The bitter half

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January 2009
A special report focuses on the UAE, concluding that the halcyon days of the country's tourism sector are expected to be disturbed later this year as the impact of reduced air traffic and currency fluctuations reaches its peak.

The UAE has been experiencing visitor growth in double digits, up to 15 per cent, over the last three years, but analysts caution this is unlikely to continue. According to Alex Kyriakidis, Managing Partner for Real Estate, Hospitality and Leisure at Deloitte Touche Tohmatsu, the region faces a challenging time in maintaining those visitor levels. "By the end of 2009, I think we will see growth, at best, 10 per cent down from this figure," he predicts.

Kyriakidis says that while bookings for the first quarter of 2009 still look positive, the negative results of worldwide recession will start to appear in the second quarter. Retail consultant Simon Thomson, who is a Director of the Middle East Council of Shopping Centres, believes that tourism is suffering because of the reduction in disposable incomes abroad as job security becomes less certain. "Much of the mall retailing, especially in Dubai, has been predicated on tourism swelling year-on-year," he says.

Europeans comprise around 40 per cent of tourists to the region, with British visitors a core group, particularly to the UAE. Travel to the region over the last few weeks is also estimated to have become 30 per cent more expensive due to adverse exchange rates of the dollar-linked Gulf currencies against the euro and pound sterling.

Discretionary vacation travel, in addition to journeys made by corporate visitors, is inevitably going to be hit by recession, which is also beginning to affect the Asia and Far East traffic that transits through the Gulf hubs. Thomson says that the collapse of the pound against the dollar and euro will reduce the number of tourist arrivals from the UK, with the amount of money available for "sunshine breaks" shrinking.

John Strikland of JLS Consulting argues that: "The recent results from EmiratesEmirates, which recorded an 88 per cent fall in profits, show that the Gulf's airlines are not immune to global trends." Despite these grim forecasts, though, the Dubai Department of Tourism and Commerce Marketing has yet to announce any amendment to its ambitious target of attracting 15 million visitors by 2015, compared with the 7.7 million visitors recorded in 2007. Government officials and airlines in the region are still willing to look at the situation as the glass being half full and seem determined to pursue long-term development strategies.

EmiratesEmirates, for one, says that "despite the challenging environment, the carrier's booking levels remain buoyant with very little slackening in demand." The airline confirms that it will continue to provide 14 flights a day from the UK to Dubai in 2009.

A spokeswoman for Qatar AirwaysQatar Airways told Gulf Business that the carrier has not had any adverse impact on its operations as a result of the current global financial crisis. "The airline is committed to growing its international network through new routes and additional frequencies over the next few years. However, we are able to shift capacity according to demand and supply market conditions and can react quickly in the event this is necessary."

Losing altitude
It is a robust response to some already recorded downbeat statistics. According to the most recent figures from the International Air Transport Association (IATA)International Air Transport Association (IATA) the number of premium tickets sold by the worldwide aviation industry fell 6.9 per cent in October compared with the same period of 2007.

"The massive adjustments now taking place in banking are being reflected in the slump of business travel. With most economic forecasts suggesting that the recession will not bottom out until the middle of this year, further sharp declines in business travel and premium revenues should be expected well into 2009," IATAIATA advises.

In spite of this, Robert O'Hanlon, Partner at Deloitte Middle EastDeloitte Middle East, points out that "hotel performance remains very strong in Abu Dhabi." Revenue per available room (revPAR) is up 45 per cent while Dubai's revPAR increased 6.7 per cent in the 12 months to October 2008, according to STR Global hotel benchmark survey.

Though it is by no means certain that this impressive momentum will continue in the face of global recession, there aren't many signs that any major brake on developing the region's tourism sector is about to be applied.

But business models are going to need to be fine-tuned. O'Hanlon believes that an increased marketing effort for the UAE as a whole is important to ensure that hotel performance remains solid, as is aligning this strategy with the route expansion plans of regional airlines, which are identified as key drivers of the EmiratesEmirates' tourism traffic.

A degree of flexibility is also being called for. Deutsche BankDeutsche Bank Chief Economist, Professor Norbert Walter, told Gulf Business: "Airlines have already started to significantly reduce their capacities during the past few months. Both business travel and the leisure and tourism market are affected negatively. Global passenger traffic is expected to decrease in 2009 due to the severe global recession."

Analysts also say the UAE should start looking at diversifying from being only a luxury destination in order to meet this target. According to Khalid Al Malik, Chief Executive of state-owned TatweerTatweer, the developer of Dubai's biggest tourism projects including the $64 billion DubailandDubailand, "Earlier, Dubai had the perception of being a place for luxury stays, short-term stays and a singles and couples destination, but now we are working to turn Dubai into a longer-stay family destination."

He points out that the mid and limited service market is currently an underdeveloped sector in the UAE's hotel supply and should be addressed promptly while hoteliers should also look at different sales channels, such as tour operators, to broaden the distribution base.

"Another way of introducing more tourists to the EmiratesEmirates is to continue developing a diverse range of attractions such as theme parks, cultural attractions, museums and nature reserves to widen the appeal to different types of tourists, such as families."

Where to position the UAE and other Gulf countries' tourism offerings is a difficult balancing act, particularly where upmarket luxury accommodation and service has so far been the hallmark. FutureBrand suggests that for the UAE "to maintain a strong country brand, there is a need to sustain the momentum through initiatives that deliver the brand's core essence. In the case of the UAE, the country has remained in a class of its own in delivering world-class hospitality options that have truly redefined the industry."

Deloitte says there will be increased emphasis on value for money and the UAE will increasingly be competing for European visitors with Egypt, Turkey and the Far East. The reduction in disposable budgets of private households for trips and holidays, as well as corporate travel budgets, may also provide some opportunities for the Gulf to refocus its tourism branding.

According to Professor Walter: "There are some chances to mitigate the downward tourism trend by lowering prices for tickets and accommodation rates and the lower oil price provides the airline industry with some room for manoeuvre."

Prepare for (soft) landing
EmiratesEmirates reduced fares from its six UK departure points by up to 20 per cent in mid-September following the fall in oil prices. But carriers can only go so far with discounting. Aviation consultant John Strikland says that airlines can consider cutting fares on a segmented basis where there is price sensitivity but it would not be appropriate to reduce fares on routes that are not price sensitive in the hope of obtaining more passengers.

Nevertheless, Strikland believes that the business models of EmiratesEmirates, EtihadEtihad and Qatar AirwaysQatar Airways, which are predicated on huge fleet expansions, are still viable when the region's tourism expansion strategies are taken into account, in spite of the downturn. EmiratesEmirates' total order book still stands at 179 aircraft, all wide-body, and worth more than $58 billion. This includes 58 A380s.

Qatar AirwaysQatar Airways has more than 200 aircraft currently on order, valued at some $40 billion, including Boeing 787s and Airbus 380s. The airline now flies to more than 80 destinations and the network is still being expanded. A third US route, to Houston, will commence in March.

"Qatar AirwaysQatar Airways has a long-term commitment to its future aircraft needs, having placed huge orders worth over $40 billion for more than 200 new-generation aircraft. Qatar AirwaysQatar Airways adopts a long-term view, not a short-term approach. We entered into multibillion-dollar agreements with no intention to pull out, as our approach is very much a long-term one," says the Qatar spokeswoman.

Strikland points out that the region's carriers are also opening up innovative routes and increasing traffic flows between the Middle East and new destinations in the Far East and Africa with the potential to generate considerable business. Oman AirOman Air is to start a daily Airbus A310 service from Muscat to London Heathrow in January.

EtihadEtihad is to fly to Tokyo five days a week from its Abu Dhabi hub from March 2009. The move is the first entry for the airline into the Japanese market where EtihadEtihad also has rights to commence flights to Kansai and Chuba in addition to Tokyo's Narita airport. The Abu Dhabi carrier also serves Beijing, Manila, Bangkok, Kuala Lumpur and Singapore.

It is not just the region's airlines that remain optimistic. Singapore Airlines has said it intends increasing services to Abu Dhabi International Airport and to the rest of the Middle East from next March, with daily flights to Abu Dhabi and four services to Kuwait.

But even with all these tempered forecasts for tourism in 2009, so far the Gulf has resisted the urge to panic. Abu Dhabi Tourism Authority (ADTA)Abu Dhabi Tourism Authority (ADTA) prepares a registry of development activity on a quarterly basis primarily to monitor accommodation development. Its latest update confirms the fact that projects are continuing, despite the difficult global environment.

"Although it is inevitable and sensible that developers and investors review longer-term projects when conditions are seen to have changed, the reality is that although Abu Dhabi is not immune from the impact of the unprecedented global economic environment, it is well inoculated," an ADTAADTA spokesperson told Gulf Business.

© Gulf Business 2009