Future in Flux-Outmaneuver Uncertainty in a New Era of Travel

Future in flux How to outmaneuver uncertainty in a new era of travel How has China’s travel industry been performing?

Across the globe, the travel industry has been severely impacted by the COVID-19 pandemic, and China has been no exception. Both domestic and international tourism suffered significant declines. In the first half of 2020, domestic tourists made 1.2 billion trips, a 62% drop year-on- year,1 while outbound international trips numbered only 0.5 million, a 78% drop year-on-year.2

Monthly Travel Willingness Index (TWI) for Chinese consumers

5 3.9 3.76 3.74 3.77 3.64 4 3.47 3.6 3.63 3.27 3.3 3.04 3 3.58

2 2.68 2.58 2.6 2.41 2.49 2.3 2.23

1 1.73 0.99 0.69 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov

2019 2020

Year-on-year comparison (2019 vs. 2020)

-20 +9% 0

-20

-40 -33% -26% -30% -39% -34% -34% -39% -60 -50% -80 -70% -77% -100 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov

Source: 2020 Travel Willingness Index (November) 3

2 Future in Flux: How to outmaneuver uncertainty in a new era of travel However, thanks to a centralized pandemic response system, coupled with the general public’s compliance with rigorous countermeasures such as mask-wearing, the COVID-19 pandemic in China is largely under control across much of the country. As a result, the travel industry has started to rebound back, in terms of both traffic and spending. The China Tourism Academy projects Domestic travel has recovered to nearly pre-pandemic that travel levels, with 48 million passengers having flown on industry revenue domestic routes in China in 2020, representing 98% of in the second half traffic during the same period in 2019.4 The China Tourism Academy projects that travel industry revenue in the of 2020 will be second half of 2020 will be approximately 2.12 trillion yuan, approximately representing a 231% increase from the first half. Domestic 2.12 trillion yuan, hotel occupancy has also rebounded from as low as representing a 10% during the height of the pandemic to around 60% in 231% increase recent months.5 from the first half. However, due to travel restrictions imposed by the government, there are still headwinds for international travel, which accounted for 14% of mainland China’s travel industry in 2019.6 Markets with a higher dependency on international travel and transit passengers such as Hong Kong and Taiwan have still been severely impacted. In September 2020, Hong Kong’s inbound and outbound passenger air traffic totaled 100,000, a 97.9% year-on-year decrease.7 Although there have been discussions between these markets and other neighboring countries on establishing “travel bubbles” for travelers that remove the requirement for a 14-day quarantine (see Exhibit 1), they have not been implemented yet on a broad scale.

3 Future in Flux: How to outmaneuver uncertainty in a new era of travel Exhibit 1: List of international travel policies announced or under discussion

Territory / Country Policy discussed Status

China Bilateral “Fastlane” to allow for essential Implemented in Singapore business and official travel between six Jun 2020 Chinese provinces and Singapore; visitors to China must be sponsored by a Chinese company or agency but are not subject to quarantine

Mainland China No quarantine required for visitors who show Implemented in Macau negative test results within the last seven Sep 2020 days

Mainland China No quarantine required for Hong Kong Implemented in Hong Kong residents in Guangdong and Macau; subject Nov 2020 to presenting negative test results within the last three days under “Return2HK” policy

Mainland China No quarantine restriction for tourists with Implemented in Singapore “Air Travel Pass,” who remain entirely within Nov 2020 Mainland China for the last 14 days and present negative test result upon arrival

China “Fastlane” for business travelers on short- Implemented in Japan term trips or workers assigned overseas who Nov 2020 produce negative test certifications

Hong Kong Bilateral air travel bubble with no restrictions Originally to be Singapore on travel; visitors are not subject to launched on November quarantine but must show negative test 22 but postponed till results (max of 200 passengers each way / 2021 due to “4th wave” day) of cases in Hong Kong

Source: Accenture analysis, 2020

4 Future in Flux: How to outmaneuver uncertainty in a new era of travel What are the future scenarios for the Chinese travel industry?

Accenture has developed four future scenarios for the global travel industry that reflect various potential outcomes and impacts of key external factors that influence global travel demand (see Exhibit 2).

Exhibit 2: Our four potential travel futures8

01. 02. 03. 04. Remarkable Collective Market Darkest recovery coexistence mayhem days

Travel companies Along with the world, Amid permanent The uncontrolled virus must act to take full travel companies volatility, travel upends the industry, advantage of a burst learn to coexist companies must and travel companies in pent-up demand, with the virus shrink and refocus on must radically rethink which largely returns through discipline remaining areas of their business models. to 2019 levels by and containment, demand to survive. Many fail. 2022. and travel makes a Some companies fail. tentative return.

Given the rebound in domestic travel, we do not expect the “darkest days” scenario to transpire for China. Rather, we expect that at least for the domestic travel industry, a “remarkable recovery” or “collective coexistence” future scenario is quite likely. However, the international travel market still remains volatile since the virus is not yet fully contained globally. Therefore, for the international inbound and outbound travel market, the “market mayhem” future scenario remains a possibility in the short and medium term.

5 Future in Flux: How to outmaneuver uncertainty in a new era of travel What shifts in market dynamics and customer behavior have occurred in China?

Although China is on the way to recovery, things will not exactly go back to the way they were before. The pandemic has transformed the way Chinese consumers travel and what they expect from travel companies. We’ve identified several key shifts in local market dynamics and customer trends that have implications for the specific actions that travel companies should take to prepare for the future travel scenarios described.

Increased emphasis on domestic spending

Consumer confidence is starting to rebound. In May, the Chinese government issued the directive of “domestic circulation”, which prioritizes domestic consumption over foreign trade to drive future economic growth. Given the limited opportunities to travel overseas where the pandemic is still spreading, we expect that domestic travel will account for a significant share of Chinese consumer spending going forward. We have already started to witness this: During the recent October national holidays, spending on domestic travel was 467 billion yuan, representing 70% of 2019 levels. 9

Reservation-based planning

Prior to the pandemic, Chinese consumers were more accustomed to buying tickets to tourist attractions on the day of their visit. However, new government measures such as capacity limits at tourist attractions and real-name pre- registration for ticket purchases mean that consumers now plan and make reservations ahead of time, and often through digital channels. During the first four days of the October national holiday, Ctrip recorded a 100% year-on-year growth in online reservations for tourist attractions on its platform, hitting a record high. 10

6 Future in Flux: How to outmaneuver uncertainty in a new era of travel Self-guided and contactless travel

Having survived a major pandemic, Chinese consumers now have a much higher awareness of the importance of hygiene than in the past. Recent research showed that 40% of Chinese travelers listed COVID-19 prevention and control measures as their most important concern when planning their travels.11

Furthermore, before the pandemic, Chinese consumers preferred traveling in large groups as part of a guided tour. However, there is now a rapidly emerging, clear preference for private, self-guided tours that allow people to avoid crowds when they travel. Many wish to reduce unnecessary direct contact with other travelers or staff as much as possible across their entire journey.

Chinese consumers' expected travel product preferences, next 12 months

Self-driving tour 71.5%

Exclusive small group 65.5%

Semi-guided tour 54.5%

Group tour 11.0%

Source: 2020 ITB China travel trends report12

“Bleisure” travel

The pandemic has accelerated the transformation of how and where people work. As people increasingly work remotely, they seek flexibility and autonomy in choosing their ideal workspace. In essence, they are redefining what it means to “work from home.” A new “bleisure” trend has emerged in which people combine both business and leisure when traveling. According to a market survey of 200 Chinese travel agencies/companies, two-thirds of those surveyed believe that more corporate travelers would arrange personal trips during their work travel in the coming year.13

7 Future in Flux: How to outmaneuver uncertainty in a new era of travel What actions should travel companies take going forward?

In response to these new local dynamics, Chinese travel companies have the opportunity to take action in five areas:Traveler Experience, Retail in Travel, Intelligent Travel Services, Intelligent Operations and Living Systems. Across these areas, we’ve identified several no-regret moves that companies should start considering, regardless of the travel future. There are also several measures that are relevant for specific scenarios; these are more aggressive or bolder moves that companies should take, depending on how positive or negative the outlook is.

8 Future in Flux: How to outmaneuver uncertainty in a new era of travel 01 Traveler experience: Elevate travel experiences with new technologies to address new behaviors

Demand will rebound to varying degrees based on each future travel scenario. Regardless, when they do travel, customers will have heightened expectations about their end-to-end experience, particularly with regards to health and safety. Many companies have already leveraged the latest technologies to launch services that do not require person-to-person interactions. Beyond this, they can use technologies such as 5G and virtual reality (VR) to offer travelers an enhanced experience in a combined real/virtual environment without additional human contact. These technologies not only address travelers’ demand for contactless services, but also provide an enriched and immersive experience.

An example of how companies have successfully integrated the offline and online travel experience for customers is the “Digital Yunnan” project. The province of Yunnan partnered with Tencent to develop a mobile app that enables customers to watch live broadcasts of famous tourist sites in the province, book tickets for various attractions, and navigate the area with easily accessible information on restaurants, hotels and even nearby restrooms. This fulfills customers’ desire for self-guided travel by giving them necessary information to help them plan without having to directly interact with others.

Screen captures of Digital Yunnan mobile app interface

9 Future in Flux: How to outmaneuver uncertainty in a new era of travel For its recent “Fantasy of the Inner World” exhibition in June 2020, which featured art from Vincent Van Gogh, the National Museum of China used technology to transform the way visitors experience the artwork. As the original paintings could not be displayed locally in China, the museum used 360-degree holographic panoramic laser-projection equipment to display and magnify the artwork on the ceiling, wall and floors of the museum to enhance the way customers could interact with the art. Instead of a tour guide, customers used VR headsets, which provided visual storytelling to help them understand the origin and meaning behind the artwork.

“Fantasy of the Inner World” exhibition hall

10 Future in Flux: How to outmaneuver uncertainty in a new era of travel 02 Retail in travel: Develop or reshape value propositions across the purchasing journey to stimulate demand

Regardless of the extent to which travel demand rebounds, companies need to be creative about how they entice customers to engage with their brand and, more importantly, complete the purchase.

This can be achieved by adapting the overall purchasing journey. Customers may have a desire to travel, but they may not be confident enough to complete the purchase given market uncertainties. Companies can motivate and encourage customers to actually spend and complete the purchase by reaching them through new channels and touchpoints.

Live-streaming has always been a popular form of entertainment for Chinese consumers, as evidenced by Douyin, China’s TikTok. In its live-streaming broadcasts, Ctrip featured James Liang, the Trip.com Group Chairman, who dressed in traditional Chinese gowns and other outfits as a way to drive traffic and entertain viewers through cultural appreciation. In one hour alone, Ctrip was able to generate 27 million yuan in sales by using entertaining content to reinforce and encourage customers to travel more. 14

Screen captures of livestreaming broadcasts hosted by Ctrip featuring James Liang, Trip.com Group Chairman

11 Future in Flux: How to outmaneuver uncertainty in a new era of travel Beyond the purchasing journey, companies need to think about how to restructure their existing offerings and/or explore new consumption opportunities. Given that customers have changed their travel behavior, revenue earned through traditional sales touchpoints and products may be more limited going forward. By adapting their propositions, companies will also drive loyalty among their existing customers, who expect brands to recognize their evolving behaviors and needs and retain their relationships with the brands who best address them.

Marriott has recently launched a new program called “Work Anywhere,” which brings the office to the hotel. Under this program, there are three initiatives: Day Pass, which provides guests with access to a hotel room for the day and includes business center services; Stay Pass, which provides access to a hotel room for 36 hours and includes business center services; and Play Pass, which targets the “bleisure” traveler by offering businesspeople and their families child care services as part of their stay.

12 Future in Flux: How to outmaneuver uncertainty in a new era of travel Jinling Hotel Group created a new consumption opportunity by launching a food-delivery service from its seven hotels in Nanjing in the first quarter of 2020. By repurposing kitchen and frontline staff, the Group earned 8.4 million yuan in revenue in only 22 days. The Chinese government has been supporting airline companies to pursue similar consumption opportunities by granting them Food-Production Licenses that allow them to produce and sell food beyond the restricted area in the airport.

Companies can also explore forming partnerships or alliances with each other or with companies outside travel in order to create new demand. For example, hotels such as Hilton, South Pacific and Grand Metropark have signed up some of their properties in China to a delivery platform run by Meituan. This allows them to deliver their dining services to local customers.

Finally, when the economy is close to or at full recovery, companies can be even bolder and innovate new product and service offerings for customers beyond traditional travel products. Doing so will not only help maintain engagement and awareness with existing customers, but also attract customers who previously did not interact with the brand as travelers.

AirAsia recently developed Ourfarm, a B2B e-commerce platform for the Malaysian market that leverages its cargo, logistics and payments capabilities to help Malaysian farmers connect with—and sell fresh fruits and vegetables to—hotels, restaurants and supermarkets. With this platform, AirAsia created a new proposition that not only helped them reach a new group of customers, but also expanded their offerings beyond traditional travel into a new retail space.

Screen captures of the Ourfarm online order platform

13 Future in Flux: How to outmaneuver uncertainty in a new era of travel 03 Intelligent travel services: Leverage data analytics to support business and operational strategies

Regardless of the travel future, the pandemic has altered the way customers travel to such a degree that companies cannot solely rely on their past understanding of customer behavior. Leveraging data analytics tools will help companies gain the necessary insights into what customers want and structure their offerings accordingly.

China Eastern has been stressing the importance of omnichannel data analytics to improve customer understanding and product customization. Earlier in the year, as the pandemic was coursing through China, the airline used analytics to identify an untapped opportunity: weekend travel. Based on this insight, the company designed and launched the “All you can fly” Weekend Pass, which allowed customers to enjoy unlimited weekend flights for the rest of the year for 3,322 yuan. Over 150,000 people used these passes in just two weekends—a strong indicator of the offering’s success.15 Other airlines soon followed suit and China Eastern subsequently launched a promotion for unlimited weekday flights to target business travelers as part of the broader “bleisure” trend.

Screen captures from China Eastern’s website explaining how to redeem the “flight pass”

14 Future in Flux: How to outmaneuver uncertainty in a new era of travel 04 Intelligent operations: Realize operational efficiencies through cost-reduction initiatives

Companies should not only think about how to stimulate demand, but also focus on driving operational efficiencies. The degree to which companies should prioritize these initiatives depends on the overall market outlook. Under the “remarkable recovery” and “collective coexistence” futures, companies should explore strategic cost-rationalization opportunities, but not necessarily invest in major operational transformations. By targeting specific components of their back-end operations, they can realize operational efficiencies without having to undertake a large-scale effort and by potentially leveraging existing digital solutions.

Automated services that companies have launched not only address customers’ needs for contactless experiences, but also yield benefits in terms of cost and operational efficiencies on the back end.

FlyZoo Hotel, an Alibaba Future Hotel in Hangzhou, has successfully automated its front-end hotel services. With these services, travelers are able to enjoy a seamless check-in experience via a mobile app and artificial intelligence (AI) facial recognition. They can order room services through voice AI and robots and check out using an invoice machine. With these technologies, FlyZoo Hotel is able to reduce its staff-to-customer ratio to 0.5, as compared to 2.0 for a traditional hotel.

FlyZoo Hotel service delivery by robot

15 Future in Flux: How to outmaneuver uncertainty in a new era of travel Airlines have also realized operational efficiencies by enhancing their back-end infrastructures. China Eastern launched an internal communication system called MUSS, which automatically pulls all cabin, ground service and luggage-handling staff serving the same flight into a group chat for more efficient preflight communication.

Under the “market mayhem” future scenario, in which revenues do not rebound, there should be an all-out focus on aggressive cost-reduction initiatives. This means streamlining business processes through outsourcing and reducing the number of fixed workforce positions, thereby reducing labor costs. With these measures, companies can shore themselves up for the short- to-medium term without sacrificing the ability to “keep the lights on.”

16 Future in Flux: How to outmaneuver uncertainty in a new era of travel 05 Living systems:

Migrate and transform legacy IT systems to enable a more nimble and efficient organization

Companies should also consider revamping their underlying system infrastructure. Depending on the overall market outlook, this can be to either support the increased demand that comes with a positive recovery, or to enable a more agile organization if demand is at a standstill.

Under the “remarkable recovery” or “collective coexistence” futures we anticipate, demand for travel will return. But given shifts in customer behavior, we expect a surge of activity on digital platforms. Migrating to cloud architectures will help companies cope with this increase in traffic. Cloud computing enables more efficient use of resources, thereby helping enterprises to respond quickly and efficiently to customer needs and also expand their scope of services.

Shiji Group has signed a partnership with The Peninsula Hotels to provide the hotel group with Shiji Enterprise Platform, a scalable, secure and modern hospitality cloud technology platform. The platform provides state-of-the-art technology and architecture and allows connectivity between systems to facilitate strategic business success.

However, under the “market mayhem” scenario, scalability and agility are crucial for survival. In that circumstance, migrating to the cloud should not be the focus. Rather, companies should pursue a full transformation of core systems and infrastructure in order to equip themselves to react to high volatility, while also realizing significant cost savings necessary for long-term survival.

17 Future in Flux: How to outmaneuver uncertainty in a new era of travel China’s travel industry has rebounded faster than travel industries in most countries thus far. Amid this recovery, companies need to quickly prioritize actions that both stabilize their short-term future and sets them up for longer-term success. Those that don’t will lose out on the new business opportunities that will emerge with new customer expectations and market dynamics. Those that do will reap the benefits of first-mover advantage and play a vital role in leading the industry towards recovery.

18 Future in Flux: How to outmaneuver uncertainty in a new era of travel References

1 China Tourism Academy, “China Domestic Travel Development Report 2020”, September 14, 2020, at http://www.ctaweb.org/html/2020-9/2020-9-14-13-2-83232.html

2 Beijing Municipal Bureau of Statistics, “Outbound Tourism organized by Travel Agencies”, July 20, 2020, at http://tjj.beijing.gov.cn/tjsj_31433/yjdsj_31440/ly_32068/2020/202007/ t20200720_1952789.html

3 CAPSE, “2020-11 Travel Willingness Index Analysis Report”, November 3, 2020, at https://www. capse.net/article/11032

4 Civil Aviation Administration of China, “Monthly Press Conference in October 2020”, October 15, 2020, at https://m.us.sina.com/bg/china/thecover/2020-10-15/detail-ihaazchv4578011.shtml

5 Skift, “Why Marriott Sees a Full Hotel Recovery in China in 2021”, September 11, 2020 at https://skift. com/2020/09/11/why-marriott-sees-a-full-hotels-recovery-in-china-in-2021/

6 TravelDaily News, “China's recorded a total of 6.63 trillion yuan revenue in 2019 for tourism, and number of domestic tourists exceeded 6 billion”, June 22, 2020, at https://www.traveldaily.cn/ article/138617

7 Hong Kong SAR Government Civil Aviation Department at https://www.cad.gov.hk/english/ statistics.html

8 Accenture, “Future in Flux: How to outmaneuver uncertainty in a new era of travel”, September 2020

9 China Tourism Academy, “China Domestic Travel Development Report 2020”, September 14, 2020, at http://www.ctaweb.org/html/2020-9/2020-9-14-13-2-83232.html

10 Ctrip, “Mid-Autumn & National Holiday Travel Big Data Report,” October 10, 2020, at http://finance. eastmoney.com/a/202010101658547996.html

11 CAPSE, “2020-07 Travel Willingness Index Analysis Report”, July 3, 2020, at https://www.capse.net/ article/10604

12 ITB China, “2020 ITB China Travel Trends Report”, September 1, 2020, at https://www.webintravel. com/fit-customised-and-bleisure-travel-trends-among-chinese-travellers-in-the-new- normal/

13 TravelDailyNews,“ITB China Travel Trends Report: Travel products to focus on safety, health, nature and customization”, 26 Aug 2020, at https://www.traveldailynews.com/post/itb-china-travel- trends-report-travel-products-to-focus-on-safety-health-nature-and-customization

14 Shine News, “Ctrip scores big with livestreaming sales event”, April 3, 2020, at https://www.shine. cn/biz/tech/2004035652/

15 TTG Asia, “Success of China Eastern’s unlimited flight passes prompts copycats”, July 17, 2020 at https://www.ttgasia.com/2020/07/14/success-of-china-easterns-unlimited-flight-passes- prompts-copycats/

19 Future in Flux: How to outmaneuver uncertainty in a new era of travel Authors About Accenture

Robert Hah Accenture is a global professional services company Managing Director with leading capabilities in digital, cloud and security. Accenture Strategy Lead, Greater China Combining unmatched experience and specialized skills [email protected] across more than 40 industries, we offer Strategy and Consulting, Interactive, Technology and Operations Marco Siu services—all powered by the world’s largest network Director - Accenture Strategy, Greater China of Advanced Technology and Intelligent Operations [email protected] centers. Our 506,000 people deliver on the promise of technology and human ingenuity every day, serving Yuxing Jiang clients in more than 120 countries. We embrace the Director - Accenture Strategy, Greater China power of change to create value and shared success [email protected] for our clients, people, shareholders, partners and communities. David Lau The company has been operating in Greater China for Manager - Accenture Strategy, Greater China over 30 years. Today, it has more than 17,000 people [email protected] servicing clients across the region with offices in the cities including Beijing, Shanghai, Dalian, Chengdu, Guangzhou, Shenzhen, Hong Kong and Taipei. As a Contributors trusted Partner of Choice for digital transformation, Accenture is bringing more innovation to the business Angela Tang, Kako Zhao and technology ecosystems and helping Chinese enterprises and the government to embrace digitization and enhance global competitiveness to succeed in the new era.

For more information about Accenture, please visit its corporate homepage www.accenture.com and its Greater China homepage www.accenture.cn.

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