Income inequality and the travel class divide

There is an unmistakable correlation between the growing income inequality in society and the increasing gap in economy and luxury classes in both airlines and hotels. It should be no surprise being that tourism depends mostly on the disposable income that is most sensitive to income disparity.

On one hand, we have the extraordinary growth of LCC (Low Cost Carriers), the shrinking seats in the now spartan economy class of legacy carriers, the emergence of branded very low cost accommodation like Tune hotels (built on the AirAsia operating model) while on the other hand the airlines upper classes are getting more spacious, with better and bigger seats, with more amenities and services and 5-star hotels up their offering, refurbish to more lavish rooms and more services.

Diverging tourism markets

The point here is not to debate the social consequences of the growing economic inequality, but to consider the effects on the tourism industry evolving into two diverging markets. The sales channels are already largely separated with the economy market becoming purely transactional while luxury market sales are increasingly selective and personal. Calling an airline to book a seat, you don’t even need to specify what class you wish to book because even the phone numbers are now different! As to be expected, the time on hold is also very different ranging from forever on the economy class number, with a recorded suggestion to book online instead, to no wait at all on the upper class number.

Economy travel and lodging booking earns little or no commission and as these customers typically are not going to pay any added “service” fee, there is no economic justification for the now superfluous travel agent sales layer. Even OTA (Online Travel Agents) will have to evolve as they become merely transaction processors for the selection made by the consumers on the review sites. It is conceivable that OTA could be supplanted by true transaction processors, possibly even unrelated to the tourism sector (like 7-11 convenience stores in Thailand for AirAsia).

Luxury travel evolves in the opposite direction, becoming more service oriented from sales to delivery and becoming more segregated in customer relations and services. Distinct telephone numbers, airport check-in moved from the counters to upper class lounges, limousine pick-up and drop off, even special floors and dining rooms in luxury hotels for the best customers. For traditional travel agents to compete in this segment, they need a complete makeover of image, service standards and customer environment, but being service focused by nature, they do have an excellent potential market. OTA on the other hand, will have a rough time meeting the challenge as the Internet is hardly a natural personal service environment.

The void in the middle

Will anything remain or develop between these two diverging classes? The premium economy now offered by some carriers does not seem to pick up more than a marginal market share, advertising for it is far less visible today than it was a couple years ago, while the allocated space for premium economy seats in aircrafts does not seem to get any larger. Hotels may be the most affected as 3 and 4-star hotels still accounts for the largest number of beds. 3-star hotels are trimming services and extra to compete with the rising competition from the budget hotel chains while 4-star hotels have a difficult time balancing price and service in some markets, while competing with an oversupply of 5-star rooms in other markets. In a few short years, we could very well see a customer distribution in lodging becoming very similar to that of airlines, with the bulk of the business splitting and shifting toward the opposite ends of the scale. 

Budget and luxury segregated paths

By extension, destination services and attractions also differentiate their offering because it makes just as good business sense for them as it does for airlines and hotels. Many attractions in Europe already have special fast track gates or private tours offered as premium services. It is entirely possible today for budget tourists to never cross path with luxury tourists even as they visit the same attractions at the same destinations. And, most likely, they would have also bought air tickets and booked hotels through entirely distincts channels as well.