Tourism Economics
The following text considers tourism from an economist’s perspective. Firstly, how should tourism be identified within consumption activity? In what ways does this component of leisure fit with market interactions more than others? What exactly does the term “tourism industry” cover? Is its content homogeneous, or is it rather a collection of segments with distinct economic features? How does tourism tackle the challenge of digitalisation? What are the consequences of this for each segment of the tourist industry? To what extent is tourism harmful to the planet and to the preservation of our heritage? What actions can be undertaken or increased to limit these effects? These are the topics considered below.
Until the mid-1960s, most economists considered that preferences – individual and subjective – connected us to goods and services, while others – more anthropological – saw the hierarchy of human needs as a more objective source for this consumption. Then, Kelvin Lancaster (1966) proposed a sort of compromise, explaining that it is actually the “characteristics of goods” and not the goods themselves that we consume. A single good, such as a meal, offers, for example, nutritional and aesthetic qualities, and contributes to satisfy several needs in varying proportions. At the same time, labour microeconomics still considered labour supply (or job demand) to be the result of a trade-off between, on the one hand, wages that make it possible to purchase all sorts of market goods offering various characteristics, and, on the other, leisure, free in this case, but regenerative and endowed with other gratifying attributes. Today, our leisure activities are often based on sophisticated, paid services. Tourism in the leisure sector requires a “change of scenery”: it generates expenses for tourists and income for service providers. To dream or stay in bed longer, we have to work less, but we have to “work more to travel more”: this is the productivist equation of the tourism economy, the occasional reward for a year of work, which generates incentives for effort and ultimately a driver of growth, both directly and indirectly (Lin, Yang & Li, 2019). Thus, tourism is at the root of an economic activity that is much richer than any other component of the “leisure society”. It quickly absorbs innovations and, at times, actively encourages them. Artificial intelligence enables certain players to offer travel and accommodation solutions adapted exactly to the characteristics of their customers. Blockchains can be used to outsource and secure booking and payment histories. We are told that facial recognition technologies will soon simplify boarding procedures. In the meantime, virtual reality enables tour operators to offer clients a preview of potential visits, which improves the conditions for making their choices. Although tourism stimulates innovation, its dynamism sometimes struggles to be economically virtuous. Its costs in terms of energy, its carbon footprint exacerbate our ecological imbalances, but also sometimes serve as a laboratory for more resilient forms of consumption.
Thus, the tourism sector is analysed today as an “industry”, a specific branch of economic activity. We will start by considering its essential features. Then, we will look at two of its current challenges, namely its digitalisation and its relationship to ecological and environmental constraints.
The tourism industry
Dividing tourism up into private, social, and business tourism raises more methodological problems than it offers a genuine overview of the tourism economy. It is more informative to identify sub-sectors according to the services provided. It is generally agreed that tourism comprises five of these: transport (including travel agencies and tour operators), accommodation (the former term “hotel trade” is no longer suitable), catering (similar), travel insurance and assistance, and finally events.
This classification is far from perfect: transport is not only used by tourists but also for regular travel; catering may also be daily, and events may target residents. Conversely, tourists are customers for local or luxury retailing, which is not included in these sub-sectors. However, this breakdown has the advantage of identifying the “professions” and technologies that require distinct organisational methods. Consider accommodation and travel assistance: in the first case, the physical capital weighs heavily in costs, as does staff. Apart from the very high-end segment, hotel size, standardised copies across various destinations, and savings on design costs, management and advertising are decisive factors in their profitability. This is why the hotel sector is highly concentrated, with major international players such as Marriott, Jin Jiang, Hilton, and Accor. By contrast, insurance and travel assistance require limited fixed assets and staffing and concern more specialised areas of insurance, requiring financial solidity, but also responsiveness and good networks capable of intervening rapidly around the world. Therefore, many players in this sub-sector operate outside the field of tourism and have various origins: Europ Assistance, currently an insurance company subsidiary, provides service offerings that align with those of other insurers, leading credit card issuers, car manufacturers, and tour operators, etc. The assistance sub-sector is actually relatively competitive, with credit card companies, transport companies, car makers and even volume retailing operators, among others, offering their own solutions, often in partnership with national or international insurance companies.
The events sector is strongly influenced by history and local specificities, which also limit its concentration. Public initiatives often drive the organisation of major culture or music festivals and festive celebrations, although privatisation is also increasing in this field (Mair & Weber, 2019). Catering is slightly bipolar. The fabric of restaurants, bars, snack bars and fast-food outlets is largely local and fragmented, ranging from high-end services to low-cost street food. However, in fast food, international giants have established themselves for several decades, with a clientèle comprising both tourists and residents who appreciate their standardised services, which have also become symbols of junk food.
Transport is the most interesting sub-sector for economists. Airlines and their elaborate strategies take center stage here. The sector’s leaders are now American (American Airlines, Delta Air Lines, United Airlines) or Asian (China Southern Airlines, China Eastern Airlines, Emirates, etc.): they first have weathered several crises, while the latter have expanded into new markets. At the same time, low-cost carriers such as Ryanair and EasyJet have led European airlines to diversify their services, offering simplified services and lower prices to attract customers they were losing. Thus, the sector has become more concentrated in Europe, led by groups such as Lufthansa, British Airways and Air France. With dynamic pricing (Neubert, 2022), the price of a single seat now varies according to the day and time of travel, but also the time of booking, and the number of visits to a website: traditional discrimination based on social criteria (age or family status) has been forgotten in favour of extreme optimisation of revenue and occupation in highly “contestable” markets. Behind these airlines, there are three Global Distribution Systems (GDS), namely Amadeus, Sabre and Travel Transport, which manage bookings for most of the main airlines and structure competition by making coordination of their members’ flights easier and making the association of non-“partner” airlines for the same transfer more complex.
Airport platforms are naturally less concentrated than airlines. Traditionally, these are public or semi-public facilities. Their gradual privatisation fosters competition between platforms, particularly in their role as hubs. In Europe, Frankfurt and Amsterdam, for example, have streamlined their operations and have moved ahead of other structures. Attracting fewer tourists than Paris or London, these functional hubs are better at redistributing American and Asian tourists around Europe than their competitors. From an economic perspective, changes are slower in rail transport, which became public in many countries in the middle of the last century: some privatization processes tend to separate infrastructure operators—which constitute “natural” monopolies—from carriers, which are increasingly competing in increasingly globalized markets, with in some cases questionable in terms of service quality. Ferry routes are often private but subject to local regulations; competition exists on some routes, with a reasonable level of carrier consolidation. However, the cruise market has become extremely concentrated, with three global giants that manage the seasonality of their activity around the world better than smaller local operators. As for road transport, its management takes many forms, ranging from public service to concessions, including various public–private partnership arrangements. Environmentally aggressive, polluting and heavily congested during holiday periods, despite its obvious role in tourism, it is hoped that it will soon be reserved for fewer, cleaner vehicles, and that its infrastructure will become more discreet in urban and rural landscapes.
Digital and environmental challenges
The computerisation of processes and the availability of fixed and mobile Internet access have profoundly changed the economic organisation of the tourism industry. Artificial intelligence applications also drive new and rapid change. However, the challenges linked to climate change and the measures it justifies are still only partially integrated by tourism activity that will have to target its innovations in this field in the coming decades.
One of the first sub-sectors affected is the travel services sector. At the start of the century, travel agencies were well established: whether local or international, these companies relied on networks connecting them to tour operators, on the expertise of their staff, on significant marketing expenditures—which were essential given the turnover in their customer base—but above all on their proximity to prospective travelers. However, their names have gradually disappeared, often absorbed by large online groups. Proximity and the quality of staff are less important, with network efficiency, price, and easy access to the entire offering becoming the leading criteria for travellers, along with a race to be referenced on search engines. This led to strong concentration in the sector, with very few players focusing more on occupying all the sector’s segments (transport, accommodation, car rental, etc.) than on external growth to win markets or reduce competition. Thus, Booking Holdings (formerly Priceline) brings together Booking.com (originally European), a specialist in hotel reservations, and Priceline.com (American), Agoda.com (initially Asian), and many other brands. Expedia, number two in the sector, has a similar portfolio. The hotel industry, more fragmented than air transport, has an ambivalent view of these intermediaries, which provide customers but also erode their margins. TripAdvisor, followed by other players, has specialised in publishing customer reviews of hotels and restaurants. For catering, where standardisation is not as strong as in accommodation, these reviews can be decisive for customers passing through: they are credible and provide free publicity for professionals, and their effect helps raise average service quality.
Platformisation has led to other upheavals that benefit tourists at the expense of traditional professions and lower-income residents. These are accommodation and transport. Seasonal rentals have always existed, but platforms have provided them with a fearsomely effective tool for accessing tourists. Airbnb (the global leader), Vrbo (a subsidiary of Expedia, known as Abritel in France) and Booking offer an extraordinarily extensive and varied selection. Their success is based on the quality of their information, classified by advanced artificial intelligence algorithms, its availability in just a few clicks, its credibility supported by photographs, detailed descriptions, reviews from previous guests, and ad hoc labels awarded by the platforms themselves. These platforms’ payment intermediation services reduce risk for landlords, whose upgrade and maintenance costs have absolutely no bearing on those supported by hotel operators. The growth of Airbnb, both as a sector leader and as an independent company from traditional travel agencies, was exponential between 2014 and 2018 and has now reached a certain maturity. The resilience of these platforms during the pandemic was spectacular. Initially, they attracted small owners offering their primary or secondary residences for a few months. They provided accommodation in relatively unattractive destinations without any hotel infrastructure. Then, very quickly, two trends emerged: a shift from many apartments offering long-term rentals to short-term furnished rentals, but also a professionalisation of this offer, with the entry of owners with multiple properties listing dozens/hundreds of properties on the platform. In destinations already under strain in terms of long-term rentals (with low-income families, pensioners, students), these shifts have worsened the difficulties faced by those most in need. Occasionally encouraged by the hotel industry, some highly attractive destinations in the United States and Europe have regulated short-term rentals (Furukawa & Onuki, 2022). Restrictions on the number of listings per owner, limited rental periods, mandatory compensation schemes when creating a new short-term rental, simultaneous offers of a new long-term unit, higher taxation of seasonal rentals, etc. It is still too soon to assess these measures, which are mostly non-retroactive.
Uber and its partners have challenged traditional taxi services. Other models, such as shared taxis, make urban and peri-urban transfers more accessible. The licensing system, which once limited the number of taxis, has collapsed in some destinations. In many countries, legislation has nevertheless required that “independent” drivers be considered employees, which significantly reduces the advantages of platforms over taxis but relieves states of the need to cover sick leave, unemployment or retirement for drivers. Even so, these platforms have exerted pressure on taxi fares and service quality. As a result, cash payments and tax evasion have also declined. For tourists, these operators have increased supply, simplified access and reduced fares: for established professionals, they are formidable competitors that erode their margins and reduce their activity.
Other effects of the digital sector are less well-known: smart contracts help simplify contract execution in the tourism sector. These are based on blockchain-type technologies that enable the automatic execution of simple contracts after validation by computer networks, for example, in the field of travel insurance. The development of cloud computing has enabled widespread use of GPS navigation and real-time map updates while on the move. Planned artificial intelligence applications in the field of tourism range from anticipating tourist flows with machine learning techniques to the use of neural networks in forecasting models, which can provide relevant, immediate answers to queries on mobility, places to visit, emergencies, etc.
Tourism is not immune to environmental challenges. The carbon footprint of transport is usually catastrophic (Gössling, Balas, Mayer & Sun, 2023). Aircraft, ships and internal combustion engines are major sources of carbon emissions. The production of electric engines is not yet environmentally virtuous, even if we can see some technological improvements which offer a glimmer of hope that, once production processes are fully accounted for, electric propulsion may become advantageous from a macroeconomic perspective. While waiting for future solutions, it will be necessary to accept combining greater frugality with the cleanest technologies available. Many of us now favour rail travel for journeys of less than four or five hours. No doubt, it will be necessary to go even further and prohibit airlines from offering routes where rail operators offer an acceptable alternative.
Another issue specific to mass tourism concerns the danger posed to highly attractive natural and cultural resources. In this field, two main policies coexist: a quantitative limitation aimed at maintaining damage to the site or building at a level that does not compromise its preservation. Advantage: “queues” put rich and poor on an equal footing, with access to the site determined by a “first come, first served” basis; the drawback: fewer visitors also mean fewer resources for site maintenance, undermining the solution’s long-term sustainability. Another solution is to charge high prices for visitors, while maintaining free or near-free access for locals. This is the solution applied in India or Spain. It has the advantage of generating the resources needed to maintain the site, but the drawback of being highly elitist or of strongly affecting visitors’ motivation, with only the wealthy and tourists extremely interested in the site visiting it (Chenavaz, Leocata, Ogonowska & Torre, 2022). Other solutions, potentially complementary to the previous concerning access policies for sites affected by “overtourism”, are based on virtual or augmented reality.
Some forecasts to conclude. The populations of emerging countries – present and future – will be the tourists of the coming years and decades. Around 1.8 billion tourists are expected by 2030, and even more thereafter. Longer leisure periods, rising cultural levels, and information overload are likely to saturate beaches and sports leisure sites, complete the transformation of certain cities into museums and lead future generations to opt for new forms of mobility. Greener for some, more virtual for others? No doubt. More technological too: we all hope that hydrogen engines and robotics will bring about cleaner, more autonomous modes of transport. Other upheavals are also to be expected in the much longer term. We cannot yet imagine them, just as the inhabitants of the Mediterranean could not imagine that their arid lands would one day become “Club Med countries” when they first set sail to spread their influence around the New World.
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