Major Industry Trends
Global Financial Crisis has Significant Impact on Industry
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, for, again, travel is one of the first areas that the corporate sector axes when the economy slows.
The United Nations World Tourism Organization (WTO) says that international tourist arrivals grew by 7% to 908 million in 2007, and that international tourist arrivals grew by an average of 4% per year between 1995 and 2007. It adds that tourism held up well during the first half of 2008, with international tourist arrivals growing by 5%. In the second half of the year, however, international tourist arrivals fell by 1%. Overall, international tourist arrivals increased by 2% in 2008. Apart from the global financial crisis, various other factors negatively affected tourism during the year. These included sky-high oil prices, which led to sharp increases in travel costs, and wild gyrations in exchange rates.
In March 2009, the WTO predicted that the tourism industry would continue its decline, at least in the short to medium term. The WTO expects international tourist arrivals to stagnate (0%) or even decline slightly (−1–2%) during 2009. However, the WTO added that the impact of the global financial crisis on tourism would vary around the world. The Americas and Europe would be most affected, “as most of their source markets are already in, or entering, recession.” However, the WTO expects tourism volumes to continue to grow in the Asia-Pacific region, albeit at a slower rate than in previous years. It said that similar trends to those seen in the Asia-Pacific region would occur in Africa and the Middle East.
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 UK (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 February 2009 dropped by almost a quarter compared with the same period in 2008. Although the recession in the UK, and rising unemployment, are undoubtedly factors, the strength of the euro against the pound has also been a major reason for the slump in the number of Britons holidaying in Spain.
Hotel Industry Battles Falling Customer Numbers and Prices
Hotels around the globe are battling for customers amid the global economic downturn. The Agence France Presse (AFP) news agency reported, in March 2009, that hotel prices around the world fell in the fourth quarter of 2008, compared with the same quarter in 2007, with the steepest declines seen in the US and Canada. AFP cited a survey by hotels.com, involving some 68,000 properties in more than 12,500 locations.
Hotel prices fell by 10% in Europe, by 7% in the Caribbean and Latin America, and by 2% in Asia, according to the survey. The slump in the hotel market in the Americas was blamed on a sharp reduction in US domestic demand, and a drop in the number of tourists from Europe. The survey said that most cities around the world had experienced falling prices, but some particularly sharp declines reflected the hotel industry’s sensitivity to geopolitical and economic events. Prices in Mumbai, for example, plummeted by more than 40%, following the terrorist attacks in the Indian city in November 2008. Reykjavik, whose economy has been devastated by the global financial crisis, saw prices collapse by 36%.
Hotel Industry Faces New Corporate Age of Austerity
The hotel industry has been particularly hard hit by a slump in business travelers, who account for a large proportion of hotels’ income. The outlook appears bleak, according to Amadeus, a leading provider of technology to the travel and tourism industry. Amadeus commissioned a report from the Economist Intelligence Unit, published in March 2009, which predicted that the business world was entering a new age of austerity.
The report, titled “The austere traveler—The effect of corporate cutbacks on hotels,” concluded that executives would make fewer, shorter, and cheaper business trips in 2009, and that they would prefer basic efficiency and good service over ancillary services. Antoine Medawar, managing director of Amadeus Hospitality Business Group, was quoted as saying: “We are entering an age of visible austerity with regard to business travel. With the eyes of their organizations and shareholders upon them, executives are anxious to make business trips as productive as possible. Forget gyms and restaurants; instead concentrate on efficient check-in and check-out, and internet access. Good wifi connectivity is now rated above any other extra. There is a flight to trusted brands, and the expectation of a common level of good service, no matter where you are in the world.”
Emergence of New Tourism Hot Spots
One of the major themes of recent decades has been the emergence of new tourism centers. While countries such as France and Spain have long been among the most popular tourism destinations, some of the major tourism centers today, such as Turkey and Thailand, barely featured on the global tourism radar just 30 years ago.
Thailand received 14.464 million international arrivals in 2007, compared with just 1.2 million in 1977, and the country is now regarded as one of the world’s premier tourist destinations. Tourism is today Thailand’s largest foreign-exchange earner, bringing in more than US$16 billion in 2007. It also accounts for around 6% of GDP, and generates more jobs than any other industry in the country.
It’s a similar story in Turkey, which attracted 22.2 million international visitors in 2007, making it the ninth most popular tourist destination in the world, according to the WTO. Yet in 1977, the country received just 1.661 million international arrivals. Even in 1987, tourist arrivals numbered well under 3 million. The industry provides around US$20 billion in foreign-exchange earnings to Turkey, and provides employment for around 3 million Turks.
Environmental Concerns Pose Long-Term Threat to Industry
Prior to the global financial crisis, the biggest international problem grabbing the attention of the media and the political classes was that of climate change. Air travel, in particular, attracted the ire of environmentalists, and proved a useful scapegoat for politicians keen to polish their green credentials. Certainly, governments around the world were quick to impose taxes on air travel. To the cynics, this was simply an exercise in raising revenue, while environmentalists called for even higher taxes, and 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, but 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.
Market Analysis
The Global Market
Tourism is now one of the largest industries in the world. According to the WTO, the export income generated by international tourism ranks fourth after fuels, chemicals, and automotive products. Furthermore, the WTO 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:
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From 1950 to 2007, international tourist arrivals grew from 25 million to 908 million.
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The overall export income generated by these arrivals (international tourism receipts and passenger transport) grew at a similar pace, outgrowing the world economy and exceeding US$1 trillion in 2007, or almost US$3 billion per day.
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In 1950, the top 15 destinations absorbed 98% of all international tourist arrivals, but in 1970 the proportion was 75%, and this fell to 57% in 2007, reflecting the emergence of new destinations, many of them in developing countries.
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.
Slump in Passenger Numbers Hits Airlines
The airline industry is a good barometer of the fortunes of the tourism and hotels sector. In March 2009, the International Air Transport Association (IATA) said that it anticipated a 3% fall in passenger numbers in 2009. IATA, which represents 230 airlines, including British Airways, Cathay Pacific, and United Airlines, said that the world’s airlines lost up to US$8 billion in 2008, and that losses are likely to exceed US$2.5 billion in 2009, as the global economic crisis hits passenger and cargo traffic.
In January 2009, international passenger demand fell by 5.6% year-on-year, following a 4.6% decline in December 2008, according to IATA. The Association said that the fall in business traffic was particularly painful for its members. The Reuters news agency quoted Giovanni Bisignani, the director general & CEO of IATA, as saying: “Business classes are empty. The airlines make money in the front and recover the cost on economy, and when the business class disappears, it’s a big problem.”
Major Hotel Chains Report Impact of Downturn
The impact of the economic downturn on the hotel industry has been highlighted by results from some of the world’s leading operators. In its 2008 year-end report, Rezidor, the European group that manages the Radisson SAS hotel chain, said that “the negative impact of the economic slowdown on the European hotel market escalated during the last quarter of 2008, with double-digit drops in industry RevPAR (revenue per available room).” The company added: “Industry RevPAR is expected to continue to decline further in 2009. In order to meet an increasingly weaker market we have extended our existing cost-cutting program.”
In February 2009, Marriott International, which operates hotels around the globe, reported fourth-quarter 2008 adjusted income from continuing operations of US$121 million, a 49% decline on the same quarter in 2008. It said the results reflected the significant economic decline affecting worldwide lodging and timeshare demand, and the turmoil in the financial markets. Meanwhile, the France-based international hotel group, Accor, which operates hotels in 100 countries, saw a sharp decline of 34.9% in net profits, to €575 million, in 2008.
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