Low prices, big impact: A new focus on affordability bodes well for future revenues

When the global economic downturn hit Dubai’s tourism sector in 2008-09, the luxury segment, in particular, suffered substantial losses. The emirate’s extravagant high-end hotels, many of which commanded room rates in excess of $1000 per night prior to the crisis, were forced to lower their prices substantially to maintain occupancy rates, for example.

Similar cutbacks resulted in airlines lowering the price of first-class tickets to Dubai, lower costs at some luxury retailers and a number of major high-end real estate projects being put on hold or cancelled. In an effort to make up for these losses, the sector has worked to help broaden Dubai’s appeal among budget and mid-income travellers in recent years, with a substantial amount of success.

A NEW DIRECTION: From 2008 through 2009 average revenue per available room (RevPAR) rates in Dubai fell from $238 to $163, a drop of more than 30% according to STR Global, a US-based hotel benchmarking and research firm. Average occupancy rates across the segment dropped from 81% to 69% during the same period, according to HVS, a US-based hotel consulting firm. Prior to – and in the years immediately following – the downturn Dubai’s hotel supply skewed heavily towards the high-end market. According to a mid-2010 report from Jones Lang LaSalle (JLL), a multinational real estate firm, as of late 2009 four- and five-star hotels accounted for more than 60% of the market.

Since then, however, budget and mid-market hotels have accounted for a steadily increasing percentage of the market. By June 2012, according to data from the Department of Tourism and Commerce Marketing (DTCM), the government’s tourism arm, four- and five-star properties only made up approximately 37% of the emirate’s total hotel supply.

In an effort to make up for losses in these high-end properties, many local hotel operators pivoted away from the luxury segment soon after the downturn hit. By late-2010, for example, around two years after the crisis, nine new hotels had opened for business, boosting the budget hotel stock by 175%, according to JLL. By then, six new budget hotels with 1780 rooms opened, including properties from international brands, such as Ibis by Accor and Express by Holiday Inn, along with a handful of new developments by local hotel brands, including Rotana and the Landmark Group. Since then, more budget and middle-income hotels have opened as well.

TRANSPORT OPTIONS: In addition to the rapidly expanding budget hotel supply, the middle-income segment has benefitted from the expansion of budget airlines. The government-owned carrier flydubai, founded in 2008, has become a leading low-cost carrier in the region since the downturn.

As of mid-2012 the airline had received around half of an order of 50 Boeing 737-800s that the government placed in July 2008, with which it served more than 45 destinations in the region. In May 2012 flydubai announced that it would be adding an additional five destinations by year-end.

The company was also planning to place an additional order for new planes by end-2012. The remaining 737-800s are expected before the end of 2016. While flydubai is currently the only budget airline that is based out of Dubai International Airport, the firm nevertheless competes with a handful of other low-cost carriers based in the region, including Air Arabia, which flies out of Sharjah; Ras Al Khaimah Airways; Kuwait’s Jazeera Airways; and Bahrain Air.

STATE SUPPORT: The government has played a major role in the recent shift towards the budget tourism market in Dubai. The DTCM has worked to support the burgeoning budget segment in a variety of ways.

In 2011 and 2012 the DTCM launched advertising campaigns in a number of key foreign markets with the goal of highlighting Dubai’s increasing affordability and low-cost attractions, not to mention that in recent years the state has worked to make the emirate more accessible to visitors on a budget. Indeed, the completion of the state-funded Dubai Metro in September 2009 was considered to be a major step in this direction.