Bloodied But Unbowed - Tourism's Battle With Terrorism (PKF UK Opinion Piece)

You always remember where you were when major events happen. That is certainly a truism. When the Gulf crisis started in August 1990, I (Melvin) was in Cannes staying at the Carlton Hotel, one of the great resort hotels of the world, undertaking some work for Inter-Continental Hotels. I stayed overnight and had a meeting with the General Manager the next morning. I awoke to the news that Iraq had invaded Kuwait. When I met the General Manager his first words indicated that his whole business had been destroyed, uncertainty would certainly deter American and Middle Eastern visitors from travel and the business plan that we were working on with him was no longer valid. Overnight. From an event thousands of miles away.

The tourism industry is notoriously averse to trauma and highly sensitive to sudden political and economic events. This has been proved time and time again: the oil crisis of the late 70s, the Gulf War, of course, and then the Balkan Wars and the Asian Crash, to name but a few. Each time the industry takes a hit and then recovers - it recovers because essentially travel is one of the major drivers of today's society.

The resilience of the tourism industry is demonstrated by its continued growth despite the inevitable knock-backs. The World Tourism Organisation (WTO) has recorded continued growth in worldwide tourism arrivals and receipts for the last ten years.

This time, as the terrible events of 11 September unfolded, I was chairing a hotel industry conference in London for an international audience. A note was put in front of me with the initial news. As events unfolded everyone realised that this was an event which would change our world, and for tourism more than virtually any other industry.

However, 11 years ago, the situation involved only two (economic and political) of the three critical factors with which we are presented today, the third being the direct involvement of tourism itself. The use of civilian aircraft as human missiles directed right at the heart of world trade and world leaders is a case without precedent. The short-term effects of the 11 September may or may not be on a scale comparable with the Gulf War but the long-term implications for travel and tourism are certainly greater.

The industry faces a renewed crisis. Business leaders, industry experts and investment analysts dig up the past in an attempt to feel their way forward and decide the best course of action. The Gulf War is the most obvious example - a model case scenario for what happens when a fragile world economy is confronted with a political crisis which, until now, has represented the lowest point in the history of modern tourism. We do not intend to re-iterate here the details of the magnitude of the impact of that crisis but it is worth reminding ourselves of the headlines. Hotel occupancies in major cities plummeted; airlines were financially ruined; and destinations judged as danger zones were avoided. A report produced by the WTO in 1991 on the impact of the Gulf Crisis on international tourism estimated that 36,800 flights scheduled for January and February 1991 were cancelled. They calculated that the war cost the airline industry losses of around $2 billion in the first two months of 1991. The current crisis, however, and the numbers already being bandied about, appear to dwarf the earlier event.

The three immediate risks facing the tourism industry are essentially war, further terrorist attacks and recession.

War: War has always been the ultimate travel risk and, as previously documented, has an immediate knock-on effect on the industry. When war is declared, travel embargoes are issued, a sense of nationalism is invoked and, if the fear of travel and the desire to be close to friends and family is not enough, the guilty conscience suffices to keep people from venturing far from home. In the short term, the travel trade is inconstant; leisure travel is not a necessity and business travel can usually be postponed.

Even the period of uncertainty before the official breakout of war can be extremely damaging to the industry. People tend to forget that before the Gulf War came the Gulf crisis when the world waited five months for definitive action. When describing the global events surrounding the hotel industry in 1990, PKF wrote "the Iraqi invasion on 2 August caused months of disruption that hoteliers worldwide will hope are never repeated". During the immediate aftermath of the invasion of Kuwait, travel cancellations burgeoned and hotel stocks dropped by 25% to 30% but consumer confidence actually started to return after the war began on 17 January 1991. Both investors and consumers fear the unknown. Over the last few weeks, the unknown has again been the greatest fear. Again, hotel stocks have fallen while the world awaits - only this time the unknown is likely to remain constant because this time there is no fixed battleground and no fixed enemy. This is a war against terrorists who are spread far and wide integrating themselves into our own societies.

Event risk: Tourism has a high profile - it is worth billions - and, under close scrutiny by world media, its high profile tragically gives it an equally high ransom value.

Tourism has long been a target for terrorism, particularly since the early 1980s. Tourism is attacked by terrorists for a number of reasons: firstly because it is seen to be symbolic of capitalism; secondly, tourists represent western oppressive regimes; and thirdly, by attacking state-sponsored tourism, terrorism is seen as a way to influence political behaviour.

These are the same motives that triggered the action of El'Gama fundamentalist group in Egypt. The attack in Luxor in November 1997 killed 58 tourists and brought Egyptian tourism to an immediate halt although the resulting increased security measures in Egypt have since led tourism figures to increase. One of the greatest threats in these circumstances is that posed by the world media. If left to its own devices, media hype can distort events and cause irrational behaviour on the part of travellers and, in turn, tour operators.

The reason for irrational behaviour comes down to the simple fact that the need for safety is deep-seated in the human psyche and can overrule the desire to experience pleasure or uncalculated adventure. Even without the complication of disaster, people have preconceived ideas of the risks associated with travel in certain areas, where cultures are far removed from our own and health hazards abound. Perceived danger is catastrophic for tourism and safety or perceived safety is the dominant factor for the continued growth of a destination's popularity.

Recession: The world has been anticipating a recession for some time now. It is only a matter of time before the current cycle moves into the next. The debate for this year and last has largely centred on whether it will be a hard or soft landing, and whether it will be global or regional in scope. While the events of 11 September cannot be labelled as the sole reason for economic downturn, they will go down in history as one of the major catalysts for change. Tourism's sensitivity to economic distress is measurable and directly correlated with real GDP as demonstrated in the tables below.

Arguably, this time the industry was better prepared to recognise nature of the tourism 'product'. It is highly perishable. If a seat on a plane or a room in a hotel is not sold on the day, its value is lost forever. Any cancellation or period of low occupancy, therefore, has a disastrous and sometimes long-term impact on trading.

Better prepared? Better prepared, yes. Immune, no. Prior to the last recession and the Gulf War, borrowing had been made too easy by false economic confidence which led to rapid expansion and huge oversupply, particularly in the hotel sector. Interest rates were high, and rising, and many companies had high debt ratios. Many companies suffered in its wake. Since then investors have become more cautious, and so have lenders.

The 'Basel agreement' was actioned under which banks internationally agreed that their capital to assets ratio should conform to a minimum standard. This reduced lending power but also helped to restrain supply and, in general, companies are now not as highly geared and thus better protected against a downturn. The financial sector is also far better informed with many investment institutions employing specialist leisure/hospitality analysts.

The industry is different in other ways too. There has been a greater sharing of knowledge within the industry itself which is evident, for example, in the growth of contributors to industry surveys such as those produced by PKF. This facilitates the transfer of information and 'best practice' within the industry which can aspire to new benchmarks. This is exacerbated by extensive integration and consolidation across hospitality and leisure sectors which reduces the number of small firm casualties and enables a more global approach. Globalisation, while prevalent, is a double-edged sword. For business it brings advantages, for the world it brings news and knowledge, and bad news travels faster and more visibly these days. Advanced communications technology, including the internet and satellite TV, which enables stories and information to cross the world in seconds, is far more available than it was even ten years ago at the time of the Gulf War. So, we in tourism, should not be surprised at the impact and speed made by those vivid 11 September images.

The impact on hotels was immediate from Day One. Over 80% of London hotels saw an immediate drop-off in business of between 20% and 30% during the two weeks after the event. New York hotels reported an immediate downturn in business of 50% to 60% with hotel occupancies during the weekend following the event down to between 30% and 40% and 75% of events being re-scheduled. Although New York and London have been the cities most publicised, an immediate downturn in demand for accommodation was reported in many of the world's major cities although hoteliers have since reported a marked improvement. In New York, hotel occupancies have risen back up to over 60% levels.

Industry reaction was equally quick as hotels across the board immediately began to minimise expenditure in line with drops in revenue by cutting costs (including immediate redundancies), recruitment stoppage, and postponement of refurbishment, capital expenditure or expansion plans. The hotel trade literally froze on the spot. The impact on the airline industry was faster still and, in an industry already facing structural issues, the damage has been great and looks like being long-lasting.

Now the war has begun in earnest. How long will it last? What is its scope? Will the enemy fight back, and if they do, where and how? Good questions. Without the answers - and we would contend that at this juncture no-one has definitive answers - forecasting is impossible. For the reasons we have discussed, this is not the same as the Gulf War. Will it be longer, shorter, regional, global and, ultimately, will the war of words hurt more than the bullets? A split along religious and/or cultural grounds could seriously impact the current tourism paradigm for the long term.

What will be the impact of all this on the world's economy? That is an equally vital question since, following the Gulf War it was the economic impact which caused such lasting and widespread damage. Currently, in the immediate aftermath, the effects on tourism are there for all to see. But they are the global effects, and they can be seen in global cities and the obvious regional locations. Economic downturn bites harder, and wider, and impacts on areas which are dependent on domestic travel more than international travellers.

The immediate prospects are clearly not good but what are the long-term implications? As we have already said, the industry as a whole has pulled through similar situations in the past and recouped its losses. Given the continued escalation of travel trade over the last decade and its status as arguably the world's largest industry, it is almost inconceivable to imagine that people will ever stop or even reduce their travelling patterns. Leisure travel has become almost a human right for those who can afford it and economic globalisation will secure the need for business travel for the foreseeable future. However there will inevitably be losers and long term changes to the industry as a direct result of 11 September and its aftermath.

The World Travel and Tourism Council has forecast an estimated 30% decrease in worldwide travel in the short-term and 10% annualised over the next 12 months with a loss of up to 8.8m jobs across the globe. The extent of damage suffered by individual industry players will depend to a large degree on their adaptability. There are varying degrees of flexibility within the industry, from the tourists who have complete flexibility of choice, to the tour operators who are also free agents with relatively high mobility, to the airlines and cruise lines who can exercise their mobility to some extent through route changes. Those with fixed locations such as hotels, restaurants and ground operators are forced to have a long-term commitment to the destination and are consequently most exposed to a crisis taking place at a particular location. Unfortunately, it is often those that generate direct revenue for the local population and contribute to the nation's GDP.

• Airlines: For a number of reasons, airlines are likely to suffer the greatest losses as a result of the recent terrorist attacks. Firstly, there are the implications of the use of civilian aircraft in the attack itself. Some people who watched the traumatic events on television screens will develop a permanent aversion to flying and, in any case, airlines will have to fund more rigorous and costly controls at flight terminals from now on. Secondly, the events further aggravated the effects of an economic slowdown which had already hit the airlines and will now slow even further. As a third blow, the airlines will suffer from volatile fuel prices whilst trying to compete in a price war environment. Many carriers, including some of the larger national players such as BA and Swissair have had to make dramatic reductions in capacity and major route changes. Major branded airlines and national carriers are likely to shoulder the additional burden of being primary, high-profile political targets for terrorists. In the longer term, like the hotel industry of the 1990s, the surviving airlines may emerge leaner and fitter. But the immediate future looks extremely difficult.
• Non-airborne transport: Car-hire firms, which are closely linked with airports and fly-drive packages are likely to suffer a parallel decline in business. Avis has already announced plans to cut its fleet by 10%.
• Source markets: Dramatic reduction has already been reported in the North American, Japanese and Middle Eastern long-haul generating markets; and is anticipated to continue for the short to medium term for the duration of the war period and its aftermath, as well as through any period of economic difficulty in those countries.
• Destinations: The world has changed. From 11 September and until the paradigm changes again and we have a world free of terrorism (the declared aim of the current conflict), all financial capitals and major tourist cities will be concerned that they are potential terrorist targets and will have to spend heavily to promote as well as protect themselves. Destinations considered too close to the hostilities will also lose out during and beyond the period of political unrest as tourists opt for destinations perceived to be safer. This is likely to include the entire Middle East region and other surrounding areas such as North Africa (Egypt, Morocco and Tunisia), perhaps the East Mediterranean (i.e. Cyprus & Turkey) and to a lesser degree this may also stretch to other Muslim countries such as Indonesia and Malaysia. In the short term, other countries which ally themselves politically to the US will also suffer. In 1991, Britain recorded a drop of 5% in total visitor numbers, many of whom feared terrorist attacks. BTA fears long-haul visitation will be down 15-25% during the final quarter of 2001.
• Accommodation: US hotel chains and those companies with strong representation in the Middle East, New York and London have so far been most severely affected. Just as during the Gulf War, the five-star hotel market has been dealt the most severe blow due to the drop-off in international and long-haul business with the greatest number of cancellations emanating from the group incentive and meetings and independent travellers (FIT) markets.
• Tour operators and agents: Those specialising in long-haul leisure travel, particularly the smaller companies are likely to be the hardest hit. During the Gulf War, the UK's second largest tour operator ILG was forced out of business and swallowed by its main competitor, Thomsons.
• Jobs: Job losses have already been prolific and the industry has seen a widespread freeze on recruitment. Millions of individuals will be directly affected by the current circumstances.

Although few in number, realistically there will have to be some who benefit from the displacement caused by the current climate of fear and cost saving.

• Budget airlines: amongst airlines, the more cost-effective 'no-frills' airlines have been quick to promote bargain fares to fill seats and are already seeking to snap up routes cut by other carriers as well as their redundant aircraft. Although the price-cutting strategy is unsustainable in the longterm, it is certain that the conflict will act as a catalyst for structural changes in the airline industry.
• Non-airborne transport: As people seek to avoid air travel, they are likely to opt for more traditional transportation such as trains and ferries. Eurostar and other international high-speed train services may see an upturn in business in the long term. Cruise liners may also benefit albeit that they will need to re-route in order to avoid trouble spots.
• Source markets: In terms of leisure travel, levels of domestic and Inter-European visitation are sure to increase. We find it hard to envisage the current situation having substantial impact on people's desire for an annual holiday, unless economic impact accompanies the political and military uncertainties. Business markets will steadily resume - the businessman in pursuit of a deal will only delay a necessary trip for so long.
• Destinations: Traditional 'safe havens' are likely to be chosen in favour of 'high-risk' destinations. Countries experiencing strong growth during the Gulf War included Austria, Chile, Hong Kong, Korea, Portugal, Seychelles and Sri Lanka. More contemporary hotspots are likely to include Thailand and Australia. However in the current situation, with more nervousness about flying and the sometime need to stop along the way, we cannot be sure that travellers will not, in the short term, curtail long haul flying as a general trend. For Europeans, popular short-haul destinations are likely to also include Switzerland, Spain, and the Canaries, whereas many US visitors will choose the Caribbean and Mexico over European excursions.
• Products: Certain product types are likely to see a surge in popularity such as self-catering holidays, ski-holidays, and 'nature' holidays. Holiday home ownership may also see a rise in popularity as people are attracted to the safe and familiar.
• Accommodation: Within the hotel sector, budget and mid market hotels are likely to win some of the business resulting from companies cutting costs if economic circumstances worsen.

The industry faces a true crisis situation and is likely to take some time to recover. The word 'crisis' has been adapted from the Greek word "krisis" meaning "decision" or in Greek medical literature meaning the breakdown of an organism. However, the Chinese character used for the term 'crisis' also means 'opportunity'. It can be argued, therefore, that there are three elements to the term 'crisis', decisionmaking, system breakdown and opportunity for change. The tourism industry needs to face up to the fact that terrorism is now an integrated risk of contemporary travel and will have to learn how to deal with it. Below, we suggest some of the changes which may well characterise tourism in the future.

• Major infrastructure changes including increased safety measures in airports and public places. This is likely to be a major factor to be considered within transport design.
• Security will also be heightened in hotels - we may well see changes in building design, for example fewer skyscrapers - but staff training and personnel checks will certainly be increased.
• High police visibility /tourist police force (as in Thailand) - helps to create confidence. This will also be done more discreetly involving air marshals on flights and possibly also on coaches.
• Within the hotel sector, strategic planning and hotel development plans are likely to be revised as investors seek tougher terms with bankers demanding larger premiums to reflect a more volatile market. Hotel companies may be more cautious when going forward with new projects in Muslim countries.
• Further consolidation within the hospitality and leisure industry as cash-rich companies buy up 'distressed' competitors. Recognition of the need to adapt to changed attitudes through greater contingency planning and crisis preparedness.
• Stricter visa restrictions and less open mentality - heightened mistrust and sharpened level of awareness amongst travellers.
• Government funding and industry assistance packages, particularly for airlines in order to support the travel industry as a whole. It has already been suggested that the US government may invest in equity shares in airlines.
• An increase in satellite conferencing - a safer and cheaper way to do business (although we still believe people would rather travel and meet face to face rather than deal through technology from a distance).

There will always be risks involved in travel - if not war or terrorism then technical, human or natural disasters. As probability still dictates that ordinary day-to-day activities such as crossing the road are more dangerous than international travel, we maintain that the chances of tourism being defeated by terrorism are minimal. As so tragically demonstrated by the events of 11 September, the threat of terrorism is now all around us, a part of our everyday lives until the magical day when all world conflicts come to an end. As the world stands back and takes stock of the implications of recent events, industry think-tanks will be devising new, safer and certainly different ways to keep us on the move.

We are optimists who believe in the vitality and vibrancy of tourism and travel as a growing part of the modern world. The cultural impact of tourism and the understanding created by immersion in different environments for short periods of time helps to promote global tolerance. Despite the uncertainties of this moment, tourism will ultimately resume its growth trend.

Melvin Gold is Managing Director of Hotel Consultancy Services at PKF, a leading sector consultancy

Michelle Holland is a consultant with PKF and recently completed a masters degree in Tourism. Her final thesis focused upon the area of crisis management in the tourism industry.