2002 - year of hope, or glory? - In This Opinion Piece Melvin Gold Looks At The Prospects For The Hotel Industry In The Coming Year (PKF UK)
For the hotel industry, 2001 was a year which we always felt was going to be difficult. The heady days of the millennium proved to be a catalyst for an exuberant level of performance across the continent's hotel industry, almost without exception. Given that, we felt that a hangover was likely to be a consequence. But it was to be worse than that as the industry met with a series of accidents on the way home from the party.
At the start of 2001 all the talk was of the downturn in the US economy. How deep was it? How long would it last? How far would it spread? And while the talk went on the travelling slowed down. While cities were worrying about economic downturn creeping in from the USA, rural areas of the UK suddenly found a far bigger threat in their midst - foot and mouth disease. There was some spread to the continent but this was limited. However, the television images spread the story far and wide and much more quickly than the disease itself had ever threatened to do. The fallout was felt by the tourism industry, perhaps to an even greater extent than the agricultural community.
Then, having weathered a quite difficult summer season for tourism (especially in the UK), an event took place that was to put all previous difficulties into the shade. 11 September 2001 is a date that will be branded into the annals of history forevermore. The horrific pictures from New York challenged the psyche of every right thinking human being. It did not take long for those connected with the tourism industry to realise that images of aeroplanes being flown into buildings would shake the confidence of the air traveller for some time to come and change the traditional paradigms of the tourism industry, probably forever.
September's figures for the industry in key gateway cities were awful. October's were worse, including a 34.1% rooms yield decline in London, the worst single-month deterioration ever recorded by our 29-year-old survey. While average rate in the British capital fell by a similar amount in November, around 15%, the drop in occupancy was less severe - some consolation, but still enough to put most hoteliers off their Christmas pudding.
So basically that's where we are today. The big question is, what happens next?
This time last year we expected 2002 to be a better year than 2001. The economic forecasts showed improved growth in many European countries, while a wide range of events promised a boost to tourism, not least in the UK with the queen's Golden Jubilee and the Commonwealth Games in Manchester. But 2002's party looks like being spoiled by the events of 2001.
In the UK, the queen's Silver Jubilee in 1977 was one of the most-successful years for tourism. The pomp and pageantry proved a perfect magnet for attracting our cousins from across the Atlantic. The way things feel right now there is no magnet yet invented that can help gold emulate silver, and the Commonwealth Games is also set to be a more-subdued occasion. However, we should not despair entirely.
The Afghanistan situation appears to be drawing to a close, with the extremists and terrorists routed. If that were the end of it then we may see Americans (and others) travelling almost in celebration and undertaking previously cancelled trips. I have to say that I am sceptical about this happening, but some upturn is not impossible. Then there is the marketing money available, not least that allocated to the British Tourist Authority in the wake of foot and mouth and which, to my knowledge, has not so far been spent.
Furthermore, the UK's situation is far from unique. Paris's suffering is even deeper than London's, and Rome, Amsterdam, Madrid and other major gateway cities are all experiencing uncomfortably low numbers. Tourism providers have been hard-pressed in the final quarter of 2001 and the supply-demand equation is sufficiently out of balance to ensure that there are some attractive deals available, not just in hotels but also on airlines, from car rental companies and at some major attractions. Although this is not a pricing issue, low prices will not do any harm in boosting visitor numbers. So we cannot rule out a really major push for the American visitor if there is a glimmer of hope that such a campaign may be successful. A period of calm is a prerequisite for such initiatives and we may get this just in the nick of time.
Then there is the economy. Or in fact the economies, since there are many separate ones that have a bearing on the overall situation. America has been on the brink for the whole of 2001 and 11 September just made things worse. Recently Germany announced it was technically in recession. Japan has been swimming against the tide for a long time, although it is a strong swimmer. No one seems to be able to agree about the UK and no consensus has really emerged. There seem to be more economists about at present who believe we will avoid a recession than those of the contrary view, but then does anyone really know? What we do know is that it is possible to broadly correlate hotel industry performance against economic performance for long periods of time. Therefore, once we get out of the shadow of terrorism, the longer-term trend is likely to more-closely correlate with that of the economies of key source markets and the country of domicile.
To compound this, in 12 continental European countries a brave new dawn arrives with the introduction in January 2002 of the euro in a tangible form. Many questions arise. Will people be tempted to travel across borders just because it is easier to do so? Will there be logistical problems in the distribution of currency that prove disruptive to eurozone countries in early 2002? Will the level of increased spending late in 2001 to clear a backlog of sometimes 'black' old currency reduce spending in eurozone economies early in the new year? Will the eurozone countries have enough economic instruments at their disposal to act in the interests of their own economies in more difficult economic times than have been experienced to date? These are all valid questions to which the answers are currently unknown. I put them before you on a rhetorical basis. We will know the answers soon enough. But the reality of the euro will be an event that changes the face of Europe - let's hope it's for the best.
So let's try and pile all this information onto the scales and weigh up the balance of fortune for the hotel industry in 2002. Hope or glory? I have one proviso and two basic scenarios.
The proviso is that I am assuming a period of calm will ensue in the 'War against Terrorism' - from all sides. The Israeli-Palestinian conflict will probably continue - it is difficult to see an end in sight although we can but hope - but we must believe that it will not spill over, either into a crossborder regional conflict or into wider international terrorism.
Based on that proviso the optimist in me can see a return to a flat or positive growth trend in key gateway cities around May/June time, assuming that some marketing takes place in long-haul markets this winter to give travellers impetus to travel and that economic news is reasonably positive. Under this optimistic scenario we are still unlikely to see a return to trading levels even at 1999 levels until 2003 at the earliest.
The more pessimistic scenario has it that recovery will not be evident until late 2002 or early 2003 and will take place at a slower pace. This scenario will most likely follow on from poor economic performance, whether driven by the euro or more traditional factors. This would have a heavier impact on domestic markets and the wider hotel markets stretching well beyond the gateway cities. In other words things will get worse before they get better. 1999 level performance would therefore not be seen until 2004, or later.
Forecasting is an imprecise science at the best of times. I lay out the arguments and make no apology on this occasion for a less than satisfactory conclusion. I live in hope of an industry that will return to strong growth in both supply and demand in the medium to longer term. I hope the more optimistic of the above scenarios will come to pass. But in 2002 I suspect that glory will not be a word associated with the hotel industry very often, so we will have to rely on the queen, the athletes at the Commonwealth Games and the successful introduction of the euro. Happy New Year.
Melvin Gold is managing director of PKF's hotel consultancy services department and a PKF partner. He rejoined PKF as a director in September 1996 having previously been a senior consultant with the firm from 1989 to 1992.