Tourism and Hotels Industry

Major Industry Trends

Spending on tourism and hotels is closely related to the economic cycle. Certainly, spending on leisure activities such as holidays tends to be one of the first things that consumers cut back in times of economic hardship. The travel and hotel industry is further affected by reduced demand from the business sector since travel is one of the first areas that the corporate sector axes when the economy slows. Not surprisingly, the global downturn of 2008–09 had a pronounced impact on the sector.

The United Nations World Tourism Organization (UNWTO) says that international tourist arrivals for business, leisure, and other purposes declined worldwide by 4% in 2009 to 880 million. However, there were signs of improvement in the final quarter of the year, when arrivals grew by 2%. By contrast, international tourist arrivals shrank by 10%, 7%, and 2% in the first three quarters, respectively.

In 2009, international tourism receipts are estimated to have reached US$852 billion worldwide, down from US$942 billion in the previous year. In real terms (adjusted for exchange rate fluctuations and inflation), international tourism receipts decreased by 6%, as compared to a 4% decline in arrivals, showing the close relation between both indicators. Experience suggests that in times of crisis, revenues tend to be more affected than arrivals, as was the case for the year 2009, according to the UNWTO.

The Asia-Pacific region and the Middle East led the recovery in international tourist arrivals, with growth already turning positive in both regions in the second half of 2009. “The global economic crisis, aggravated by the uncertainty around the A(H1N1) pandemic, turned 2009 into one of the toughest years for the tourism sector,” said UNWTO secretary-general Taleb Rifai in January 2010. “However, the results of recent months suggest that recovery is underway, and even somewhat earlier and at a stronger pace than initially expected,” he added.

There were certainly sharp differences in the performance of the various global regions in 2009:

• Europe ended 2009 down 6% after a very poor first half (−10%). Destinations in central, eastern, and northern Europe were particularly badly hit, while results in western, southern, and Mediterranean Europe were slightly better.

• Asia-Pacific (−2%) showed an extraordinary rebound. While arrivals declined by 7% between January and June, the second half of 2009 saw 3% growth, reflecting improved regional economic results and prospects.

• In the Americas (−5%), the Caribbean returned to growth in the last four months of 2009. The performance was more sluggish in the other sub-regions, with the A(H1N1) influenza outbreak exacerbating the impact of the economic crisis.

• The Middle East (−6%), though still far from the growth levels of previous years, had a positive second half in 2009.

• Africa (+5%) was a robust performer, with sub-Saharan destinations doing particularly well.

The first results from 2010 indicate that the improvement seen in the final quarter of 2009 is continuing. For, according to the April 2010 Interim Update of the UNWTO World Tourism Barometer, international tourist arrivals are estimated to have increased by 7% in the first two months of 2010. This follows the upturn already registered in the last quarter of 2009, when arrivals grew by 2% after 14 consecutive months of negative results. Although data for March are still limited, countries with data already reported confirm that this positive trend is set to continue, said the UNWTO.

Growth was positive in all world regions during the first two months of 2010, led by Asia-Pacific (+10%) and Africa (+7%). Information for the three countries of the Middle East that have reported results so far also point to a strong rebound in the region, compared to very subdued first months of 2009. The pace of growth was slower in Europe (+3%) and in the Americas (+3%), the two regions hardest hit by the global crisis, and where economic recovery is proving to be comparatively weaker.

The UNWTO said that a large number of countries around the world reported positive results in the first months of 2010. Of the 77 destinations reporting data for this period, 60 showed positive figures, of which 24 posted double-digit growth, including Estonia, Israel, Hong Kong (China), Macao (China), Japan, Taiwan (China), Indonesia, Singapore, Vietnam, Guam, India, Nepal, Sri Lanka, US Virgin Islands, Nicaragua, Ecuador, Kenya, Seychelles, Morocco, Egypt, and Saudi Arabia.

However, the UNWTO added a note of caution, saying that although there is a clear improvement on the negative results of 2009, this growth compares with a particularly weak period of 2009—the worst months of the global economic crisis. On the whole, international tourist arrivals totaled 119 million during the first two months of 2010, up 7% on 2009 but still 2% below the value of the record year of 2008.

Chinese Expenditure on Tourism Continues to Grow

The top 10 ranking by international tourism spenders shows one noticeable change in 2009, according to the UNWTO, with China overtaking France to take fourth position in the ranking of international tourism spenders. Chinese expenditure on international tourism has been the fastest to grow in the last decade, up from seventh position as recently as 2005. Even during the 2009 economic downturn, tourism expenditure by China increased by 21%. Chinese tourists splurged US$43.7 billion on their travels abroad in 2009. That compares to US$36.2 billion in the previous year, when China was the world’s fifth biggest source of tourism spending. While most of China’s 1.3 billion people live on just a few dollars a day, the country is producing a burgeoning middle class that can dwarf the populations of many other countries, and who are eager to travel. The WTO estimated that the number of Chinese tourists visiting foreign destinations will number 100 million by 2020, up from 31 million in 2005. While most overseas trips by Chinese are to other Asian destinations, they are increasingly heading to Europe and the United States as restrictions on travel to these regions ease.

However, there were no major changes in the rankings of the first 10 destinations by international tourist arrivals and receipts in 2009. France, the United States, and Spain continue to be leaders in both arrivals and receipts, albeit in a different order. France continues to lead the ranking of the world’s major tourism destinations in terms of arrivals and ranks third in receipts. The United States ranks first in receipts and second in arrivals. Spain maintains its position as the second biggest earner worldwide and the first in Europe, and ranks third in arrivals. In 2009, both Turkey and Germany climbed one position in the ranking of arrivals to seventh and eighth places, respectively. In arrivals, Malaysia entered the top 10 in 2009 at ninth place.

The Role of Tourism in the Global Economy

Travel and tourism are significant contributors to the world economy. The OECD points out that international tourism has been growing at a slightly faster pace than the world economy in recent years and has played a critical role in sustaining economic growth and employment and in generating foreign currency receipts for countries. In OECD countries, the employment growth rate in the hotel and restaurant industry was above 2% every year from 2000 to the start of the global downturn, and by 2011 had recovered to similar levels. This is more than a percentage point above total employment growth and demonstrates the importance of the sector in job creation. During the last 20 years the growth rate of non-resident tourist arrivals in OECD countries, while 1.6% below the worldwide rate, has averaged 2.8% a year, well ahead of the average OECD country growth rate of 2.4%.

Spanish Experience Highlights Effect of Gyrating Exchange Rates

The impact of fluctuations in the exchange rate can be seen by the experience of Spain. The United Kingdom (which, like Spain, is a member of the European Union, but which, unlike Spain, remains outside the eurozone) has long been the main market for the Spanish tourist industry, the country’s second-largest industry. In the latter half of 2008 and early 2009, however, the British pound slumped against the euro. Figures from the Spanish Tourism Ministry show that the number of British tourists visiting Spain in 2009 dropped by 15.5% to 13.3 million. The Spanish Tourism Ministry blamed the economic crisis and the strength of the euro against the pound.

Hotel Industry Battles Falling Customer Numbers and Prices

Hotels around the globe compete intensely for customers and in recessions room rates plummet. The average price of a hotel room around the world was 14% cheaper in 2009 than in 2008, according to the Hotels.com Hotel Price Index (HPI®). In fact, a hotel room was cheaper in 2009 than it was in 2004, when the HPI began. Rooms cost 13% less in Europe during 2009 than in 2008, 14% less in the United States, 16% less in Asia, and 21% less in Latin America. However, towards the end of 2009, the price falls started to level off. The average price of a hotel room fell by just 7% year-on-year in Q4 2009, compared to 14% in Q3, 17% in Q2, and 16% in Q1.

In its 2011 HPI, Hotels.com pointed to a happier story. The hotels market began to recover in 2010 and the price of a hotel night grew by 2% globally through 2010. However, this only brought room prices back to the rates they were at six or seven years ago. Many hotels are still running promotional deals with steep cuts to official room rates. In some countries, Greece, Ireland, and Spain, for example, the recovery is still some way off. However, both the Asian and luxury hotels markets looked buoyant by the second quarter of 2011. It remains to be seen how the sharp market falls at the start of August 2011, on the back of resurgent European sovereign debt worries and poor statistics from the US economy will impact the sector through the second half of 2011.

Environmental Concerns Pose Long-Term Threat to Industry

One of the biggest international problems grabbing the attention of the media and the political classes is that of climate change. Air travel, in particular, has attracted the ire of environmentalists, and proved a useful scapegoat for politicians keen to polish their green credentials. Certainly, governments around the world have been quick to impose taxes on air travel. To the cynics, this has simply been an exercise in raising revenue, while environmentalists have called for even higher taxes, and the introduction of draconian measures to curb air travel. Given the slump in air travel that has occurred as a result of the global economic slowdown, the immediate urgency to adopt measures to discourage air travel has evaporated. In the long term, the issue may come back to haunt the industry. However, the aerospace industry is investing heavily in technology to boost fuel efficiency, as well as in research to develop alternative fuels. Indeed, it is doubtful whether anything—even concern about the environment—can stop the long-term growth of the industry, given its potential in countries such as India and China as living standards rise.

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Market Analysis

The Global Market

Tourism is now one of the largest industries in the world. According to the UNWTO, the export income generated by international tourism ranks fourth after fuels, chemicals, and automotive products. Furthermore, the UNWTO points out that, for many developing countries, tourism is one of the main income sources of foreign exchange, and creates much-needed employment and opportunities for economic development. The industry has also enjoyed staggering growth over the past six decades. The WTO says that from 1950 to 2009, international tourist arrivals grew from 25 million to 880 million.

The industry is expected to continue to grow rapidly in the long term. The World Travel and Tourism Council (WTTC), a “forum for business leaders in the travel and tourism industry,” says that, globally in 2009, travel and tourism employs approximately 219 million people, or 7.6% of total employment, and generates 9.4% of world GDP. The WTTC anticipates that, by 2019, travel and tourism will generate 276 million jobs, or 8.4% of total employment, and will account for 9.5% of global GDP.

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