Recalibrating Expectations

Friday Reflections

Recalibrating Expectations


Heading into summer, people expect to travel. A month-long stretch of partial economic reopening in most states created the sense for many people that the path to normalcy was coming into focus. For the global travel and tourism industry, though, normalcy is still far off. At home in the US, many fear the return of routine will lead to ebbing attention to pandemic precautions and cause further escalation of coronavirus cases, even without the return of travel.

Official data this week reflected spikes in positive COVID cases in many areas of the US, including material increases in Florida, Texas, and California1 – three economically important states that sidestepped the first peak. Countries around the world have seen similar patterns. These renewed virus concerns led equity market prices lower this week and highlighted that the recovery rally has stalled recently. Also reinforced is the understanding that the path to economic recovery is not linear and will need recalibration along the way.


Signs of Reversal

Investors always expected more infections would occur. After all, it is only logical that lifting restrictions on in-person business activity will increase virus transmission, and expanded testing will increase reported cases. The rate of infection, which has been increasing in recent weeks, is more concerning than the total number of cases.2 The magnitude of this new virus surge and the resulting impact on hospital capacity and activity restrictions will in turn determine whether recent economic momentum continues or falters.

As for the market, it is a callous estimator of future profits. It does not care about the absolute number of infections, per se, but rather the risk that key segments of the economy will need to be halted again. Renewed restrictions on economic activities are a known risk that can exacerbate downward pressure on market prices.

That is what changed this week – those renewed restrictions arrived fast and furious, both locally and globally. Louisiana and Texas both announced delays to further economic reopening, and Texas halted elective surgeries in four counties to preserve hospital beds. On Friday, Texas Governor Greg Abbott ordered the re-closure of all bars in the state and banned gatherings of more than 100 people, backtracking on earlier boasts of progress. India decided to re-close all rail travel until August 12th, based on the rising number of coronavirus cases in the country.

Even in states where restrictions aren’t mandated, private businesses are making similar decisions. Apple announced on Thursday that it will close 14 additional stores in Florida, bringing the total number of re-closures announced this week to 32 stores. Walt Disney announced that it is officially delaying the reopening of Disneyland previously planned for July 17th, and is considering further delays for the debut of its next big film, Mulan. None of these decisions will singularly derail the market recovery, but collectively they mean the case for a full-steam-ahead, V-shaped recovery is hard to support.


Former Growth Engine, Current Ghost Town

Last week we discussed the challenges to re-opening in the restaurant industry; travel and tourism is even more challenged in its recovery. Cruise ships were an early poster child for the dangers of close-quarters travel, and the ease of air travel allowed the virus to spread around the globe with unparalleled speed.  The industry has languished in more of an L-shaped pattern since the onset of the pandemic.

In 2019, travel and tourism accounted for over 10% of global GDP.3 The sector has grown at an impressive 6.1% annually since 1950,4 outpacing broader global growth of only 3.5%. In 2020, international travel halted to a virtual standstill. The TSA reported that US airports saw a 96% decline in passenger traffic in early April, and almost three months later, traffic is still down 81% from one year earlier. Most businesses have eliminated all travel for the remainder of the year in favor of virtual meetings and employee safety. National travel restrictions have become a virus mitigation tactic, with significant implications for the strength and speed of global recovery.

Even if travelers are willing to brave airports and cramped seating on planes, they need somewhere to travel. Many international destinations are actively telling travelers they are not welcome by canceling visas, imposing quarantines, or simply closing borders entirely. As they look forward to re-opening their internal borders on July 1st, the EU has added the US to the list of dozens of countries banned from incoming travel: they are considered too risky because they have not controlled the coronavirus outbreak5 Domestically, Hawaii and the New York City tri-state area only allow incoming travelers if they quarantine for 14 days upon arrival. That timeline makes it impossible for travelers seeking a traditional vacation of only a week or two in length.

Economic fallout is unavoidable as the flow of money spent by tourists continues to be a fraction of prior years, and areas most reliant on tourism are being hardest hit. European destinations have accounted for 50% of all international travel arrivals in recent years, and certain Asian countries, including the Philippines and Thailand, rely on tourism for more than 20% of their GDP6. While regional ‘travel bubbles’ are forming7, the road to recovery will be longer for these countries and owners of travel-related businesses.


Flights Aren’t Cancelled – Just Delayed

Travelers – like investors – are looking ahead to 2021. Wayne Nupen, a director at a South Africa-based company that arranges high-end tours, said that 89% of clients with trips upended by the virus have rebooked the same itineraries for 2021. The optimism extends beyond individual travelers: Tokyo has already re-scheduled the Olympics to start July 23rd, 2021. It’s impossible to know if this timing will be safe, but it is clear there is a great deal of effort to restart global travel as soon as possible.

The international tourist trade is made up of countless local hotels, independent restaurants, and tourism-dependent businesses. While the promise of future travelers does not cover current expenses, many of those businesses are pursuing creative attempts at bridging their revenue gap in the meantime and developing modified operating models that could allow them to stay in business. “Pivot” is the new word for the adrenaline-fueled responsiveness to current conditions; many of the new approaches being tested may become accepted – and successful – practices.

While the timeline remains uncertain, and the extent of the current damage is still unfolding, the path forward for investors and global communities is being recalibrated – not abandoned. We are all pivoting, in our home lives, our work lives, and our community work. We are all innovating, and with that in mind, we advocate remaining invested, with cautious but optimistic expectations for eventual economic recovery. There are likely to be moments of progress, as well as moments of reversal, as creative renewal in our national and global economy moves forward.

1 Robinson Meyer and Alexis C. Madrigal, “A Devastating New Stage of the Pandemic,” The Atlantic, June 25, 2020.

2 “Cases, Data & Surveillance,” CDC Coronavirus Disease 2019, week ending June 20, 2020.

3 S. Lock, “Travel and tourism:  share of GDP worldwide 2000-2019,” Statista, March 2, 2020.

4 Max Roser, “Tourism,” Our World In Data, 2017.  The United Nations World Tourism Organization (UNWTO) estimates that internationally there were just 25 million tourist arrivals in 1950. 68 years later this number has increased to 1.4 billion international arrivals per year, or a 56-fold increase.

5 Matina Stevis-Gridneff, “E.U. May Bar American Travelers as It Reopens Borders, Citing Failures on Virus,” The New York Times, June 26, 2020.

6 Colm Quinn, “The Tourism Industry Is in Trouble.  These Countries Will Suffer the Most.” Foreign Policy, April 1, 2020.

7 “Free travel zones” — also known as “corona corridors” and “travel bubbles” — are agreements with neighboring regions that allow for travel across borders for non-essential trips without quarantining upon arrival. Bianca Hiller, “’Travel Bubbles’: Who’s in and who’s out of the plan to save global tourism,” PRI/The World, June 12, 2020.

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By |2020-10-20T14:51:03-07:00June 26th, 2020|