 | | David Redekop
Principal Research Associate
Canadian Tourism Research Institute |
Canada’s travel industry is in difficulty and the prognosis is not good. More than a million fewer Americans visited Canada during the past 20 months. Visits from overseas travellers are also beginning to wane. Even worse, Canadians don’t seem to want to travel as much either, inside nor outside the country.
The downturn in the travel industry is not however, anything comparable to what caused a similar downturn in the industry in 1991 – the last time Canada went through a significant recession. In fact, the current situation has more similarities to the events that followed the terrorist’s attacks on September 11, 2001 than the recession of 1991.
We need to be concerned about Canada’s travel industry as it makes an important contribution to the Canadian economy. The industry employs lots of people (over 650 thousand direct jobs last year) and is an important export industry. Yes, tourism is an export industry no different really than wheat, aerospace, pharmaceuticals or other commodities. Tourism, however, is a larger export industry than those commodities and many others. Spending by foreigners in Canada reached $16.6 billion last year. That is a lot of foreign exchange for Canada’s export oriented economy.
But all is not right with the travel industry these days. The blue skies have turned from cloudy to downright gray. Canadians, like our neighbours to the south and our friends overseas, are in no mood to spend on what is considered to be a discretionary item like travel. Canada is not the only country feeling the effects of a downturn in tourism revenues. Forecasters around the world have been revising their travel forecasts downward with each passing month.
Conference Board surveys show that Canadians are concerned about the future prospects for the economy. I call this a “crisis of confidence”. Following the events of 9/11, Canadians also had a “crisis of confidence”. We were afraid to fly for fear that another terrible event was going to occur. Fear and uncertainty rather than economics was the driving force of consumer behaviour during the months that followed the attacks.
During the recession of 1990/91, economics, not fear, was the driving force behind consumer behaviour. Interest rates reached 11 percent during first quarter 1991 or nearly three times today’s rate. The unemployment rate had swollen to 10 percent compared to around 6 percent today. Real disposable income actually fell by 2.1 percent during the first quarter of 1991. Canadians have enjoyed seeing their disposable incomes grow over the past few years. Canada was also recording budget deficits in the early 1990s, not surpluses as is the current situation. About the only parallel with 1990/91 is the value of the Canadian dollar which was worth about the same as it is today.
There is another major difference between 1991 and 2009. In 1991 the much hated Goods and Services Tax (GST) was introduced by the ruling Conservative government. While the ruling government is again a Conservative one, that is only a coincidence.
What the new GST did was to send Canadian shoppers scurrying to the US. Cross-border shopping was the hot political issue of the day. Retailers wanted governments to enact legislation to stop the flow of Canadians travelling to the US. Despite the recession, leisure travel to the US grew by 6 per cent during winter 1990/91. US retailers constructed new malls just to service the onslaught of Canadian shoppers.
While the US enjoyed an increase in Canadian visitors, that was not the case for the Caribbean and other countries. Canadian leisure trips to destinations other than the US fell by 7 percent during winter 1990/91. It took until winter 1993/94 before Canadians made more winter leisure trips to non-US destinations than they made during winter 1989/90 – the winter prior to the 1990/91 recession. Yet, winter leisure travel to the US continued to grow during this period.
Consumer confidence was weak during winter 1990/91, as it is today. The Conference Board’s Index of Consumer Attitudes fell during fourth quarter 1990 by 20 percent compared with Q4 1989. On that indicator, the situation is similar. Consumer confidence in October 2008 fell by 25 percent compared with October 2007.
Unlike the winter of 1990/91, Canada’s economy is not already in recession. What has fallen is consumer confidence. Even more important for the travel industry, winter travel intentions are at their lowest level since October 2001 – the month after the 9/11 terrorist attacks. Canada’s major tour operators are now faced with the dilemma of having too much capacity for a shrinking market – just as they were following the events of 9/11.
The last time there was a “crisis of confidence” Canada 3000 Airlines went under, leaving thousands of passengers stranded. Air Canada too was unable to withstand the shock of the events following 9/11 and was granted court protection in December 2003. Jetsgo and CanJet were next to falter only to be followed this summer by Zoom Airlines. With the exception of Air Canada, the demise of these carriers was a result of providing more capacity than the market could absorb. The low air fares that followed were not sustainable.
As we enter the 2008/09 winter travel season, we again see carriers adding capacity at the same time the travel market has become weaker. The situation is eerily similar to the events that led to the demise of carriers over the last few years. Capacity is expanding at the same time surveys show the market for travel is about to contract.
The “crisis of confidence” which has led to a downturn in winter travel intentions will take more than a few months to resolve. Like the period following the events of 9/11, rebuilding confidence is more in the hands of other countries, most of whom are faced with far worse economic issues than is Canada.
The flood of capacity is shaping up to make it an ugly winter for Canada’s travel industry – and I am not talking about the weather!