Wednesday, 30 September 2020 KordaMentha’s Behind Business podcast discusses the most pressing commercial, financial and operational issues facing business today. Few sectors have been hit as hard by COVID-19 as the Tourism sector. In this episode, KordaMentha partners Scott Langdon and Tony Miskiewicz discuss the current challenges facing the sector and the outlook for 2021 and beyond. Transcript Sean Today, we're talking about tourism. The tourism industry is massive and obviously important to the Australian economy. Before COVID-19 caused lockdowns, Australian tourism made up around 8% of all employment across the country, employing about 660,000 people in over 250,000 businesses. In dollar terms, domestic tourism makes up around two-thirds of the market and is worth $105 billion each year. The other third worth over $40 billion is spent by international visitors. While the number of international tourists is lower, they have a bigger spend per capita. Across the economy, few sectors have been hit as hard by the coronavirus as tourism and reopening of domestic borders is critical to recovery in the sector. But so, too, is the reopening of national borders. To talk to us about what's happening now and what the future for the tourism sector looks like, we have KordaMentha partners Scott Langdon joining me from Sydney and Tony Miskiewicz joining me from Townsville. Welcome to Behind Business. So let's start by thinking about where we were before COVID-19 hit. Scott, until this year, how big a business has tourism been in Australia? Scott Tourism is the heart and soul of so many employees and employers throughout Australia, but one thing that's really interesting about tourism is it's a bit like property and the property market. It has so many different micro markets throughout our nation. And it's really important when we talk about how tourism has been going for a sustained period of time, we need to look at each of the little microcosms throughout Australia. And one of the interesting things that we've seen through the crisis is that it's the small- to medium-sized businesses that are most at risk, that are the most impacted from, initially, the bush fires at the start of this year to the COVID crisis, and the small- to medium-sized enterprises, they just don't have the balance sheet or cash reserves to see through the crisis. And whilst that's not an absolute, the regional operators throughout Australia are the ones at greatest risk to come out the other side. They're the ones that need the support from Australians and also government. Sean Tony, where do people go? What do they do? How do they spend their money? Tony So international visitors, about 25%, 26% of visitors to Australia, they usually stick to the Eastern seaboard as much as possible. Seventy-four percent is domestic tourism. Say in Queensland where I'm from, 50%'s intrastate and 25% is from other interstates so ... and you're looking predominantly from New South Wales and Victoria. So it's very difficult when the borders are shut to have a successful business and there's no one coming up to visit. But international tourists spend about $45 billion in our market and domestic tourism spends about 105 billion. So international tourists spend more per visitor than the domestic market, but yeah, so they're very important to us, but obviously, we have to look at the domestic market at the moment 'cause international tourists aren't coming. Sean So when I think of tourism, I think of five-star hotels versus backpackers, or should I be thinking of international versus domestic? How should we think about it, Scott? Scott Yeah, I think when we think about the international market, we break it up into two core components. One would be that the Chinese who have increased their numbers significantly over the recent decades. Now they are, and only in the past few years, our biggest number of international tourists at 1.3 million tourists coming in last year when generally speaking, their profile is to stay for up to 10 days, stick to the East Coast, stick to the metropol and spend a lot of their funds around dining, around casinos and around shopping. And then, we have our international tourists more broadly and they're heavily skewed towards Europe and their trips are more likely to be a 10-week trip as opposed to 10 days like the Chinese. And we see them traveling a lot more remotely, likely to do some work, but that's the market that seems to have been a little bit more subdued over the last 10 years. And I think it just hasn't grown the same way we've seen the interest out of China coming to Australia, and that's the market that's probably the most fragile at the moment. Sean So when international tourists come into the country, what do they spend their money on? Who are the biggest beneficiaries? Scott I think the biggest beneficiaries of international tourism are absolutely the hotels, the airlines, restaurants, which is what's obviously front of mind, but what I think we've seen through this COVID crisis that is unprecedented crisis we've seen, the ecosystem of the companies that are either directly or indirectly impacted by the downtick in international tourism to a larger extent and intrastate tourism to a lesser extent is far, far greater than what we probably had anticipated in the past. And I think the tourism breadth has been seen throughout the economy around when you're seeing initiatives like the Victorian government has done, which has been an unbelievable success, when you see this click for Vic, how we can support the industry that supports tourism and that's everything from wine to experiences, to dining, to gift vouchers, to earrings, personal care, art. So the ecosystem that's impacted by COVID has just made us think, well, the ecosystem of entities that are tourism businesses is far, far greater than what we previously had reconsidered. Sean Tony and Scott, you're both actively involved in working with clients and banks and people who work in that ecosystem and are exposed to the travel and tourism sectors. What are you actually seeing on the ground, Tony? Tony Sean, from what I'm seeing on the ground in Cairns and Whitsundays over the past six months, it's fair to say, there's a lot of emotion. There's actually concern and frustration, concern about what's to come if there's no vaccine in the near future and frustration of the strict border policies, particularly in Queensland. You have to remember that the tourism sector's already taken a hit from the bush fire tragedy over summer. We're seeing revenues for some businesses fall by as much as 80, 90% during COVID. So there's no a doubt the government centers have kept the tourism sector afloat up this way. We've got 40% of businesses on Job Keeper in Cairns and Whitsundays. The measures may also be creating a little bit of a false economy, take Cairns, for instance, just looking at their occupancy numbers for July, they were around 35% as opposed to 80% last year. And the domestic passenger numbers at the airport were about a quarter of last year's numbers and that was when the borders were open up. So it's probably worse now given the restrictions in Victoria. So broadly speaking, the number of insolvencies are actually down about 60% on last year's figures. So just from probabilities, I'd suggest there's some companies around that just surviving solely on the incentives at the moment up here. Sean Scott, what about you, what are you seeing on the ground? Scott Well, interestingly, a number of the banks we speak to is that companies in their SME divisions actually are sitting on more cash now than what they were prior to the COVID position and they're in hibernation, that the companies in the SME division are trying to hold on to cash as much as possible, which could come from a number of areas through government stimulus, through trying to do a renegotiation with the Australian Tax Office, delaying rent payments and also, deferring some interest payments and repayments to the banks. So one of the things we're seeing from the banks is that businesses, which include the tourism businesses in the SME space, actually sitting on more cash. And that's a bit of a concern, right, 'cause it's counterintuitive. It's a concern because does that mean, is it this wave of creditors and they're just building up debt behind them and how that's going to flush through. And even though they've got more in reserve, do they know what their path out of this does when ultimately, we do come through the COVID situation? Sean Tony, have you got a view on that? Tony We're seeing the same thing up this way. There are a lot of businesses that are sitting on cash reserves, which is the right thing to do in a way, but there are some businesses we're aware that are also building up their [inaudible 00 08 08] quite well and not paying anybody. So there's going to be a problem next year, I would imagine, or later this year in regards to that because obviously, the banks defer to a certain point, the banks will review, and then obviously, the ATO once they start action again, because I understand there's a lot of small businesses not paying tax at the moment. Scott But having companies do this is actually not a bad thing. I think battening down the hatches to save money is the right thing to do in the current climate for these tourism companies. Having cash gives you optionality. Having cash gives you flexibility. And I think that doing a deal with the ATO, doing a deal with your bank, having a 15-month plan with your bank to get through the next phase is really important, doing a deal with your landlord, it's just how you unpick it and how you unwind it. Each of those ideas in isolation is a really good plan, but it needs to come together in a fulsome rebuild of the business. Tony As long as their talking to their actual financier. We are seeing a lot of the SMEs not talking to their financiers. That's going to cause an issue down the track, I'd say. Sean So following the government support, is there a time coming when it's going to get tougher? Scott That's one view and either it is going to be tough. We do have a wall of creditors to work through out the other side, but there is a bunch of people out there who are confident in what it looks like. I think the big picture should be that operators in the SMEs tourism space should be confident because there is absolutely a pent up demand. When you speak to your friends and family, when they say, "Well, the first thing I'd do when COVID lifts and the restriction's lifted, I'm going to travel. I'm going to go see Tony in Townsville, or I'm going to go to country Victoria. I'm going to go to the wine regions of Adelaide." We are, as Australians, we are adventurous. We love to travel. And there is absolutely confidence in the market that there is pent up demand and that we will overreact and the pendulum will swing hardest first. And then, if there's a secondary phase, some of the people I do speak to on the international front is yes, it's going to be a while until the borders open up on the international front. But at the same time, we're a nation that's managed COVID pretty well comparatively. And plus, we're a nation that's preferred by a lot of people to travel to. So there is hope there that once we do open up the international borders, that pent up demand will swing and swing hard. And there's some evidence we should look to that M&A activity is still alive in tourism. It's not dead. Yes, it's not the same levels it's been in previous years, but there's still activity where people are buying and selling businesses. You just look in the last couple of months, Village Roadshow was sold to BGH. That includes SeaWorld and Movie World. There's a company up in Queensland called Experience Co, sold off their Great Barrier Reef Helicopters and the Byron Bay hot air balloon businesses. So there is M&A activity. People do have confidence that once our state borders open up, once our restrictions open up and our international borders open up, it'll swing. It's just a matter of time. Sean Tony, what sorts of tourism do you think will pick up the soonest? Tony I think consumers are looking for a safe way to travel. So looking at the caravan purchases over the last year, there's a 40% increase. So I was in Airlie Beach last week and the caravan parks were quite full and there were a lot of caravans on the road. And given the registration plates, Victorians actually got out as well, which is great to see. Yeah, I think we'll also see wellness tourism market take off as a result of the effects on people in lockdowns. Definitely, we'll see different types of tourism emerge. But people are looking for a safe way to travel. That's the issue. So tourism operators need to focus on changing their offerings to suit the market, but also keep their business COVID safe for the customers. Sean Tony, what would you be advising travel and tourism operators to be doing right now before the pandemic ends? Tony I'd be working out my target customers, definitely domestic, just target it. Get my social media platforms right, the advertising right. I'd be adapting my premises and I'd be seeking advice from a financial advisor pretty quickly. Sean Scott, you agree with all that? Scott Yeah, absolutely. I'd be battening down the hatches to save money. Cash in the bank gives your optionality in the future then to adapt. And I'd also think about, well, what can I do differently right now to come out the other side? So can I renegotiate contracts with suppliers? Can I right size my workforce? Can I renegotiate workforce agreements? Do I change, as Tony said, my online offering? Do I find new partnerships? Do I find new alliances? I'd be looking inside my business as much as possible so when we do come out of hibernation, I'm a fit ready business to come out that can cater to the new market. And I think in particular, I'd be thinking about how can I cater for the domestic market and really put that front of mind so when the pendulum does swing, the domestic market is the most to take forward. And I would really embrace understanding what my cashflow looks like. And probably my final one is to embrace with your banker, your finance provider. They do want to be a partner with the borrower. They want to be a partner over longer term. Don't run away from the problem. Run towards the problem. Sean Do you have a sense whether the tourism operators are doing that at this point? Scott I think they fall into one of two categories. There are some that are doing it and doing it very well. We speak to some parties who are in hibernation, are getting themselves match fit, and speaking to their banker and speaking to potentially new financiers as well to come out the other side. And there are some that just the uncertainty and the timeframes is just too overwhelming for them. So there are absolutely some that do, but I think it's also the advice that they take. Many operators will go to their tax accountant to get advice on how to deal with the tax office, how to deal with their internal finances, but the advice that they should be seeking at the moment is a more fulsome advice and what they can do to open up their business for future optionality so when the pendulum does swing, they can come out of hibernation successfully. Sean Tony, what are you seeing up in Queensland in terms of people getting match fit? Tony That is definitely happening. We have seen [inaudible 00 13 53] parties that are refocusing on the domestic market to get a slice of it. Now I understand the Australians spend about $65 billion overseas in trips in 2019. So it's more than the lost inbound number, which I mentioned before at 45 billion. So it's fair to say that the market has looked at that pretty quickly and they're starting to chase it. So they are getting match fit, certain players. I won't say all players, but there are people that are sitting on cash and they are doing the right thing. So they are talking to advisors, they are talking to their banks and they're adapting their premises, but it's not all the players. That's the issue. Sean Now, the government subsidies and particularly Job Keeper have been very important for the sector. Does the government need to keep that support going for an extended period do you think as we emerge from the COVID-19 shutdowns, Scott? Scott I think the government need to be very careful on how we wean the nation off Job Keeper and Job Seeker that we just can't come to a cliff and then fall off. And the extension that's been agreed and implemented is a good start. But once we get to the end of that phase, how we wean the nation off around that is really important. It just can't be a hard stop. But I think that the tourism industry in particular needs a little bit more support, especially for the regional areas. I suggested that we had been somewhat subdued for a sustained period of time of regional Australia. So what can we do to really boost, whilst we have our international borders closed, what can we do to boost regional Australia and the tourism operators there? 'Cause they are an important employer of Australians that some of the things that we think about is to make the tourists' experience even better than what it is. And there's two key pillars that I think about on how we can make that experience even better. One is that we need to reduce approval processes for regional Australia and speed them up as much as possible. There's some really great ideas out there that we just need to get rid of the red type and really embrace for regional Australia. And the second one is there are so many wonderful Australian entrepreneurials out there that have great ideas how to boost tourism in Australia. We need to run towards them and we need to embrace their great ideas 'cause there's so many out there that regional Australia needs all the assistance we can get. So removing approvals and embrace the entrepreneurs who have great ideas for regional Australia. Sean Now, Tony, looking into the crystal ball in five years' time, what will tourism in Australia look like? Tony Well, that's a tough one. I've been thinking about that. It really comes back to, I think, what happens with the vaccine and how other countries will be affected longterm. But yeah, I think it will be a different landscape. There will be some fallout and some company failures. We may see less SME business in the space. Sean Why do you say that? Tony Well, I think Scott's right. I think there's a lot of liquidity in the market. There's a lot of capital raising going on at the moment. So I think we'll see some acquisitions in the next five years. But yeah, we're seeing the local tourism industry come through other major issues like September 11, GFC, SARS, so I'm hoping overall, the market will come out the other end and be more resilient and stronger at the end. Scott Yeah. And as an extension of that, I think there's a couple of steps that's going to occur and it's how long it will take for Australians in particular to be content and comfortable with living with COVID, how long it's going to take for Australians to jump on planes, buses and trains as to what we did in the past. And the first step change I think it's going to be opening of the borders. That's a big step for Australia to say, "Yeah, it's good to travel," and I think that'll give us a boost. And then I think even just the announcement of a vaccine will provide a big stimulus for the economy. And then obviously, when the vaccine does come through, whenever that is, that'll be the next level. So I think there's going to be a step change towards getting back to some sort of normality for the tourism industry. Sean When, Scott, do you think we're going to see lots of international tourists coming back to Australia and vice versa? Scott I think the key message in my mind is controlling the controllables. We've seen our friends over in New Zealand do such a great job of managing COVID. Broadly in Australia, we've done a great job of managing COVID. And I think getting a mini bubble with New Zealand would just give so much confidence and stimulus to the tourism market. It would be hard to believe, but New Zealand is the second largest source of tourism in Australia with 1.2 million people in 2019. So it's only a hundred thousand behind China. So if we could open up a border with New Zealand and from the East Coast of Australia, it's only a couple of hour flight, I think that'll just be such an unbelievable boost to tourism in Australia. And you speak to the people on the ground, that'd be just such a step change and it's such an important goal for our federal government to open up a bubble with New Zealand. Sean Do you think that in the future that a fundamental change will be that Australians do actually visit Australia more often? Tony I hope so. I hope Australian attractions are on the bucket list. And yeah, as we've mentioned before, people want to travel. It's human nature. So as long as business operators got the ... They need to play their part and implement a COVID safe plan, I think Scott's right. We need to get the government comfortable with how we travel around Australia. We definitely will see a lot more intrastate travel. In Queensland, we're seeing that already. We're seeing a new group from Sunshine Coast to Cairns recently open up so ... And that's been quite full, I understand, the planes on that so ... But we also need to talk about the air bridges like Australia, New Zealand. I think we definitely will do a lot more traveling to New Zealand and vice versa instead of long haul travels. Sean So what should a company in hibernation focus on right now? Scott Yeah, company in hibernation right now needs to be resilient and have an unwavering confidence that it'll come through the other side. And we as Australians are very resilient people and we need to really dig deep over this next short period of time and look at the positive. And the positive is this is a once in a lifetime opportunity to re-look at your business, look deeply at the way you're operating, look at your systems, look at your customers, look at your online platforms and work out when I do come out the back of this, what do I want my business to look like? This is a once in a lifetime opportunity. And for people in the tourism industry, the pendulum will swing and will swing hard and you need to be prepped as best as possible to make the most of it when the pendulum does swing Sean Scott Langdon and Tony Miskiewicz, thanks for talking to Behind Business.