Tourism in Turmoil
by Andrew Drinkwater
July 15, 2009
Mark Twain once urged us to “... throw off the bowlines, sail away from the safe harbor. Catch the trade winds in your sails. Explore. Dream. Discover.” In these troubled economic times, more than ever, casino operators around the world are anxiously gauging the trade winds as they decide the best strategies to survive the downturn.
Similarly, the figures for Las Vegas over the last year are not the type casino owners would chose for bedtime reading if they want a peaceful night’s sleep.
It’s a similar story in Europe. Airline passenger numbers have fallen for the first time since 1991. Britain’s Civil Aviation Authority recently published a report showing that while the drop year-on-year from 2007 to 2008 was 1.9 percent, the declines in November and December 2008 were 8.9 percent and 7.9 percent, respectively.
As British Airways looks at operating losses of around US$220 million for the year to March, their CEO Willie Walsh is under no illusions about the challenges facing the airline in the months ahead: “We are in the worst trading environment the industry has ever faced.”
His comments were echoed recently by Giovanni Bisignani, director general of the International Air Transport Association.
“Alarm bells are ringing everywhere. This industry is in intensive care. Airlines face two immediate fundamental challenges: conserving cash and carefully matching up capacity to demand.”
The airline industry’s problems have been exacerbated by two further factors: fluctuating exchange rates and oil prices. The former means that the strengthening euro has made travel to most parts of the euro zone less attractive for those outside it; and the latter has seen airlines try to hedge against wild price variations for fuel. Most airlines sensibly took steps to protect themselves against higher fuel costs, as crude hit a peak of US$147 per barrel last summer, by committing themselves to contracts for jet fuel equivalent to $100 a barrel. Then the price promptly plummeted to $45 a barrel. A wrong-way bet on fuel prices caused Cathay Pacific to post a $1 billion loss in 2008, the biggest in the Hong Kong airline’s history.
In March this year, travel industry leaders gathered in Berlin for one of the world’s biggest industry get-togethers. The highlight of the event is the annual “World Travel Trends” report, which combines market intelligence from a variety of sources to paint an overall picture of the way the industry is going. The headlines weren’t reassuring — but in the details there were some glimmers of hope.
“The boom in tourism based on low-cost travel, globalisation, higher disposable income in emerging markets, and higher propensities to travel in developed markets, has been very resilient,” says the report.
The firm message, as the report sums it up, is that “once the economic crisis is over, demand for tourism will recover quickly, reflecting pent-up demand for travel that will be accumulated during the current downturn.”
The mood of the industry is summed up by Jean-Claude Baumgarten, World Travel and Tourism Council president:
“Lower fuel costs will make a difference, as will lower general inflation, which should reverse part of last year’s squeeze on households’ spending power. But given how widespread and deep the current recession is, it is inevitable that travel and tourism will continue to be affected.”
So what is the picture region by region? What are the trends worth watching? And how might they impact the ability of the casino industry to recover quickly from its current travails?
New freedoms and growing prosperity in China saw 46 million travel outside the mainland last year. But disappointingly the United States only managed to attract half a million of them. It’s likely that tourism leaders across America and other leading destinations will follow the lead of California, whose Tourism Commission has set up three new offices in China to promote the state as a tourist destination. They’re confident their $750,000 investment will reap rewards.
You could almost hear the collective groan in Las Vegas earlier this year when President Barack Obama, asked about bailed-out banks’ expenditures, responded, “You can’t get corporate jets. You can’t take a trip to Las Vegas or go down to the Super Bowl on the taxpayers’ dime.”
Phones rang off the hook with cancellations. Businesses decided it wasn’t good to be seen organizing high-profile corporate events in the gambling capital. Goldman Sachs and Wells Fargo were among 340 event cancellations in the first quarter, depriving the city of $131.6 million in non-gambling expenditure.
The good news is that when questioned about the value of business conventions most corporations still believe they are useful and worthwhile. A recent survey by the American Gaming Association shows that the vast majority of business travelers in America think such trips are crucial to the health of their employers.
As Peter D. Hart, whose company carried out the research, points out: “For the 62 percent of Americans who have attended an out-of-town meeting or convention for work, 87 percent say it is important to running a strong business.”
The same group of people also believed that promoting tourism and travel both within the United States and from Europe, Asia and South America could help shore up the domestic economy.
This research would suggest that once the current focus on the financial viability of America’s big corporations shifts elsewhere, business travel will return to previous levels.
One trend identified in the Berlin report was that with the increased use of the Internet for travel bookings, niche markets, last-minute bookings and bargain-hunting will dominate travel intentions over the next 12 months. In addition, people are more likely to look closer to home for their breaks, which are likely to be shorter and more price-driven.
Already, airlines and resort operators have grasped that working in tandem can reap rewards. Cheap travel packages are springing up all over the Internet. One recent example was an American Express offer for a trip from Los Angeles to Las Vegas on US Air and a stay at Wynn Las Vegas for $344, including three nights and the airfare. On the surface it’s hard to see how this could be profitable for either the airline or the casino. But closer inspection shows that it’s actually a very good way to generate cash flow from travelers who might not have made the trip otherwise. After all, the flights are going to make the trip whether they’re almost empty or nearly full. Similarly, the casino has most of the same fixed hotel costs regardless of the number of guests. The name of the game is staying in the game, and casinos and tour operators are coming up with more and more imaginative ways to tap into the lucrative last-minute-bookings market to keep on playing.
Growing prosperity in South America has given travel and tourism an impressive upward swing in the last few years. According to IPK International South American Travel Monitor, the region was one of the fastest-growing markets in the world for outbound tourism last year, and once economic recovery kicks in it is expected to be one of the main areas of growth.
Argentina, Brazil and Chile are leading the way. Clearly this reflects the growing prosperity in these countries. Peru is rapidly catching up, reflecting the fact that it is the fastest-growing economy in the region. Brazil is being keenly watched around the world. Impressive economic growth, easier access to credit and a combination of lighter regulation and social reform have begun to close the gap between rich and poor.
But where are the South Americans headed? Of the 14.5 million trips taken in 2007 by residents of the continent, almost two-thirds (63 percent) were to other destinations in the region, according to IPK International. Brazil, particularly, tends to see more domestic travel for holidays. But, encouragingly, trips to the United States were expected to grow by more than 10 percent last year, and there’s every reason to believe this trend will continue when the economic outlook improves.
Most economists agree that South America is one of the regions that is likely to emerge first from the recession. Many believe this could happen before the end of this year.
Hope rising in the East
According to John Koldowski, PATA’s strategic intelligence director: “The numbers of international arrivals from both within the region and from long-haul source markets are expected to remain largely positive, but the strong growth rates of recent years will prove now to be the exception rather than the rule. There are certainly opportunities for growth, and we are working hard to discover and exploit them with our members and the industry at large. There is a real battle for market share across the region.”
Asia has been hit hard by the global downturn. Visitor arrivals to Macau, the gambling capital of the region, were down by double digits in the first quarter, largely the result of restrictions on travel from mainland China imposed in 2008. Casino revenues fell over the same period also by double digits.
But PATA remains relatively upbeat about the future. It is forecasting that international arrivals to Southeast Asia will grow to nearly 77 million by 2011, compared to 62.2 million in 2007. Northeast Asia, including Macau, is projected for almost 240 million international arrivals by 2011.
The here and now is not so pretty, however. Travelport GDS predicts that bookings across the Asia-Pacific region will be down 13-15 percent this year, with Asia proper faring only slightly better with a 9-12 percent drop. Individual country statistics project Singapore down 11 percent, Malaysia down 20 percent and India down 5 percent.
One ray of hope for casino operators in the region is the increased accessibility of travel thanks to the growth in low-cost airlines, which are expected to account for at least 25 percent of total seats in the region in the next five years. The Centre for Asia Pacific Aviation estimates low-cost airlines have almost 10 percent of the market at present after three years of unprecedented growth.
Low-cost airlines fuelled a similar boom in travel in Europe and the UK. The weekend “city break” had been a good source of tourist euros and pounds for the past five years. But the travel industry has been through a turbulent time in Europe. While skiing holidays and touring and mountain holidays were still on the increase before the slowdown, weekend trips to major cities on the continent experienced zero growth. One reason is thought to be the decline in the number of cheap seats available as low-cost airlines cut back capacity to compensate for factors such as increases in fuel prices.
In the UK the weakening of the housing market has had a profound effect on consumer confidence. Fear of unemployment and the deepening financial crisis all played their part in slowing growth at the back end of 2008. The highly publicized failures of some airlines and tour operators have also had an impact. The collapse last year of conglomerate XL Leisure Group, which left many thousands of holiday travelers stranded, was the start of a sharp decline. Recent studies suggest that as many as half of all Britons plan to take their holidays in the UK this year.
In Germany higher airfares began to impact traffic in the middle of 2008, and in France the signs of slowdown also became apparent last year with outbound travel declining by 4 percent. The one destination to buck the trend last year was Russia, which saw a 15 percent increase in outbound travel through the end of the summer.
Another trend worth noting is the growing use of the Internet not only to shop for travel but to book travel too. In Europe for the first time in 2008 more people used the Web for travel bookings than didn’t.
In terms of destinations the weak dollar helped the United States lead the way in the growth of visitor numbers in 2008. Before the downturn, this was running at 10 percent. Newer markets such as Cambodia and Bulgaria were showing similar increases, as were the ever-popular Turkey and Thailand.
Ultimately it’s not just the global economy that’s likely to affect travel trends in the coming months. Increasingly, factors such as fuel costs and exchange rates are beginning to affect the travel decisions of an increasing number of people. Those at the helm of the biggest casinos would be well-advised to keep a close eye on such factors. They could make a huge difference to marketing and operational strategies.
Andrew Drinkwater is a UK-based freelance journalist and media consultant. He has written for a number of business and gaming publications, including Forbes, EuroBusiness and Inside Edge, a specialist betting magazine.
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