Tourism as the Huge Industry in the United Kingdom - Case Study Example

Introduction Tourism is the fifth largest industry in the United Kingdom with £114 billion total (direct and indirect) contribution to the economy or8.2% of GDP and supports over 1.36 million jobs. Total spending of visitors, both domestic and international, amounts to £86 billion in 2007. The United Kingdom is also the sixth top destination in the world. (Deloitte, 2008). As with all other industries, the tourism sector is currently weathering the effects of the global crisis that ensued from the US sub-prime mortgage crisis. The ensuing layoffs, cost cutting and salary downgrading is said to have significantly reduced the demand for travel, both by British and foreign citizens. The aim of this paper is to discuss and analyze the effects of the global crisis on UK tourism industry with focus on the hotel sector. The Tourism Crisis Research conducted by Visit Britain in 2010, the national marketing agency for tourism, found that inbound tourism visits, domestic overnight trips and bedspace occupancy rates have slumped in the period coinciding with the global crisis. Inbound tourism visits have fallen more than 10% in 2009 alone as shown in Figure 1: Hotel Room Rates A survey conducted by Hogg Robinson Group (2010), a hospitality market research firm has found that room rates in 10 key cities were on a steady decline. The results are shown in Figure 2: The steady decrease in inbound tourists and domestic overnight travels has reduced occupancy levels forcing hotels to offer more competitive rates to attract the remaining customers. Heathrow Airport suffered from the reduction in passenger numbers. Aberdeen, an oil and gas city, had suffered from the slump in oil prices due to the economic downturn leading to budget cuts on corporate-sponsored trips and accommodation. Belfast and Liverpool, which previously enjoyed growth in tourism after being identified as a European Capital of Culture in 2008, suffered a steep decline of not less than 15%. As less people opt to travel for the holidays due to cash-strapped financial conditions, UK hotels are finding it hard to fill their rooms and making it necessary to cut profits to be able to sustain the business. A deeper analysis of London average room rates indicate that the steepest decline was mostly in the financial district (city) as shown in Figure 3. Room rates in London districts fell from £159.45 to £146.73, an 8% decrease from 2008 levels. Room rates in West End and Central Districts, where most five star hotels are located, also experienced a 3.75% decline as preference for lower star ratings increased. A monthly comparison of 2008 and 2009 shows differences in room rates as illustrated in Figure 4. It is interesting to note that the trend is not steadily decreasing. For example, room rates are at a high for the months of May, June and November. The effects of the economic impact were cushioned with the fluctuations in exchange rates as the Pound weakens against the Dollar and Euro. Currencies, when converted, resulted to more Pounds leading more buying power for inbound travelers. As a result, there was an increase in demand for hotel rooms. May and June also represented spring season where tourism is at highest levels. The hotel industry took advantage of the increased demand and exchange rate fluctuations to counter the effects of the economic downturn. Length of Stay Another measure used in the hotel industry is the customer’s length of stay. The Business Development Research Consultants (BDRC), a service market research agency, reported in its 2009 Hotel Business Guest Survey that the long stay leisure market is on a steady decline while short term breaks are increasing. This is shown in Figure 5: Long term stay is defined as a 5+ night stay. From Figure 5, one can see that the demand for leisure-related nights peaked in 2004 with over 30 million short stays and 24 million long term stay. From then on, short term breaks have increased but the total room nights have continuously decreased indicating a sharp drop in long stays. Long term stays have decreased more than 50% from 22 million in 2006 to 11 million in 2008. The data indicates that people increasingly prefer short breaks thus explaining the demand influx from 35 million in 2007 to 37 million in 2008. Budget hotel brands have also been found to be on the rise as business travelers prefer using them to maximize allowances. The top most improved business brands in the hotel industry in terms of advertising awareness are all budget brands and include Premier Inn, Travelodge and Holiday Inn Express. Nonetheless, the Premier Inn figures indicate that the demand is still less from previous rates though not as severe as their up market counterparts. Hotel Construction Interestingly, the British Hospitality Association (BHA) reports that 110 hotels with 11,000 rooms have opened in 2009 with 40,000 more to be added by 2015. Growth has also been mainly on the budget brand sector with 6,000 additional rooms in 2009. The primary driver of growth was identified to be the demand generated by the 2012 Olympics where the United Kingdom is to be the host. Special offers designed to boost occupancy and cost cutting have also enabled many hotels to continue operating. Several hotel businesses have also undergone new ownership and management. The increase of 1.2 million holidays in local tourism brought about by British citizens preferring ‘staycations’ (stay vacations) is also replacing foreign occupancy rates. Nevertheless, the credit crunch has slowed the industry boom that started in 2003. 30 major hotel projects have been put on hold or cancelled due to funding problems. Only a few five star hotels have opened and none of the existing five star hotels have expanded. Instead, they have confined their activities to refurbishment. As previously mentioned, hotels are also lowering their room rates resulting to less profits when compared to previous levels. The credit crunch has also led the government to withdraw its Hotel Buildings Allowance that it previously offered as an incentive to hotel developers and owners. Many hotels now are company owned and independent ownership now number only to a few (BHA, 2009). Recovery in the Global Economy At this point, it is clear that the tourism slump particularly in the hotel sector is inextricably tied to the recession of the global economy. Statistical data provided by national and private agencies have all confirmed this relationship. Does it follow then that an economic recovery also equates to an increase in tourism and consequently, hotel demand? The March 2010 tourism report of PriceWaterhouseCoopers indicated that this is indeed the case. After 18 months of recession, the economy is now moderately recovering and so are hotel occupancy rates. Data for London hotels such as the Holiday Inn and Holiday Inn Express indicated a turnaround in the 4th Quarter of 2009 coinciding with the reported economic recovery. Provincial occupancy rates are still projected to decline but not as steep as what happened in 2008. Economic growth is expected to be modest and so is the return of corporate visitors, transient guests and conference participants. Hence, only significant gains are expected for the year 2010 and 2011. More importantly, this verifies that the hotel industry’s fortunes are directly influenced by economic conditions. Conclusion The global economic recession caused by the US sub-prime mortgage crisis has affected the tourism industry of the United Kingdom particularly in the hotel sector. Falling demands due to a decline in business-related travel and decreased consumer spending have resulted to lower occupancy levels, shorter holiday breaks and preference for budget brands. While thousands of room has been added in 2009, most of them are catered to the thrifty customer. It should be noted that there are other factors affecting the hotel industry such as the 2012 Olympics but the role of economy in the tourism sector is undeniable. A direct relationship exists between the two. References: BDRC (2009). Will the recession change the UK Hotel Industry. Retrieved from 09 April 2009 from www.bdrc.co.uk BHA (2009). British Hospitality: Trends and Developments 2009. BHA Publications: London. PriceWaterhouseCoopers (2010). UK Hotels Forecast: 2010 and 2011. PCW Publications: London. Visit Britain (2010). Headline UK Tourism Trends – 23 February 2010. Retrieved 09 April 2009 from www.visitbritain.com Read More