1. Brexit Requires Radical Rethink to Safeguard UK Travel
and Tourism
Opinion | 28 Jun 2016
Dark clouds have gathered over the economic
and political future of the UK following the
dramatic decision to leave the European Union
announced on 24 June 2016. The country has
already lost its triple A credit rating as the
ramifications of the vote begin to emerge.
The referendum result has brought into sharp relief the deep divisions and polarised
opinions in many sections of the UK population - dividing young and old, rich and poor,
north and south - leading to a period of shock and soul-searching across the UK. The
country has entered unchartered waters with many questioning the country's identity
in the 21st century, its social values and future role in the world. What does this
profound decision mean for UK travel and tourism and where might opportunities lie?
Uncertainty guaranteed
Following the Leave vote, the UK has entered a period of uncertainty with many
unknowns, notwithstanding the election of a new Prime Minister and the timeline for
Brexit, once a decision is made on the triggering of Article 50 of the Lisbon Treaty that
allows for member states to withdraw.
Euromonitor International's macro model shows a 2% fall in GDP growth over five years
to 2020 stemming from a Brexit, with the biggest impact felt in 2017 and a return to
the baseline forecast by 2023, meaning it will take several years for the UK economy
to return to normal.
Identity crisis
The UK is high up on the scale of popular destinations, ranked sixth globally in 2015,
with an impressive 35.4 million international trips, worth £28 billion to the UK economy.
According to FutureBrand, the UK was ranked the 12th global country brand in
2014/2015 in terms of interest in visiting, most likely to recommend and do business
with, and seventh in Europe. The top three countries were Japan, Switzerland and
Germany.
The UK has firmly positioned itself on its cultural credentials, heritage and countryside
and went through a major marketing revamp before the Olympics in 2012, to ensure
that it could maximise the opportunity and pulled it off with aplomb. Despite a blip in
2012, inbound tourism growth has been consistently strong, averaging 6% per year
over 2013-2016.
The updated image of GREAT Britain launched onto the global stage during the 2012
Olympics, showcasing its multi-cultural society, inclusive values and modern approach
focusing on digital innovation. The recent Brexit vote damages the country's image as
an open and inclusive society considering the primary argument for the Leave
Caroline Bremner
Head of Travel
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2. campaign pivoted on immigration. A big question mark hangs over what the UK's future
values and positioning should be, as well as what the future regulatory framework will
be in terms of future connectivity, visas and security.
UK Arrivals '000 Trips 2009-2020
Note: Historic data to 2015, forecasts from 2016 to 2020 were made prior to Brexit
High dependency ratio
The UK has a high dependency on Western and Eastern Europe for its international
tourists, with both regions accounting for 73% of all inbound tourism in 2015. Post-
Brexit, taking into account GDP adjustments in key source markets and previous travel
behaviour, correlated with economic performance, the top 20 markets to the UK
combined are forecast to see 5% knocked-off their baseline UK arrivals forecasts by
2020 between 2015 and 2020.
France is the UK's biggest source market, with 3.7 million visitors to the UK in 2015,
and has exhibited a high level of resilience to external factors in turbulent times such
as the Great Recession. France is therefore a robust source of tourism for the UK.
However, based on previous travel behaviour during times of uncertainty and weaker
economic performance at home, Germans and Americans are less likely to travel to the
UK, and Euromonitor expects that each country will see 0.5 million fewer people travel
to the UK between 2015 and 2020 to reach 3.3 million and 3.5 million respectively.
United Kingdom Forecast Adjustments to Arrivals from Key Source Markets Post-
Brexit 2015-2020
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3. Note: The incremental difference in terms of arrivals from origin countries to the UK
was based on the forecast performance of inbound tourism before and after Brexit
over the forecast period. We applied correlations displayed between tourism demand
for the UK and economic performance of each source market over the historic period
to gauge the potential difference in arrivals from key markets over 2015 to 2020
Glass half full
On the positive side, financial volatility in the markets and the ensuing slump in the
pound to a 30-year low, dropping 10% since the vote, make the UK much cheaper for
international visitors, so costs for lodging, transport and in-destination services will
become more affordable in the short term. For budget-conscious European travellers,
this will be a boon - and low-cost carriers should actively promote the country's value
for money.
Nevertheless, a fall in the pound has the opposite effect on outbound demand, leading
to price hikes from travel brands for the costs of services, and also for holidaymakers
for food, drink and leisure activities in destination.
Consumer Foodservice Pricing Comparison in Spain Before and After Brexit
Brands Company name Price (EUR) Quantity Total Cost
Orange Juice Oita Café 2.80 2 5.60
Café Latte Costa 2.70 2 5.40
Soft drink Pizza Jardin 1.15 3 3.45
Pizza Margarita Pizza Jardin 7.25 4 29.00
Samun Ice Cream LlaoLlao 3.70 2 7.40
Soft drink Large Burger King 2.45 4 9.80
Chicken Nuggets x9 Burger King 3.60 2 7.20
Bic Mac Menu ( Grande) McDonald's 5.95 2 11.90
Total Cost - EUR 80.00
Total Cost - £ 60.81
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4. Note: Consumer foodservice pricing as of 31 Jan, 20 June and 28 June 2016 to
illustrate the effect of currency exchange
before and after the UK Brexit vote on 23 June 2016
Outbound demand to bottom out again?
In the aftermath of the global recession, the UK travel industry witnessed the bottom
fall out of the UK outbound market, particularly budget travel packages, with a few
high-profile companies going to the wall, such as Flyglobespan. It took eight years for
UK outbound demand to recover to its original levels pre-crisis, only achieving levels of
over 78 million outbound trips in 2015.
In value sales terms, the outbound market collapsed and lost over £10 billion from its
peak to trough in 2008 and bottomed out in 2013 when the outbound market started
to pick up again thanks to pent-up demand and a stronger economy. The sharp fall
was not just a result of demand collapsing, but also the removal of unprofitable low-
costs deals and players, with major tour operators reducing supply to maximise
average transaction prices.
Before Brexit, Euromonitor International expected outbound tourism to return to its
former level by 2019. Leisure outbound demand was particularly sensitive to the global
downturn. So, the Brexit vote is bad news for the outbound market and all
destinations that depend on the UK, especially for the traditional family market. Even
when outbound demand eventually recovered in 2015, there were still high levels of
price sensitivity. We are expecting to see discounting to clear the remainder of
summer 2016 and winter 2017, and could well see deep discounting and/or much
greater flexible payment offers to entice holidaymakers to book in advance, as 2017 is
expected to be the crunch year for the full effects of Brexit.
One of the most pertinent questions that the travel industry across all types of travel
brands - car rental, destination, hotels, airlines, online travel agencies - is what will be
the implications on flight connectivity and what happens next to the single European
aviation market. The British Air Transport Association, BATA, states "given the UK is an
island trading nation and with excellent air links.the environment for aviation post-
Brexit must be clarified as soon as possible".
UK Business and Leisure Outbound Departures Before and After the Global
Recession 2007-2015
Total Cost - £ before Brexit 61.58
Total Cost - £ after Brexit 66.24
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5. Potential winners
During the global economic crisis, there were a couple of stand-out categories. Along
with budget brands, whether low-cost carriers, budget hotels and short-term rentals
that offer value for money, there were some major surprises. Online package holidays -
including traditional and dynamic packages - saw an upturn and cruises were in
demand as consumers tightened their belts. UK consumers opted for these packages,
especially all-inclusive, bought online as the costs were fixed upfront. The online
channel provided greater transparency of prices, thanks to review sites, meta search
and flash sales. It is likely that online travel agents (OTAs) such as Expedia,
Booking.com and also meta search players like Google and TripAdvisor will become
increasingly important to consumers seeking out the best deals.
Return of the dreaded 'staycation'
In terms of domestic tourism, there could be a fillip, seeing as outbound travel may be
impacted by the economic slowdown, and one of the most hackneyed phrases of the
last economic crisis was the rise of the "staycation". Domestic trips continue to far
outweigh outbound trips, and remain popular with 132 million trips in 2015 due to their
much lower cost and convenience.
Scotland voted resoundingly to remain in the EU, following its highly divisive
independence referendum in 2015. It is therefore expected to emerge as a stronger
investment and business option than other parts of the UK. It may also appeal more to
European leisure visitors with its pro-Europe sentiment. Cutting APD would help
formalise Scotland's commitment to developing tourism. London also has the chance to
review its future brand image and positioning in order to ensure it doesn't lose its
crown as being one of the world's leading cities for business and leisure visitors.
Gambling, tax and duty-free mecca
In February, I considered what the UK might look like post-Brexit, and discussed the
need for a complete rethink on the country's branding (#BrandNewUK). The launch of
the single market led to the demise of the UK's profitable duty-free business worth £4
billion back in 1999 and there is therefore likely to be an enormous opportunity to put
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6. duty- and tax-free back on the table. Inbound tourists already spent £5 billion on
shopping in 2015, accounting for 18% of their travel budget, so there will be
opportunities to develop more shopping retail outlets, duty-free shops and attract
ever more investment in the UK's high street shops.
We may see the UK go down the route of Las Vegas or Macau in establishing mega
casino developments, including hotels, retail outlets plus casinos. This would be a
means to attract Asian and Chinese visitors, diversifying the UK to find new revenue
streams including casino cruises. Singapore would be a good case study to review how
to balance mega resorts with sustainable development that minimises the impact on
local communities and the environment by looking at Resorts World Sentosa for
inspiration.
Another option would be for the UK to develop as a tax haven in the same way as the
Caribbean islands or Switzerland, where financial laws are attractive to offshore
investors. However, considering the majority of votes for Leave were lower-income,
this option is less likely to wash with the electorate.
Digital divorce
The UK turning its back on EU data privacy laws may lead to a slowdown in online and
mobile travel sales, seeing as data systems used in the UK and Europe diverge. It will
be more difficult for online travel brands to launch pan-European platforms and there
will be a need to develop UK-specific technology to meet national laws as the UK
bifurcates from Europe on data distribution and privacy. The abolition of roaming
charges across Europe is planned for 2017, and now doubt has been cast on whether
the UK will follow suit. Already, mobile travel sales accounts for 21% of online travel
sales sold to UK residents and there is huge potential for travel brands to mine this
area to grow additional travel services sold during the trip - that opportunity may now
be at risk due to Brexit.
For international start-ups looking for innovation, collaboration and a shared sense of
purpose, London may lose its crown to European alternatives such as Berlin and
Amsterdam, where it may be easier to secure a visa, business grants and short-term
residency. This would knock a chunk out of London's tech-hub status in the short to
mid term as it struggles to attract and maintain top talent. Business travel into the UK
is likely to take a sharp nose-dive over the next two years or more whilst deals are
struck, seeing as business travel is much more sensitive to external shocks than
leisure travel. The shockwaves of the vote will be felt for many months and years to
come, and the travel industry needs to batten down the hatches and keep focused on
ensuring the UK travel and tourism industry remains open for business.
Over the coming weeks, the travel team will review the potential impact of Brexit
through opinion pieces, looking at lodging and the UK's investment outlook; airline
capacity challenges and what the future holds for the single EU aviation market; along
with which destinations around the world are most at risk of a fall in UK outbound
tourism demand.
For further insight, please contact Caroline Bremner, Head of Travel, at:
caroline.bremner@euromonitor.com.
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