Economic Importance of Long-Distance Travel for the German Tourism

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Potential, Structure and Influence Parameters of the European (respectively German) Long Distance Travel Market to East Asia

By Werner Sülberg Vice President Corporate Development and Market Research Deutsches Reisebüro GmbH Frankfurt/Germany

4.11.2000

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(Chart 1)

Ladies and Gentlemen,

It is a great honor and pleasure for me to be speaker in this important and highly reputable conference here in Taipei. Thank you very much for your warm welcome and your kind invitation, which I attend as Representative of the German Travel Agency and Tour Operator Association (DRV).

Long-distance travel embodies a combination of exotic experiences, adventure, luxury and dream vacations for the customers. Long-distance travelers are the special treated VIPs or key accounts for travel agencies. Long-distance tours constitute the high-yield assortment, the cash cow and are most profitable for tour operators. If clients, travel agents, tour operators and suppliers are in agreement on the high attractiveness of long distance travel, this creates an ideal marketing and distribution line-up.

So are there rose-colored prospects? Everything could not be better? If this was an appropriate description of the situation, the importance of long distance trips in the travel industry in terms of quantity should be significantly higher than it actually is. Hence there exist obviously parameters that restrict the boom of this market segment. Before analyzing those factors in detail, the structure, development and volume of the long distance travel market shall be described.

Please allow me to argue in the following basically with figures of the German travel market due to a lack of reliable joint figures for the European Market in total. The German travel market is beside the British by far the biggest one and the structures are representative for the European market structure. Special developments for Germany I will explain hereinafter.

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1. Long-term Development of Long-distance Travel (Chart 2)

Long distance trips in Europe are defined as all trips going out of Europe and into another continent with exception of trips into the North African and Middle Eastern countries bordering on the Mediterranean Sea. According to this definition Morocco, Tunisia, Egypt, Turkey, Cyprus, Israel, Jordan etc. do not belong to the long distance travel destinations for Europeans. In logistical terms they are determined by a flight time of more than 5 hours out of the respective domestic market.

The share of long distance trips among all trips out of Germany expanded from 0.6% in 1970 via 2.1% in 1980 and 4.8% in 1990 up to 7.0% in 1999 which is an overproportional increase compared with the increase in the overall number of holiday trips.

(Chart 3)

The number of all holiday trips longer than 5 days raised from 25 million up to 80 million by an annual rate of 4.2% on average during the comparable period while the number of trips organized by tour-operators increased from 6 million up to 35.2 million by 6.5% per year and the number of long distance trips went up by 9.4% per year from 0.4 million up to approximately 5 million.

At first glance the volume of long distance trips on the German travel market seems to be small but it has to be considered that these trips depend much stronger on external influencing factors than short and medium-distance trips within Europe.

In order to classify the status of long distance travel by volume, here are some remarkable numbers: 3.3 million Germans did travel to the Spanish island airport of Palma de Mallorca. This is exactly the number of people who traveled to Asia in total, business, private and ethnic travel included. The by far favorite destination for German tourists Spain represents in total with 9.0 million holiday trips 72% more than all long
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distance holiday trips together or more than four times as much as all German tourists to the main overseas destination USA.

2. Volume of the International Air Travel Market

The following analysis is based on the air travel statistics from the German Federal Office of Statistics including all passengers with origin from Germany independent from travel purpose and nationality. Customer surveys and market research projects focused on customer demand are not helpful because of the small market size of overseas travel and the accordingly low number of cases for a detailed analysis in terms of the absolute volume.

The immigration statistics of the destinations too are not a reliable source of research for the total amount of German travelers. The official statistics of immigration normally show higher numbers than the flight statistics do because they distinguish between nationalities but not between actual origins of the travelers. As for example the Asian destinations as well as the airlines from Far East invite tourists to round trips through different countries there will be sometimes a significant divergence. This means that for instance a traveler from Germany with stopover in Thailand who continues to Australia and returns via Singapore to Germany will appear in the immigration statistics of all three countries. At the same time he will appear in the flight statistics as an Australian visitor but not as an Asian one. Strong ethnical travel can distort statistics, too. This has to be considered when analyzing the tourism figures from different sources.

(Chart 4)

Out of the 45.6 million international flights with a German origin, only 10.4 million flights or 23% were long distance flights. The remaining 77% (35.2 million) were flights within Europe and to countries bordering the Mediterranean Sea. Actually during the last ten years the increase of travel to European destinations is with 7.4% higher than to long distance destinations with 5.7%, during the last three years even +6% versus +2%.
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3. Structure of the International Air Travel Market by Purpose of Travel (Chart 5)

A structural valuation of the volume shows that 48.5% of the European flights (17.1 million) are holiday flights while 10.9 million flights are business trips. 7.3 million flights concern ethnic and private travel. The structure is a more complex one when looking at intercontinental flights. Out of the altogether 10.4 million flights a little more than 50% (5.2 million) are holiday trips with a slightly bigger share for ethnic and private trips compared to business travel than for European flights. Three quarters (3.9 million ) of the long-haul holiday trips are organized by component tour operators offering single modules for flights, accommodation, car rentals, rail or bus services, local events and sightseeing tours. Only one quarter is organized by package tour operators (1.3 million ) offering seasonal charter flights to 14-16 long-haul destinations - mostly on islands, which are not served with a big capacity by scheduled airline alliances.

The importance of charter flights for long-haul travel is declining because of the significant increase of capacities of scheduled flights together with a growing extension of airline hubs in Asia, Europe and Northern America. Scheduled flights are often less expensive and away from mass destinations more flexible, too. In 1986 the share of charter flights for long-haul destinations was 49%, declining to 40% in 1990, 25% in 1995 and approximately 20% in 1999. One of the reasons for this development is besides other facts the price policy of scheduled airlines offering their over-capacities via a very active consolidator market sometimes with real bargain prices.

About half of the 2.4 million ethnic and private trips in Germany are booked via air travel consolidators or travel agencies. It should be considered that the ethnic traffic is strongly growing because of the development of the global labour markets. This type of travel activities cannot be clearly separated from holiday trips because ethnic travelers spend a big part of the yearly vacation with family and friends in their native country.
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4. Structure of Long Distance Travel by Destinations

(Chart 6)

Among the most popular international holiday destinations European countries are leading by far. Spain is dominating with 20% before Italy (16%), Austria (12%), France (6%), Greece (5%) and Netherlands (5%). The first long-haul destination is USA ranking number 7 with 4%. Asia in total, which represents only two third of the volume to North America, is ranking only number 12 with 2.5%.

(Chart 7)

Regarding only intercontinental flights by destinations, 45% of all long-haul flights concern the destination North America. Second destination area is Asia with 32% and a share of approximately one third each for Indochina, Far-East and the rest of the continent (India, Middle East and Inner Asia). All other regional overseas destinations do not have any significance here.

Even though all destinations have shown a two-digit increase since 1990, there has been a clear alteration in the market share. The only obvious winner in market shares with 7.1%, ranking three, is the Caribbean ( 1990: 2.9% ) participating from the booming destinations Dominican Republic and Cuba representing 85% of the total volume to the Caribbean islands.

Following in market share is Africa with 6.6%, ranking four, with the main destinations South Africa and Namibia already representing 50% of the volume, South America with 5.1 %, ranking fifth, and a portion of 50% only for Brazil, Central America with 2.5%, ranking sixth, and a portion of 90% only for Mexico. Ranking last on seven is the region Oceania with 1.6%, representing 80% only for Australia.

(Chart 8)
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The favorite overseas holiday destinations by country are in a ranking: 1. USA 2. Dominicanian Republic 3. Canada 4. Thailand 5. Cuba 6. South Africa 7. Sri Lanka 8. Mexico 9. Maldives 10. Emirates 11. Indonesia 12. Australia 13. Kenia 14. Mauritius 15. Jamaica Other destinations (1,900,000) (454,000) (340,000) (298,000) (172,000) (155,000) (106,000) (100,000) (92,000) (90,000) (56,000) (50,000) (48,000) (43,000) (40,000) (1,153,000) 39% 9% 7% 6% 4% 3% 2% 2% 2% 2% 1% 1% 1% 1% 1% 19%

5. Structure of the Long Distance Travel to Asia

(Chart 9)

The German travel volume to Asia since 1990 climbed significantly by 6,5% per year up to nearly 3.3 million all travel purposes included. The highest increase in market share from 26% to 30%shows Indochina with the expansive tourism markets Thailand, Malaysia, Singapore and Indonesia, while India shows the biggest drop in market share with 6.2%. Concerning volumes the three Asian areas Far East, Indochina and India/Middle East/Inner Asia cover with round about one million travelers one third each.

(Chart 10)

43% of the total volume for the Far East region is heading to Japan only with a decreasing market share, another 22% travel to People’s Republic of China and nearly the same quantity to Hongkong only (16%). Taiwan represents a market share in this region of 4%. Winner in market share since 1990 are People’s Republic of China and South Korea.
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But the high volume for Far East is cheating when regarding holiday trips. The only important tourism destination in this Asian hemisphere actually is Hongkong. All other destinations attract only a share of holiday travelers between 10% and 20% of the shown volume, because they can’t match the main motivations of German respective European guests: sun&beach with elements of shopping/bargaining, sightseeing and sport activities with comparable European quality and entertainment standards.

Among all Asian countries only Thailand and Indonesia cover these needs and expectations during a total stay of 2 or 3 weeks per tourist. All other countries are mainly visited on round trips around Asia or on the way to or from the aforesaid destinations or Australia/New Zealand. Unfortunately this is the basic situation for Taiwan as well. Natural highlights like Taroko gorge, breathtaking waterfalls, grottos and caves, hot springs, beautiful temples, cultural and historic attractions like lantern and drake boat festival are primarily points of interest for small specialized interest groups with high level education and intellect and not for sun&beach mass tourism.

Beside structure and volume figures there are lots of qualitative parameters, which determine the development of the European overseas markets as well.

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6. Influence Parameters for Long Distance Travel

(Chart 11)

The ten most important negative parameters influencing long distance trips are:   The development of the German/European economy, hence the situation of incomes and assets just as the social security and the security of the jobs of the customers. Fluctuations in the currency exchange rates of the German Mark/EURO against the local currency of the destination and against the US-Dollar as a leading currency in the main overseas markets.       Environmental damages, epidemics. Crises, conflicts, wars. Natural disasters like hurricanes, earthquakes, mud avalanches, floods, heat waves, cold spells. Volume of available flight capacities. The price-quality-ratio of the accommodation capacities. Attractiveness of alternative holiday destinations. This includes also the attractiveness in price because a long-distance trip should only be up to a maximum of 20-30% more expensive than a mid- to high-price European destination.  Difficult visa or immigration procedures

In the following I am going to explain detailed the most important factors that influence the volume of the long distance markets.

7. Sociodemographic Structure of the Long-Distance Travelers

(Chart 12)

How does the sociodemographic profile of the long distance traveler look like? The majority of long distance travelers (52%) is on average more than 50 years followed by the age group 30-39 years with almost 25%.

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This age structure does not astonish because even other lines of business are realizing that this group has the highest potential of purchasing power but also the highest pretensions and expectations concerning their holidays. About two third of the members of the 50+ group belong to the wealthy, money spending, munificent and experience orientated "Master-Consumer" (50-59 years) while the last third belongs to the financial secured and enjoyment orientated "Establisher" (60 years and over).

75% of the German long distance travelers live in big cities, 62% of them are highschool graduated and 38% own an additional university degree of higher education. 60% have learnt two 30 % even three foreign languages. 25% have a monthly net-income (per household) of more than 10,000 DM (4,500 USD), 40% have an net-income of more than 6,000 DM (2,700 USD) and 70% earn more than 4,500 DM (2,000 USD) per month per household, while the average net-income in Germany is around 4,000 DM (1,800 USD). The share of families with children is significantly lower than 10% while the share of single-living (which does not mean single-travelling) people is relatively higher compared to short and medium distance travel within Europe.

These numbers illustrate that the common long distance traveler belongs to the group of better earning people, has reached a high level of education and can be often found within the uppermost social classes.

It is also remarkable that the number of destination repeaters except for North America is very low especially compared to the number of repeaters to short and medium distance trips. Thus, an appropriate customer care is very difficult for tour operators as well as for travel agencies and suppliers.

The motivations of the holiday travelers are very unilateral: 80% are looking only for sun&beach, relaxation and recreation. Only one third of them accept a little sport activities or sightseeing during their vacation. The remaining 20% of the travelers prefer city tours, event travel, sightseeing and study tours.

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8. Development of the US-Dollar Exchange Rate

(Chart 13)

Long distance travel is very price-sensitive and shows a partly high degree of dependency on the development of currency exchange rates. Hence, it has to be considered that the US-Dollar is not only the leading currency throughout North, Middle and South America (with exception of the Dominican Republic). Also many countries in the Far East (like Thailand, India, Indonesia and – I suppose – Taiwan, Hongkong, People’s Republic of China as well) just as Australia and New Zealand have strong ties between their currency and the US-Dollar due to strong trade relationships with the United States.

Thus, for the middle to long term future the currency exchange rate of the new European Leading Currency EURO has to be considered if long distance journeys shall be attractive in future independent from the attractions of the destinations. If the EURO will be weaker against the US-Dollar than the former independent national currencies were (as right now), there might be a stagnation or even a decrease in the number of long distance travelers from Europe. A significant lower growth in this market since 1995 is a piece of evidence therefore because the US-Dollar climbed in this period for example against the DM from the all time low with 1.36 DM on April 19, 1995 up to 2.30 DM in September 2000 by approximately 70%.

In consequence of this development the airlines shifted unsaleable capacities from Europe to corresponding overseas markets which showed a rising demand of travel to Europe due to the reciprocal effect. Hence, the airlines were even able to improve their yields. Tour operators - even if vertically integrated - are not able to react in the same manor because they are lacking corresponding oversea markets or these markets are to weak or to small.

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The situation becomes critical if local suppliers do not consider currency parities in negotiations with the European tour operators as it can be found in some important Asian markets (Thailand, Malaysia, Hongkong, Indonesia) actually right now after the devaluation of their currencies as a result of the crisis in Asian economies 1998. Since that time many hotels and incoming agencies changed their policies and are now selling in US-Dollar rates which is highly negligent and contra-productive with regard to the European travel markets due to their weakening currencies against the US-Dollar. Thus, the boom to Asian countries in 1999 could turn out quickly as a pretence boom.

(Chart 14)

This relationship becomes extremely obvious if the development of the US-Dollar and the number of German travelers to the most important overseas market USA are correlated in an indexed long-term scale.

During the second oil crisis from 1980 until 1985 when the dollar went up to nearly 3.00 DM the demand on travel to the USA decreased, caused also by a oil surcharge which was levered on the flight tariffs to the USA. When the US-Dollar was going down and stabilizing on a low level of 1.40 to 1.60 DM during the following years, the boom in travel to the USA started overlapped by the additional travel volume of people from East Germany. But this increase was not sustainable. It can be documented that a small rise of the US-Dollar (about 0.20 DM per US-Dollar) in 1989 and 1994 caused already decreasing numbers of travelers in the consecutive years. Or on the other side a decrease in the US-Dollar (as in 1986 to 1988, 1990 to 1991 and 1995 to 1996) caused rising tourist numbers in the next year. A similar correlation can be easily found for other long-distance destinations.

(Chart 15)

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9. Critical Comments

a) Little Buying Power in Destination Markets

Compared with Mediterranean destinations the importance of German long-haul tourism is of lower importance. Besides the Dominican Republic, the percentage of German tourists in most of the long-haul destinations amounts normally to 3 - 5% of all foreign guests in the corresponding country (in the Caribbean ranking 5 with 4.7%, in Thailand ranking 7 with 4.9%, in USA ranking 5 with 4.1%). From this point of view it is almost impossible for a German tour operator to build up buying power or influence on local partners.

Let me explain the situation by an example: Besides the consequences from the currency exchange rate , hotel accommodation prices in New York City are not depending on the buying power of German tour operators but on the fact how many US citizens request hotel accommodation in New York because the market share of all overseas tourists in New York is negligible with around 10% in total. But if for any reason the domestic tourists do not chose New York as their destination, there are immediately lots of vacant hotel capacities, enabling German and other overseas-tourists affordable accommodation. The same reaction can be identified on Asian markets with a declining number of travelers from the equivalent domestic and neighbour markets since the beginning of the economic crisis in Asia, which has set free lots of capacities for overseas markets.

b) Dependency of Prices and Capacities on Substitutional Competition of the Corresponding Domestic and Regional Markets as well as on Historical and Ethnic Relations to the Outgoing Markets

The appearance of German tourists in most overseas destinations is - compared to the number of travelers from regional neighbour countries of the respective hemisphere relatively unimportant as stated by looking at the structure of guests in Taiwan:
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(Chart 16) The number of German tourists visiting Taiwan (and even Hongkong or People’s Republic of China) is comparatively low in relation to the volume of visitors from the Asian hemisphere (ranking 12 in Taiwan, 9 in Hongkong and 11 in People’s Republic of China). The figures are even climbing under-proportionally compared to travelers from other overseas countries like USA, Japan, Great Britain, Netherlands and on a low total level Eastern Europe, who showed a bigger increase in percentage (five year total + 25%) in the same period than Germany (five year total + 9%). At least 2 million or 75% of all visitors to Taiwan come from the Asian neighbour countries. About 1.5 million visitors or 53% arrive from Japan, Hongkong and People’s Republic of China. The first not Asian country is by far USA (ranking 3) with 318,000 visitors, followed by Canada, Great Britain and Germany with 34,000 visitors each (ranking 10, 11 and 12).

One third of all Taiwan visitors are tourists, 80% of them come from Japan (60%) and Hongkong (20%) only, followed by United States (6%), Singapore, Malaysia, South Korea and Canada (2% each). All other countries represent less than 5,000 tourists per year.

(Chart 17)

In many cases the swift of market shares between outgoing countries has enabled a potential offer for German tour operators. For instance, the fact that US tourists have turned away from the Caribbean during the last 15 years, caused the decline of prices down to a point that made a trip to the Caribbean affordable to many European customers while in the past this destination was said to be rather expensive. Hawaii is another example because after the Japanese started orientating away from the Pacific Islands and heading towards Australia and Europe in the 80ies, journeys for Germans and other Europeans became affordable in this destination.

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The number of tourists from the USA, Japan as well as from Great Britain or the other former colonial nations France, Spain, Portugal and the Netherlands are very often according to the destination - much bigger than the amount of German tourists. German travelers therefore tend to switch between long-haul destinations more likely because of being in the geographical middle of the European continent and because of the various choice of long-haul flights from Germany.

c) Supplier Marketing is dominating Client Marketing

From this point of view it becomes obvious that the portfolio of offered long distance journeys is not inducted by the demand but is primarily determined by classical supplier marketing. As a matter of priority destinations are offered to clients with available capacities either set free by falling numbers of tourists from other countries or arising new capacities which both can be bought at reasonable prices.

These destinations are aggressively marketed in Europe using different instruments of marketing and distribution. In case of lack of demand the quoted rates and terms of conditions are renegotiated with the suppliers in the destination markets and the customer's retail price will be adjusted by the tour operator yield-management until the available capacities can be sold. In this respect, European customers are widely influenced in their travel habits by the suppliers (mostly hotel owners and airlines) as well as tour operators due to available capacities. An appropriate market research on demands and a customer marketing only takes place in a limited way.

(Chart 18)

d) Unbalanced Relation between Pretensions and Expenses of German Tourists.

German tourists are not too welcome in most long distance destinations because compared worldwide they are only ranking in a middle position regarding the expenses during their vacation. The reason is that Germans have more vacation days than most of the nations and thus are trying to split their vacation and travel budget onto several trips
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within a year by looking for bargains and special low prices. US and Japanese tourists, with the highest expenses per person, mainly travel only once a year trying to visit and enjoy as much as possible within 10-14 days. Nevertheless German tourists have high pretensions and expectations concerning quality, reliability and service due to their guaranteed rights of the specific German travel laws. This is often hardly to understand by the suppliers in the destination markets.

e) Strong Dependency on the Price- and Capacity-Policies of Airlines

While for Mediterranean destinations a sudden shortcut or over-capacity in air travel can be adjusted more easily due to many and different charter carriers, the most overseas destinations do not have much flexibility in adjusting frequencies and capacities because of the fixed timetables of the scheduled airlines, the lack of charter flight alternatives and the politically controlled international air traffic restrictions.

Many long distance destinations are making one big mistake. They build up an intact infrastructure and hotels without reflecting how the expected tourists shall be transported to the destination. Compared to scheduled airlines charter flights to long-haul destinations can’t solve the capacity problems with the exception of some island destinations (Dominican Republic, Cuba, Maldives, Seychelles, Sri Lanka, Phuket).

Furthermore, the numerous code share agreements on the bilateral relations between the domestic markets of cooperating airlines are reducing capacities. This is because airlines have high loading factors on their planes as primary target. This was recently and painfully noticed by two attractive destinations like Brazil and South Africa. Shortcut and consolidation of airline capacities makes prices rise and reduce the demand for this destination.

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f) High Price-Sensitivity and Rate of Substitution between Destinations

Germany is as well as Great Britain a travel market with an extreme awareness of pricequality-ratio. All suppliers of accommodation and other services (transfers, tour guides, sightseeing tours etc) in a destination should not forget the price level if interested in the German market especially considering the exchange rate US-Dollar to EURO. In particular the German tourist will have a wide choice of destinations on the European continent as well as in overseas. Thus, local suppliers in overseas markets have many competitors in other destinations, which they often ignore.

Experts estimate a price elasticity concerning the demand for holiday trips in Germany of 1.2 to 1.5 i.e. the reaction of the demand on changing prices is 1.2 to 1.5 times stronger as the price change itself. Or an increase of prices of 10% causes an over proportional decrease in travel demand of 12 - 15% or vice versa a decrease of prices of 10% leads to a rise in travel demand of 12 - 15 %.

10. Future Prospects Recently a study circle for Tourism and Development published a Delphi-Study “Long Distance Travel 2005” in cooperation with two research institutes from the Universities of Bern and Vienna: 150 tourism experts from Germany, Austria and Switzerland believe in a continuous growth of long-haul travel originating in German speaking countries until 2005.

Limits of growth are mostly seen after the year 2005. Yet there will be no lack of problems until then. The average yearly growth rate is estimated with 4 - 5%; significantly less than during the last 20 years since 1980 with a yearly growth of 7%. An over proportional growth is expected for South Africa, Indochina, North America and the Caribbean. This forecast is actually out of date due to the currency weakness of the EURO in relation to the US-Dollar and the increasing oil prices.

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Most remarkable is that especially in Germany the last minute business and other bargain-chasing will gain a bigger importance. The relation between price and performance of the destination have a bigger importance than quality. A qualitatively high level tourism for long distance destinations will rather be expected from countries like the USA, Japan as well as Switzerland and Italy in Europe.

Not everything OK then? Long distance destinations will keep a high level image for customers, travel agents, tour operators and suppliers. It must yet be doubted that European respectively German customers will be travelling to long distance destinations without hesitation. Not to mention the enormous risk of exchange rates between USD and Euro. Low price long-haul trips to sun and beach destinations will easily find customers in the future, while the potential for high-quality travel will very likely only be growing moderately.

(Chart 19) Please apologize that I actually can’t support very optimistic expectations concerning European travel to this Asian hemisphere. But I think that a realistic and honest outlook and a clear analysis will help you more than rose-coloured expectations and forecasts.

Thank you for your kind attention.

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