The Real Impact of the Economic Crisis on Dubai's Tourism Business - Example

Name: Tutor: Course: Date: Title: The real impact of the economic crisis on Dubai's tourism business Abstract For about four years beginning from 2004 to 2008 Dubai had been experiencing a lot of growth in its tourism industry. This had been predicted to continue soaring high until when the Global Economic crisis started affecting the Western countries in 2008. At the end of 2007 tourism had reached its peak in Dubai. However with the fall of the value of European currencies in the particular the pound and the Euro in comparison to the Dollar many European tourists cut their travel arrangements to foreign countries (Demyanyk 20). Fewer and fewer tourists went to Dubai as down turn closed on them in 2008. This affected the tourism industry in that Emirate adversely. The boom went down resulting in the abandonment of development projects. Many people lost their jobs as the government tried to seek for bail outs from the Abu Dhabi Government. All sectors especially the property sector, real estate and hotel practice went into losses. Many extravagant construction projects were delayed or abandoned due to lack of money. Many other companies responsible for these constructions started struggling with the payment of debts. However through all this the investors and the government were optimistic of a rebound in the tourism industry as the financial crisis faded off in the west. (Verma, Sonia 64). This research project looks at the effects of the financial crisis on Dubai’s tourism industry. The methodology for this research was purely theoretical. Data was collected not from the field but from secondary sources such as books, journals, magazines, news papers and the internet. The research found out that even though the local media in Dubai and the Emirate’s government could not admit of having been hit hard the impact of the global financial crisis was massive. It affected the tourism business to a large extent. This confirmed the hypothesis for the study that the Global economic crisis had a great impact on the tourism sector in Dubai. (Lewis, Michael 89). This study was limited in that much of the information used was obtained in a very passive manner. This means that with secondary sources the research was not very interactive. It was therefore to make enquiries or get answers to unclear statements and explanations. This study is important since its findings are useful for those people in the tourism industry trying to build their economies from it. They can take an example form the experiences of Dubai in the Global Financial Crisis (Demyanyk 22). Introduction Tourism easily becomes vulnerable and volatile because of the uncertain state of the economy. In most cases tourism and travel involves discretionary expense. In times when the economy is not doing well people spare their money to take care of the basics in life like shelter, food and other family requirements (Demyanyk 29). Even though tourism is not totally stopped, it is normally adversely affected when economic times become hard. Hospitality and tourism businesses that can service travelers on tighter budgets can easily adapt to the situation and cope(Verma, Sonia 64). Demand goes down for luxuries while that one for important and valuable items and services of low cost rises. Hotels and Air lines must swiftly adapt to the prevailing circumstances in order to save a country from a decline in its tourist activities (Pezzuto 08). Instability in political undertakings can also result in poor security and safety of guests which will easily translate into a drop in the tourist activities taking place in a given country (Dirk Willem teVelde 20). The global economic down turn had disastrous effects on the economies of many countries in which tourism plays an important role. Many developing countries fall in this category since their economies are sustained either by tourism or agricultural produce. Many of the tourists promoting such economies are people from the European continent and North America. The financial crisis started affecting the west before other parts of the world started feeling its effects. An economy that relies heavily on tourism may not be able to survive the storm when it comes. Many of the employees in the hospitality industry lose their jobs when economic times get hard (Lewis, Michael 89). When the tourism sector suffers the economies of these countries are affected because the amount of foreign exchange coming in is abruptly sliced down. It is possible that development projects going on in such countries can stall because of lack of funds. Young and fragile economies like those of the third world states can collapse if there is no ready help to salvage the situation. Foreign exchange through tourism contributes much to the GDP of these countries. Government initiated projects like infrastructural development are put to a halt to a wait better economic times (Verma, Sonia 64). One of the countries a round the world with heavy reliance on tourism is Dubai. Located in the Middle East in an expansive desert oasis, Dubai is one of the nine Emirates that make up the United Arab Emirates. It is the most populous among them all but the second largest in size after Abu Dhabi. Unlike Abu Dhabi, Dubai is not endowed with oil reserves. It has there opted to invest heavily in the development of sites that can attract tourists in a sustainable manner. Many projects have been accomplished in the Emirate including the construction of man made islands and the tallest building ever to be constructed in the world; The Burj Khalifa. All these projects were expensive and cost the Emirate a great amount of money (Lewis, Michael 89). Due to its heavy reliance on tourism as a major economic activity, Dubai’s economy and tourism industry was in uncertain terms following the financial crisis that affected the whole world. The main feeder markets for Dubai’s tourism industry were affected by the ‘Global Financial Crisis.’ Citizens were under great pressure from spending because of ailing economies and impending losses of jobs. In the short term the future of Dubai tourism industry was gloomy (Steverman, Bogoslaw 88). Many activities in the hotel industry were affected including mega projects that had been announced. This mess spilled into the economy forcing the government to intervene by looking for financial assistance from the sister Emirate-Abu Dhabi. This report presents the results of the study carried out on the impacts of the global financial crisis on the tourism sector of Dubai (Dirk Willem teVelde 25). Methodology The research carried out for the study of the impacts of the Global Financial crisis was a theoretical one. It was therefore not necessary to involve data collection methods which involve the participation of respondents. The principal method of data collection was the use of secondary sources of information such as books, journals, magazines, newspapers, and the internet websites among others. Discussion Dubai hotels had had a long season of uninterrupted strong growth from the beginning of the century. This made them to make so much profit in a boom that was otherwise expected to last a bit longer. Because of this type of profitability many developers got the interest of entering into the business as well as other big developments of mixed use. All these developments were planned each having a hospitality component (Demyanyk 65). At the close of 2008 the total number of hotels had grown to 341 which meant there was a 3.2% growth since the century started. Four star and five star hotels grew by 11.0% and 10.5% respectively. The number of rooms available grew by 7.9% in that same span of time. A bigger amount of the new rooms were constructed in the five star and four star hotel categories. The growth in the number of rooms being constructed was prompted by the huge amount of visitors going to Dubai therefore raising the demand for accommodation (Pezzuto 13). Most of these visitors were coming from the western world with a small percentage coming from Asia. Because it was much easier to travel from Dubai air port several of the passengers could easily find it convenient to spend 3 or 2 days in Dubai as they enjoyed the attractive sites offered by the city to tourists. Since the beginning of the century the number of passengers arriving grew by 16.4%. A big amount of growth was witnessed between 2004 and 2008 of about 15.7 % (Demyanyk 74) Figure 1 “Passenger Arrivals – Dubai Airport 1991-2008” There was a steady supply causing new projects to be initiated on daily basis. Hotels had no problems with low occupancy, ‘revenue per available room (Rev PAR)’ or average rates. Dubai led in Rev PAR in 2007 in the region compared to the leading destinations in the world. ”More so, Dubai was being displayed as a phenomenon for the hospitality sector in that five-star hotels were dictating rates well above US$100 and maintaining occupancies above the 80% mark, which made them achieve Rev PARs well over the ordinary with the peak reached in year 2007 at US$225.” (Steverman, Bogoslaw 53). Figure 2 “Performance of Hotels in Dubai 2000-08” (Demyanyk 37) Both the private and public sectors made concerted efforts to ensure that the tourism industry in Dubai grew significantly. Diversification of the Emirate’s economy was also possible due to its ‘strategic position in the Middle East.’ It has managed to reduce dependency on oil and focusing on the development of tourism to sustain the economy (Demyanyk 26). This timely development made Dubai take the right position to be the “investment capital of the Middle East.” This has encouraged the residents of the GCC states in its neighborhood to make investments in Dubai. There is an incentive free of tax and free zones have been developed which make it easy for private companies to own offices in the city. This coupled with easy accessibility of a huge market of labor has made Dubai to take the leading role in the Middle East. These were deliberate efforts made by the Dubai Government to improve the image of the city in order attract more visitors. (Pezzuto 10). The skies in Dubai were decorated by cranes about 20% of the total in the world. Papers were filled with advertisements about the promotion of new construction projects. On 24th September 2009 the official opening of the Atlantis attracted tourists from all over the world. Atlantis is a pink resort worth $1.5 billion standing on a palm shaped man made island. Tourists were willing to par with $25,000 every night for one room to look at the rays and sharks in an aquarium lined with glass (Demyanyk 45). Until 2008 it was expected that the boom in the tourism industry was going to continue through the next decade in the century. The huge projects announced at that time were expected to entice tourists to come in bigger numbers. However this was going to be a great challenge to the market. Although there was a promise that Dubai would offer tourists whatever thing they would ever dream of having, other developed tourist hubs a round the world were going to remain a threat (Pezzuto 20). This would have made the growth experience in Dubai for those years to stabilize at some point. Demand was expected to go high for there to be a good reason for increase in capacity. Developers failed to see that there was a need for a variety of offerings for different client needs. Until 2008 June most of the already announced projects focused on the luxury segment of tourism leaving out the other segments that represent a bigger portion of the tourism industry demands. However these other segments were discovered to be as important as the luxury segment or even better (Steverman, Bogoslaw 88). Tourism is very crucial activity in Dubai. The government has put a lot of emphasis on it as a way of earning foreign exchange. Tourism in Dubai is boosted by shopping, and other attractions like modern and old possessions. ‘In 2007 Dubai was ranked 8th on the list of the most visited cities by tourists on the world.’ By 2015 it is expected that the city will carry more than 15 million visitors by year 2015. Of the all the 7 emirates in the UAE Dubai is the one with the highest number of people. Most of its revenue comes from tourism unlike the other emirates. From its shopping facilities it has earned the name “the shopping capital of the Middle East.” It has in excess of 70 shopping malls (Pezzuto 21). It has the world’s 7th biggest shopping mall. So many shoppers come to Dubai from Eastern Europe, Africa, India and the countries in the Middle East. Dubai also attracts tourists to the souk districts found on both sides of the creek. Dhows coming from China and India, Far East and Sri Lanka used to discharge their goods to be bargained over in the souks near the docks. There are also several jewellery stores and boutiques in Dubai. It is also called the ‘city of Gold.’ There are almost 250 shops retailing in gold in Deira Gold Souk (Steverman, Bogoslaw 77). The number of visitors going to Dubai for tourism purposes dropped between January and September in 2009. This was because the number of travelers coming from European countries went down considerably. The number of visitors fell by 5.7% in the last 4 months of the year in comparison to a similar period in the year before. This information is based on the figures of “Dubai Department of Tourism and Commerce Marketing (DTCM), published by the UN World Tourism Organization (UNWTO).” Tourism stood out to be a significant part of the economy of Dubai. In 2008 it contributed about 19 per cent of the city’s GDP. About 7.5 million guests were attracted to the Emirate in 2008. This number was expected to double come 2015 December. However this expectation did not consider events like the credit crunch which was yet to be experienced at the time (Demyanyk 32). There was a 1.3 per cent drop in ‘international hotel guests’ going to Dubai in form January to October 2009 in comparison to the same time in 2008. There was however a small boost of about 3 percent improvement in International visitors in that same period in 2009 as opposed to the same time span in 2008. Between March and June the number of foreign visitors dropped by 1.5 per cent. International tourists coming to Dubai are thought to have fallen by 4% in 2009 to about 880 million people because of the economic crisis and swine flu fears (Steverman, Bogoslaw 100). Worse things had been predicted for the tourism market but what came was better compared to what was expected because growth resumed in the last quarter of the year. More ‘Dubai Department of Tourism and Commerce Marketing’ figures indicate that the reduction in the number of foreign visitors was countered by a growth in the number of United Arab Emirates guests residing in hotels in Dubai. Consequently the number of hotel guests increased by 3.2 % to about 5,467,808. The reduced price rates in Dubai hotels may have prompted Dubai residents to start staying in those hotels. Because of the love for their country these citizens were also seen to be helping to boost their tourism sector in the absence of visitors from Europe. Nevertheless the number of local tourists from the United Arab Emirates residing in Dubai hotels could not fully fill the gap left by the European visitors due to the credit crunch (Demyanyk 33). The global economic crisis brought a shift in the tourism industry in Dubai. Tourists coming from countries in Asia like Iran and India are visiting hotels in Dubai in increasing numbers. Arab visitors coming form the GCC started declining at the same time. These are statistics from the ‘Department of Tourism and Commerce Marketing’ (DTCM). The change in the demographics of tourists shows the increasing appeal of Dubai on newly rich consumers from Asia and an increasing desire in the gulf to try up coming alternatives like Oman. The Asian visitors coming to Dubai increased by 11% in the first 9 months of 2009 according to a report carried in the National; an Abu Dhabi daily (Steverman, Bogoslaw 22). Read More