As the vaccination programme builds momentum, experts from L.E.K. Consulting’s Healthcare and Consumer practices have come together to create a framework for modelling recovery scenarios to help businesses plan for the upturn. This article focuses on the implications for the travel and leisure sector, one of the hardest-hit parts of the economy, but the lessons apply more widely across the consumer landscape.
The COVID-19 crisis caused previously unimaginable levels of medical and humanitarian catastrophe, ripping through the global economic fabric and devastating business communities around the world. For much of 2020, some sectors like travel and leisure were effectively entirely shut down as we closed venues and borders, and ordered quarantine and ‘self-isolation’, prompting furlough and redundancy rates amongst the highest ever seen in the modern era. However, 12 months on and the world’s scientific community have delivered amongst the most remarkable medical achievements: a vaccine approved by regulators in fewer than 300 days since clinical trials commenced. As the most ambitious vaccine roll-out in history ever undertaken starts to gain traction, we ask: how should travel and leisure businesses think about, and plan for, a successful bounce back?
We developed a post-pandemic planning framework (PPPF) to assist companies in modelling how the impact of the vaccine roll-out and subsequent opening up of the economy may influence the content and timing of their recovery plans. The PPPF includes five steps, each of which has an impact on the next.
1. The vaccination programmes
Assuming high efficacy rates in preventing symptoms and transmission, the critical first question in the PPPF is to consider how rapidly the global vaccination programme can be delivered. While the UK is currently amongst the top five countries globally in terms of administered vaccine doses per 100 people, in-country vaccination programme roll-out appears uneven at present, which will impact the sequencing of travel corridor reopening. Manufacturing capacity bottlenecks are constraining the pace of roll-out, but these problems will ease, and the global programme of vaccine development is gaining momentum. We consider these themes in turn.
How rapidly will we be able to scale in-country vaccination programmes?
Worldwide vaccination programmes are now underway, with some countries like Israel, the UAE and the UK performing particularly well, whilst others are just getting started. For domestic travel and leisure businesses, this is already good news, but for international travel to rebound, the progress of vaccination programmes in the destination market and other key origination markets for those destinations are also critically important. There are notable flows of sun-seeking passengers into Spain, Turkey and Greece from the UK, Germany, Benelux and Nordics ― vaccination programmes across these markets will set the pace of the recovery.
In the US, the new administration under President Biden has committed to an accelerated vaccine roll-out strategy to provide 100 million vaccine shots in 100 days. Notably, European countries appear slow and have not yet shown much evidence of an accelerated vaccine roll-out plan. Current estimates suggest Europe could be six to nine months behind the progress already made in the UK, with vaccination of most target priority groups not complete until the end of 2021 or even 2022.
For approved vaccines, how quickly will manufacturing capacity ramp up?
Part of the challenge lies upstream in vaccine manufacturing, which is a highly complex process to manage and to scale. Many of the vaccine candidates in the development pipeline have been ‘manufactured at risk’ (i.e. they have been manufactured before achieving regulatory approval). This has led to some ability to stockpile vaccine whilst the regulatory approval process is underway. Manufacturing capacity is usually increased through two approaches: scaling up (increasing the size of vaccine batches) and scaling out (creating multiple production streams). Both of these approaches are in progress to achieve the volumes of COVID-19 vaccine required globally.
Notwithstanding the considerable efforts to increase capacity, there have been recent reports of interrupted supply, which cannot be ruled out going forward. For at least 9-12 months, continued shortages of vaccines will be likely across most countries.
How many more vaccines are likely to be approved over the next 12 months?
However, there is a reassuring level of momentum in the global programme of vaccine development (see Figure 1). Since Comirnaty, the Pfizer/BioNTech COVID-19 vaccine, became the first approved by a UK regulatory agency (the MHRA) anywhere in the world, eight others have also received authorisation (e.g. Oxford/AstraZeneca, Moderna) in at least one country; more than 300 remain in development.
Vaccine development timelines have been radically shortened without impacting safety standards. Regulatory agencies around the world have further reduced timelines through several initiatives, for instance, reviewing data more frequently through the trial process (‘rolling reviews’). Whilst every trial carries some possibility of delay or failure (e.g. GSK/Sanofi’s vaccine candidate did not show sufficient immune response in the elderly), the sheer number of candidates in development suggests a large number may be approved over the coming months.
2. Impact on morbidity and mortality
The vaccine programme ― together, of course, with other public health measures such as the continued emphasis on infection control policies, e.g. lockdown, masks and handwashing ― is a key strategy to bring the pandemic under control. The next step of the PPPF is to ask:
How quickly will the vaccine programme impact morbidity and mortality?
We need to assess how well the vaccine programmes will translate into reducing the flow through from the rate of infections in the community, hospitalisations, intensive care capacity utilisation and ultimately death rates.
As the vaccination programme and continued disease control measures afford protection to the most vulnerable population groups, we will see a dramatic reduction in the pressure on the NHS and a dramatic decline in the statistics on the daily death rate. When this happens, the politicians will be keen to act and will move to release the lockdown constraints and travel restrictions.
Politicians and their scientific advisors will need to be convinced that once these rates are reduced, they are likely to stay low for a prolonged period. This is important in order to avoid the yo-yo effect of 2020 as waves of infection triggered various national lockdowns at different times throughout the year, causing chaos to some business segments such as the travel industry.
In the UK, the government set a target of immunising 13 million people by the middle of February 2021. According to a recent actuarial assessment, if these numbers are achieved, then the impact on intensive care admissions and deaths is likely to be felt quite quickly ― by about the middle of March. This is primarily because of the prioritisation of elderly age groups (70+), who account for most deaths (see Figure 2).
3. Easing of lockdown restrictions and the opening up of the economy
If experience in 2020 is a guide to likely decision-making in 2021, politicians and other decision makers may want to ensure that both infection and death rates remain low for a period of weeks (but probably not months) before there is any retraction of national lockdown policies. This is to avoid reigniting infections and increasing the ‘R’ number above 1 (where infections start spreading exponentially again). Importantly, governments will need to have confidence that the curve has been flattened to a level that indicates healthcare systems have avoided the risk of being overwhelmed and that future well-constructed infection control policies and procedures are in place. These include quarantine facilities, acceptable supplies of personal protective equipment, and contact test and trace systems that are operational and effective.
How cautious will governments be in reopening the economy?
Despite the pressing need to stamp down the rate of infection and death rates from COVID-19, most national governments remain under severe pressure to reopen economies given threats of redundancy, recession and government borrowing levels not seen since World War II. Some countries, especially those with the most severe lockdowns in 2020 (e.g. China, South Korea), have mostly reopened many segments of their economies already, but will always face the prospect of re-emerging infection, at least until they can get their populations vaccinated.
Other countries, including the UK and many European nations, are likely to be slower at removing restrictions. They may consider reopening their economies in a staged approach, deciding on some areas to open first, for example, the education sector or industries of national importance like car manufacture. This transition will need to be planned carefully and articulated and communicated thoroughly to the public, but it will happen, and hopefully this will begin in the near future.
4. How will companies respond to the removal of restrictions?
Once government restrictions like ‘stay at home’ orders or curfews are eventually reduced or lifted, it will be important to model and understand how companies within an industry’s value chain may respond and within what time frame. For example, in the scenario that travel corridors are once again implemented, the impact on the travel industry may depend on airlines’ willingness to increase flight routes and capacity, and airports’ ability to cope with increased volume. It may be too simplistic to imagine a wholly positive scenario whereby the removal of restrictions immediately results in a quick return to (near) normality. However, airlines and airport operators are masters at planning and logistics, they have made brave decisions about fleet and capacity to ensure they can build back as stronger businesses, and they have huge numbers of skilled staff currently on furlough, awaiting a call to return to work. So, they can build back capacity at a very rapid rate when it is economically rational to do so. Similarly, ‘asset light’ holiday brands will be able to reinvigorate their supply chains rapidly by re-engaging with destination management companies and airline partners, and will swiftly rebuild their marketing programmes.
This optimism about the health of the industry’s supply side is consistent with the views of eminent economists, notably Roger Bootle, who has stated that unlike other recessionary periods caused by major events like war, this recession has left the supply side intact. Bootle argues that the economy’s productive capacity is largely unaffected. If that is indeed the case then whilst there may be a transitionary period out of lockdown, we should return to a normal cadence of activity on the supply side in a relatively short period of time ― not just in travel and leisure sectors but across the consumer landscape more broadly.
5. The demand side
Most global economies have contracted sharply through the pandemic. In most instances, according to the IMF, contractions averaging 6% amongst almost all developed and emerging countries (except China) in 2020 are unparalleled in the modern era. However, despite the gloomy outlook, there may be reasons for optimism. The PPPF therefore asks:
How will consumer demand respond once pandemic restrictions are eased?
Whilst the pandemic has had a profound effect on global economies, the future impact on consumer spending once restrictions are lifted is less clear-cut, but here we are very optimistic. It is true, of course, that job furlough schemes and job losses are likely to have a negative impact on spending overall, but some indicators at the household level are more positive. For example, the UK’s savings ratio (a measure of how much people save as a proportion of their disposable income) rocketed to 27% in 2020 from around 7%-8% the previous year.1 This may be an indication that some consumers will have more disposable cash to spend once the lockdown restrictions are eased.
How this extra cash ― if it exists ― will be spent is an interesting question. We know from observing consumer behaviour through prior downturns that the recovery comes more quickly in some aspects of travel and leisure than it does in others. Socialising with friends and taking family holidays are central to our well-being. We expect a second-half surge in demand for eating out and live entertainment and a strong return for leisure staples like cinema and gym attendance. We expect another strong year for the staycation, a rapid return of the sun-seekers (possibly from late summer) and a really strong year in 2022 for more adventurous longer-haul experiential travel. We may also see an unexpected more rapid return to escorted tours and river cruising once the vaccines have protected the older demographic.
Even if customer volumes take time to build back, we expect strong yields bolstered by consumers ‘treating’ themselves to ‘extras’. For example, on forward bookings for holidays, consumers are already trading up on travel class, private transfers and room types, after months of constraints on their lifestyle.
Conclusion: Charting the path to normality
Our post-pandemic planning framework provides a way of thinking about and modelling the upturn. There are five key elements to consider; some are more suited to analytics, whereas others require more judgement to narrow down the range of uncertainty. This is a complex modelling task, but one where at least the parameters are clear and scenarios can be systematically worked through to identify a pragmatic pathway for business recovery. The five critical steps to consider are as follows:
- The vaccine roll-out ― at home and abroad. This can be analysed with some degree of certainty, notwithstanding the challenges for the industry of rapidly scaling capacity.
- The impact on the flow through from infections to hospitalisations to intensive capacity utilisation and the level of mortality is again something where reasonable analytical predictions can be developed.
- Political decisions about the removal of restrictions and actions to restart the economy will be harder to judge, but this is an area that lends itself to thoughtful scenario planning.
- The speed with which the supply side can rebuild capacity can also be analysed, with an eye on the financial implications of rebuilding the resource and cost base alongside a careful assessment of returning consumer demand.
- The likely strength of demand from consumers can be assessed through a combination of primary market research as well as evaluating patterns of recovery from prior downturns. We anticipate that in many areas of travel and leisure, supply constraints, rather than demand constraints, will limit the rate of recovery.
We are increasingly optimistic about the prospects for the travel and leisure industry in the second half of 2021 as we start to see a resolution to the health crisis, as politicians seek to rebuild the social and economic fabric, and as consumers are able to remake their family and social connections.
1ONS, 20.01.21 and 22.12.20