could ask any question. We’d say, “This is our view of what we think is currently going on. We could be wrong. We could be right.” Over the past year, continuing this type of communication has helped us weather other tough times. Being very transparent about our view of the situation and the reasoning behind our decisions has helped to build trust and unite everyone to get behind a common view on how we could prepare for a return of travel.

Like many tech companies, we’ve still seen an increase in attrition while everybody was working from home and an overall increased liquidity in the labor market. But we’ve now started our hybrid work style, with colleagues coming back to the office a few days a week, and that is very exciting to see.

Going forward, we plan to be very open with staff about our challenges and to share the trade-offs. It can sometimes be very difficult for others to understand the direction you are taking if you are not giving enough background. The more you communicate your assumptions and trade-offs and the eventual decision, the easier it is to get everybody behind it.

Comments and opinions expressed by interviewees are their own and do not represent or reflect the opinions, policies, or positions of McKinsey & Company or have its endorsement.

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