Written evidence submitted by Dr Jun Du and Dr Zheng Chris Cao

 

 

Impact of Covid-19 on DCMS sectors:

case for the UK Tourism and Hospitality sectors

 

This evidence is provided by Dr Jun Du, Professor of economics, who is expert on business dynamism and firm productivity and growth and Dr Zheng Chris Cao, Lecturer of economics who is expert on tourism economics, both academics of Lloyds Banking Group Centre for Business Prosperity (LBGCBP) and Economics, Finance and Entrepreneurship Department at Aston Business School. This evidence draws on a series of ongoing work LBGCBP conducts in assessing Covid-19 impact, dynamics of the UK’s global value chains and implications on the UK productivity and skills challenges.

Summary

This document provides fresh evidence on the scale of Covid-19 immediate impact on the UK tourism and travel sectors. It first summarises the business status of existing firms in the four major sectors of Travel and Hospitality sectors and the profiles of dissolved firms, then reviews the historical trends of business entry and exits, and finally provides recommendations on pathways to recovery.

This evidence addresses the questions raised in the enquiry:

The key messages are:

 

 

 

  1. Context

The COVID-19 pandemic has posed unprecedented challenges to businesses across the globe and is expected to bring the worst economic downturn since the Great Depression. With little doubt, the tourism and travel sectors have been among the hardest hit, with their businesses and occupations most at risk while experiencing the most limiting restrictions of mobility, tight regulations and social distancing policy. International travel has declined by 60%-80% decline in the first months in 2020, according to UNWTO. The World Travel & Tourism Council (WTTC) has estimated that, globally, up to 75 million jobs in tourism and hospitality are at immediate risk, with at least 6.4 million losses across the EU, and one million in the UK. There will be a potential tourism GDP loss of up to $2.1 trillion in 2020 globally.

Insofar as countries seek to recover from the COVID-19 crisis, the future is far from being clear. In this evidence, we focus on the business casualties in the tourism and travel sectors in the UK, assess the damage and identify the revealed challenges to business survival in the post-crisis period. This is important for evident reasons. First, the tourism and travel sectors are a major contributor to the UK economy, accounting for 9.0% of real GDP and 11.0% of total employment in 2019. Continuous efforts are required to prevent business closures and job losses. In addition to the sheer size in the economy, the failure of tourism and travel sectors represent a large number of small and medium sized enterprises (SMEs) and its devastating loss of jobs may disproportionately affect people and households at lower end of the income distribution, further threatening social and economic stability. In addition, some of these sectors play important roles in other parts of the economy, such as transport and logistics for production and distribution of manufacturing and retail sectors. The lost capacity during this crisis would not only hamper the recuperation of the tourism and travel sectors themselves, but also slow down the recovery of other sectors with chain effects.

  1. Our approach and source of evidence

We utilise FAME database by Bureau van Dijk compiled from Companies House to provide an early assessment on the scale of business dissolution in the UK tourism and travel sectors till 27 April 2020.

We collect financial information of firms whose primary sector belongs to one of the following:

This is in line with the coverage of a study on tourism sector productivity by Office for National Statistics (ONS). Moreover, the above categorisation ensures the comparability and relevance of our evidence with the indicators from the Business Impact of COVID-19 Survey (BICS) by ONS.   We first estimate the impact of COVID-19 on the business status – businesses subject to liquidation and dissolution, those claiming inactive dormant, and some active businesses but labelled default – in the UK business landscape. We pay a close attention to the SMEs among these affected businesses. Further, we construct the patterns of business dynamisms over the same periods of the last few years, in terms of business entry and exits, drawing observations from a longer-term perspective. These insights will help reflect on the paths we came from and identify the ways in which the government and the regulator, business leaders and stakeholders, as well as consumers as a whole to assist tourism and travel sectors to make an accelerated recovery.

  1. Evidence

3.1   Impact of COVID-19 on business survival

In the first quarter of 2020 between January to 27 April, among 506,514 businesses in the whole tourism and travel sectors, there are 79,056 businesses that are in status of business inactivity, amount to 15.6% of the whole sample. These include 21,765 firms dissolved during this period (4.3%), 12, 243 firms gone into administration or liquidation (2.4%), 11,742 businesses in default status (2.3%) and a staggering number of 33,307 businesses appeared dormant (6.6%). (Table 1)

Comparing the exact same period in 2019 and 2018, business inactivity is higher in 2020. Focusing on dissolution, liquidation and dormant status, the figures suggest that there are nearly 10,000 more businesses inactive in 2020 and almost doubled since 2018. (Figure 1)

More specifically, there are 3,871 more business liquidation cases in 2020 than the same period 2019, an increase of over 40%; and 6,394 more cases, an 85% increase, than the same period 2018. More strikingly, 33,307 firms have registered as “dormant”[1] in 2020, accounting for 6.6% of all tourism and hospitality firms. This is up from 24,627 cases in the same period of 2019, suggesting a 35.2% increase in terms of cases. (Figure 1)

In addition, we find that there are less business dissolution cases over the exceptionally challenging time in 2020, which we suspect reflect the result of government business support schemes. (Figure 1)

The overall patterns are observed across all tourism and travel sectors. The highest level of inactivates are seen in travel agency and tour operator sector, for 17.2% of all firms appear inactive, higher than other sectors which on average see around 13% inactive firms.

The sectors that are most prone to business closure are accommodation and food services sectors and transport and storage sectors, as they experience the most liquidation and dissolution cases. They have been worst hit in this sense, facing a far higher level of dissolution, in terms of absolute numbers (8,131 and 9,546) and percentages (5.2% and 4.5%), than the other two sectors. But compared with the previous two years, the level of firm dissolution in 2020 is not particularly high (5.2% in 2018 and 5.1% in 2019). In addition, accommodation and food services sectors saw more liquidation cases than other sectors, and that have increased by 66.8% compared to the same period in 2019. (Figure 2).

In comparison, the travel agency and tour operator sector and arts, entertainment and recreation sectors are less prone to business closure relatively but more likely to have gone dormant. This indicates the lockdown impact and reserved business capacity. For example, travel agency and tour operator sectors experience the highest percentage of dormant firms (12.2%), twice the percentage of accommodation and food service sector (6.0%) and nearly thrice the percentage of transport and storage sector (4.8%).

 

3.2   Which firms have gone dissolved, liquidised or dormant?

By analysing the characteristics of the existing tourism and hospitality firms in different categories of business status up to April 2020, we find the following:

Firms that have gone to liquidation and dissolution on average have lowers liquidity.

3.3   A confounding factor: Brexit

To get a clearer picture of business dynamism, we resort to studying monthly business dissolution (i.e., the percentage of dissolved firms among all existing firms) over the past two decades. In line with the previous tables and figures, the transport and storage sectors are particularly hit hard and sees a soaring dissolution rate of businesses in 2020. However, its high dissolution rate is not unprecedented. The period between April 2009 and March 2010 and the period between January 2018 and September 2018 were way more volatile and registered the extremely high dissolution rates. Especially since 2018, even for other sectors, the dissolution rates have also markedly risen. (Figure 7)

This statistical picture suggests that trend of firm dissolution may not be solely attributed to COVID-19, but could also be underpinned by other factors such as the Brexit uncertainties. A prominent example is the collapse of Thomas Cook in September 2019, which is currently in liquidation. Part of the reasons are tourists delaying booking holidays due to Brexit and a change of consumer preference towards independent travel. In addition, there has been an underlying fear from businesses that immigration reforms would negatively impact on their recruitment and operation.

Taking the temporal pattern and the seasonality into account, we have estimated the level of firm dissolution in 2020 that is in line with the historical trend, had the pandemic never happened. Then we compare those estimates with the actual numbers and interpret their difference as the excess/unusual number of firm dissolutions. A caveat here is that this is a preliminary analysis and will require more data and further analysis to identify the specific causal impact of COVID-19. 

From this early assessment, we find that compared to the previous months, there is an upsurge in the monthly excess business dissolution in March 2020. It ranges from a strikingly high level of 95.1% excess cases in the transport and storage sector, to 20.5% in travel agency and tour operator sector, to 16.4% in the arts, entertainment and recreation sector, and to the lowest 12.3% in the accommodation and food services sector. (Table 2)

Clearly, SMEs have taken the most hit, showing that earlier reactions to the crisis in February and disproportionally higher negative effects in business closures across all sectors.

Meanwhile, for April 2020 (up to 27 April), the level of firm dissolutions is roughly 70% lower than usual. This is in line with the pattern seen in Figures 5a and 5b, where April generally sees a large number of dissolution cases, except for this year.

3.4   Entry

Whilst the primary concern of our study is the gone, the dormant and other inactive firms, to get a complete picture of business dynamism, we compile the time series of business incorporation rate (i.e., the percentage of new firms among all existing firms) in Figure 8.

The overall trend since 2001 has been bumpy across the tourism and travel sectors. There was a sharp decline even before the Great Recession 2008. The incorporation rate then recovered after 2009, with an upward trend leading to late 2019.

At the moment, it is difficult to gauge the impact of COVID-19 on new firm formation. Compared with the dissolution rate in Figure 7, at the beginning of 2020, the incorporation rate has still been higher than the dissolution rate. However, given the downward pressure at the right end of Figure 8, we must closely monitor the trend whether the incorporation rate would significantly drop after April.

Business confidence has already been negatively affected. According to the Business Impact of COVID-19 Survey (BICS) by ONS, 16.0% of business respondents from the accommodation and food services sector and 14.0% from the arts, entertainment and recreation sector reported that they were not confident that their businesses were able to continue operating throughout the pandemic, the highest percentages across all sectors in the economy; meanwhile, both sectors are also the lowest in reporting that their businesses were confident.  

 

  1. The Way Forward

The COVID-19 crisis has deeply changed the way in which businesses interact with customers and co-workers. The tourism and travel sectors, constrained by social distancing measures and plummeted demand, are likely to face a prolonged stagnation or decline.

The evidence presented here shows the scale of an immediate impact of COVID-19 during the first four months on tourism and hospitality sectors, results in surged business failures and inactivity. Our analysis also shows that the younger, smaller firms with low cash and high debt are among the first to go inactive. While firms that have gone liquidized, dissolved or default are more similar in firm characteristics, dormant firms are more like active firms with good fundamentals. This suggests the specific areas of the business population that could use a helping hand. This points to helping businesses with liquidity and alleviate financial pressure. SMEs are in particularly need to be supported, especially those in dormancy. Given that these sectors are likely to be the last to come out of the crisis, preserving the service capacity of the sectors is important to allow businesses to survive and have an opportunity to bounce back.

From the perspective of businesses, the pandemic threatens their survival but potentially also accelerates innovations. Whilst the various financial support schemes by the government help alleviate the immediate survival issues, with lockdown measures starting to ease, the goal could be gradually shifted towards enhancing business dynamism through entrepreneurship. A regional culture of entrepreneurship, a high level of social acceptance and approval of entrepreneurship, is found to be persistent and resilient to severe shocks to the political-economic frameworks, including even devastating wars and abrupt changes of political-institutional regime. Pandemics and recessions are often accelerants to innovations and enable changes in business model, just like the birth of Airbnb and the rise of sharing economy after the Great Recession 2008. Technologies are propping up our daily lives under lockdown. In China, drone delivery startups like Antwork were capitalising on the lockdown by providing “contactless” food delivery. Apart from new technologies, in the post COVID-19 era, we can also expect changes in consumer preferences, where small group tours and independent travels would be much favoured. SMEs will be in a good position to cater to different niches. 

From the demand side, the recovery of these sectors hinge on rebuilding consumer confidence by addressing the public health risk concerns. This is because ffrom the perspective of tourists, the pandemic is first and foremost a public health risk. Based on the data in the USA, a recent study by Harvard’s Opportunity Insights group find that the reduction in USA’s GDP came from a sharp drop in consumer spending and suggest that the full recovery of the economy will depend on addressing consumers’ fear of the virus itself. Risk perception influences tourists’ behaviour, ranging from delaying their purchase, postponing their trips to other strategies designed to reduce the risk to a tolerable level. To manage tourists’ risk perception, destinations should ensure that they have the healthcare capacity to cater to not only local people but also tourists (albeit that the need is small). This would require coordination between destination management organisations (DMOs) and local healthcare systems. COVID-19 is neither the first nor the last pandemic that many destinations would suffer. In the past, there were SARS, avian flu, swine flu, Ebola that caused serious damage to tourism and travel sectors. The capability of detecting infections, the transparency of communicating with the public and a functioning healthcare system all contribute to enhancing destination image and rebuilding tourist confidence. 



Figures

Figure 1 – Business status of tourism and hospitality firms (all sub-sectors combined)

 

Note:

1) Active firms are omitted in this chart.

2) The Jan-Apr 2020 figures are up to 27 April 2020 only.

3) Each percentage represents the proportion of firms across the entire tourism and hospitality industries that have registered a particular status, during a particular year.

4) Each numeric value represents the count of firms across the entire tourism and hospitality industries that have registered a particular status, during a particular year.

5) Total count of existing firms available on FAME database is 453,064 in Jan-Apr 2018, 479,266 in Jan-Apr 2019, 506,514 in Jan-Apr 2020.

 

Source: FAME, Bureau van Dijk; the authors’ calculation.



Figure 2 – Business status of tourism and hospitality firms by sector

Note:

1) Active firms are omitted in this chart. The Jan-Apr 2020 figures are up to 27 April 2020 only. Each percentage is the proportion of firms within a particular industry and each numeric value is the count of firms.

2) Total count of existing firms available on FAME database: 

Transport and storage: 143621 in Jan-Apr 2018, 146938 in Jan-Apr 2019, 156438 in Jan-Apr 2020

Accommodation and food services: 181390 in Jan-Apr 2018, 199140 in Jan-Apr 2019, 213405 in Jan-Apr 2020

Travel agency, tour operator: 16967 in Jan-Apr 2018, 17661 in Jan-Apr 2019, 18100 in Jan-Apr 2020

Arts, entertainment and recreation: 111086 in Jan-Apr 2018, 115527 in Jan-Apr 2019, 118571 in Jan-Apr 2020.

Source: FAME, Bureau van Dijk; the authors’ calculation.


Figure 3

Distribution of age of tourism and hospitality firms (as at 27 April 2020)

Note: Firms of above 20 years of age are not shown in the chart.

Source: FAME, Bureau van Dijk; the authors’ calculation.

Figure 4

Distribution of age of tourism and hospitality SMEs (as at 27 April 2020)

Note: Firms of above 20 years of age are not shown in the chart.

Source: FAME, Bureau van Dijk; the authors’ calculation.

Figure 5a

Count of dissolved firms by industry

Note: The April 2020 figures are up to 27 April 2020 only.

Source: FAME, Bureau van Dijk; the authors’ calculation.

Figure 5b

Count of dissolved firms by industry

Note: The April 2020 figures are up to 27 April 2020 only.

Source: FAME, Bureau van Dijk; the authors’ calculation.


Figure 6a

Count of dissolved firms by UK NUTS1 region (1 January 2020 - 27 April 2020)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Source: FAME, Bureau van Dijk; the authors’ calculation.

Figure 6b

Count of dissolved firms by UK NUTS1 region (1 January 2020 - 27 April 2020)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Source: FAME, Bureau van Dijk; the authors’ calculation.

Figure 7