Irrepressible: Visitor numbers keep overtaking forecasts, despite recent unrest

Setting targets for the tourism industry in Thailand has become a pleasing conundrum, with the forecasts seemingly fated to be bettered by the facts. The original goal of 24.3m for total visitors in 2013 represented an increase of 2m over 2012. When it became clear that the target was too low, a new one of 26.1m was set. Even the second number fell short of the 26.74m eventually recorded. The sector’s annual achievements, at least in visitor totals, have become so consistently uplifting they give the impression that no matter what disaster befalls – natural or man-made – tourism is untouchable. However, seeing this as an inevitability may be a risky approach.

Keep On Coming 

There was nothing equivocal about the figures. The 26.74m international arrivals in 2013 was a rise of 19.6% over 2012. This was achieved despite the return of unrest in the capital and a hiccup in the rise and rise of Chinese tourism (see analysis). It instilled the notion in some that the 30m sought by the government for 2015 might even be achieved a year early. Others predicted zero growth if the unrest persisted, although such is the industry’s history of resilience that no one forecast a decline. According to the Ministry of Tourism and Sports (MoTS), seven countries contributed over 1m people each – one from Europe and six from the region. China continued to astonish with a 69% increase over 2012 to 4.7m arrivals. Next came Malaysia (2.99m, up 17%), Russia (1.73m, up 32%), Japan (1.53m, up 12%), South Korea (1.29m, up 12%), Laos (1.1m, up 13%) and India (1.04m, up 4%). By region, East Asia contributed by far the largest number – 16.09m, up 29% on 2012 and 60% of the total. Europe is the second-largest market (6.3m, up 12%), followed by South Asia (1.34m, up 5%) and the Americas (1.17m, up 8%). Andrew Langdon, executive vice-president for Jones Lang LaSalle’s hotels and hospitality group in Thailand, put the figures in perspective. “For Thailand, 2011, 2012 and 2013 were years of strong growth – around 20%,” he told OBG. “Bangkok’s figures were even higher and what has been driving this most is an influx from mainland China.” Before that, Japan had been the top source market for at least a decade. “Half the world’s population is within five hours’ flight, but the country also draws people because it has the hotels and the beaches and is very affordable. Growth could be strong for decades,” Langdon said. WHAT NEXT?: The Tourism Authority of Thailand (TAT) has set 28.01m visitors as the 2014 goal. The Tourism Council of Thailand (TCT) is more optimistic, forecasting 29.92m foreign tourist arrivals, with revenue up by 18% to BT1.35trn ($44.1bn), over 2013’s estimated BT1.16trn ($37.9bn). TCT foresees hotel room rates rising by 5-15% and more spending on tourist activities. The forecasts, part of Thailand’s Tourism Index, were made in cooperation with Chulalongkorn University’s Faculty of Economics. Francis Zimmerman, area general manager for Anantara Hotels, also sees a possible rise in room rates, though for a different reason. “For the first time since 2008 we could see some rates rise – 2014 and 2015 will be among the slowest years recently for supply growth,” he told OBG. “Many people have been coming and we have had high occupancy rates. Without these numbers it is hard to see how many of the new hotels would survive.”

Competition

Bert van Walbeek, managing director of hospitality consultancy The Winning Edge, was not confident of an immediate rate rise. “There is fierce competition and, with so many hotels close to each other in Sukhumvit and near the Skytrain, it is difficult to raise room rates,” he told OBG, “For rising hotel rates, you need 80% occupancy.”

The TCT’s president, Piyaman Tejapaibul, was quoted in local press as saying that its projections on rates growth and tourist numbers were based on there being no outbreak of political violence, and that travel advisories should not exceed Level Two (“exercise caution”) or Level Three (“high degree of caution”). The potential damage to the industry caused by travel warnings was highlighted in a statement issued in early 2014 by William Heinecke, the chairman and CEO of hotel group Minor International, to all ambassadors in Thailand. “Although the ongoing demonstrations are limited to certain parts of Bangkok, the rest of the city and the country is safe to visit, but the travel warnings and restrictions issued by some foreign governments do not reflect this fact. The MoTS forecasts that tourism arrivals in January have dropped by 1m from the same time last year. The Tourism Council estimates BT22.5bn ($736m) in revenue has been lost as a result. I ask diplomats to push for foreign governments to re-examine the severity of their travel restrictions,” said Heinecke’s statement.

Spillover

Concern was also expressed by Credit Suisse in a research paper which estimated that the shock to tourism of the disturbances could cut 0.6 percentage points from real GDP growth.

“The sector is more exposed to Chinese and Hong Kong tourists than before. These tourists appear to be more sensitive than others to political turmoil and now account for around 20% of total visitor arrivals, compared to 8-9% a few years ago,” wrote vice-president Santitarn Sathirathai. The paper added that Thailand’s tourism sector is known for its resilience, but that there are causes for concern about tourism growth in 2014. Apart from the high percentage of overall visitors, the paper said, “Data for December 2013 already showed a collapse in Chinese and Hong Kong visitor arrivals, even before the current political crisis intensified earlier this year.”

Credit Suisse emphasised the importance of tourism revenue by pointing out that as a percentage of GDP it “is the second-highest in the region after Hong Kong, while the share of tourism receipts in total exports of goods and services is already the highest in non-Japan Asia”. It did, however, acknowledge that it expects a V-shaped recovery as and when the political situation stabilises. Indeed, as Langdon put it, “On average something happens every 18 months to threaten tourism. It is a very resilient market that bounces back within three months.”

ASEAN 

While not downplaying the potential damage that could be inflicted by internal unrest – and at the time of press the tension was easing after clashes in early 2014 – there are other factors that could have deeper repercussions for the industry. The first is a change in the percentage of hotel equity ownership allowed for ASEAN investors under the ASEAN Framework Agreement in Services, which is now 70%. For the moment the overall effect on the economy will be limited, because the new figure applies only to hotels with six stars or more. Yet if Thailand is to fall in line with other ASEAN states, liberalisation of ownership will be extended to lower-rated hotels, and that would mean the inclusion of small and medium-sized enterprises. That in turn would risk losing some of the financial gains of the industry to the nation.

To counterbalance the risk, Thai firms would need to invest and expand to the degree where they become regional players. While there are targets such as capitals and towns with business travel potential, especially in Indonesia, Cambodia, Laos, Myanmar and Vietnam, there are a limited number of Thai companies capable of making the leap from national to regional status. There is also potential for fiercer competition in the Thai market if there is keen interest from other ASEAN members if the equity ownership percentage changes for lower-rated properties.

The practical impact of the equity limit increase on six-star hotels and above should be contained because 100% equity ownership of such a large hotel investment, i.e. more than BT500m ($16.4m), is already allowed under investment incentives approved by the Board of Investment. Small to medium hotels operated as family businesses dominate the Thai hotel market so the future will be more competitive, as ASEAN investors will take advantage of anticipated hotel liberalisation to enter the market.

Source Markets 

Suraphon Svetasreni, the governor of TAT until December 2013, said the fastest-growing markets in 2014 would probably be China, Russia and India. He said that visitors from these countries tend to be in the low-to-middle-income segment, and that to boost arrival numbers and earnings, Thailand needs to attract more well-off tourists. Simon Landy, executive chairman of Colliers International in Thailand, told OBG, “TAT has contradictory pulls. It is saying we want high-class tourists and we want lots of them. Thailand has become a destinations market and does not depend on a single source.”

TAT expects 1.9m Russian visitors in 2014, and is aiming to attract more Russians in the honeymoon, wedding and medical travel segments, with the island of Koh Samui being developed as a wedding and honeymoon destination. TAT projects the number of Indian visitors will reach 1.3m. The spending per head of Indian tourists is estimated at $173 per day, compared to the $144 per day average figure for all tourists.

TAT estimates that the number of Japanese tourists will rise from 1.47m to 1.5m in 2013. The authority is promoting heavily to persuade Japanese visitors to see provinces across the country, according to Nittaya Aumbhitaya, the director of TAT’s Tokyo office. Thailand competes with Malaysia as a regional centre for longer visits, though Malaysia is ahead of the game as it has made it easier for long-stay tourists to get suitable visas. Chiang Mai is seeking to promote itself as a regional long-stay hub after the opening of the ASEAN Economic Community in 2015.

Domestic 

TAT forecasts a 9% increase in revenue from domestic tourism to BT700bn ($22.9bn) in 2014. Thai tourists are expected to take 176m trips, up from the 107m estimate for 2013.

Expanding the area recognised as attractive for domestic tourism has its difficulties. “The north-east is the last big area to be developed for tourism,” Pornthip Hirunkate, vice-president of the TCT, told OBG. “Distances between one town and another are big, so the infrastructure needs improving.”

Benchmark Rates

In an analysis of benchmark wholesale rates for January and February 2014 for seven of the world’s top cities, UK-based travel services firm JacTravel said Bangkok offers the best value for hotel rooms. The benchmark rates were $38 per room per night (pr/pn) for a double room in a three-star property, $138 pr/pn for a double in a four-star hotel and $174 pr/pn for a double in a five-star hotel. Compared to the most expensive major city, New York, Bangkok was 52% less in the five-star category, 25% less in four-star and 77% less in three-star. The benchmark rate is the wholesale rate for a standard double room, including breakfast, in a good value, well located hotel, typical of the category.

Running Costs

At a time when rates are low, as are the prospects of increasing them, keeping a lid on costs takes on even greater importance. As Jamie Miller, manager of Bangkok’s Rembrandt Hotel and Towers, told OBG, “Return on new-build hotels has to be better, but our costs have risen exponentially. The increase in the minimum wage meant the entire staff had to be adjusted upwards because the guy at the bottom pushed everyone else’s rate up. There used to be a lot of outsourcing of services, but this has fallen due to a shortage of labour.” Internet booking is another aspect of revenue management to consider. Online travel agents have changed the business environment for hotels, allowing even a small location to do well and compete with larger chains.

The Thai Hotels Association (THA) is campaigning to convince the MoTS to crack down on illegal hotels. THA president Surapong Techaruvichit said by using internet booking tools non-registered hotels could compete with registered hotels without having to comply with the law or the cost of registration.

The Ministry of Interior put the number of hotels in Bangkok at 353, the National Statistical Office at 681. Surapong said there were 1209 hotels on the website Agoda. “Room occupancy for association members grew by 10% in 2013, while tourist arrivals grew by 20%, partly because bookings went to unregistered hotels,” Surapong was quoted in the local press as saying. Room rates in Bangkok would increase by 15% if the MoTS pursued the illegals, he added.

MICE

The Thailand Convention and Exhibition Bureau (TCEB) quotes 2013 statistics to support its argument that the political unrest in the capital will not cause a decline in meetings, incentives, conferences and exhibitions (MICE) activity during the first quarter of 2014. It quotes increases of 5.2% in event visits and 6.2% in revenue for October to December 2013 compared with the same quarter in 2012. In the 2013 period, Thailand welcomed 186,864 MICE travellers, contributing more than BT16bn ($523m) to the economy.

The TCEB’s president, Nopparat Maythaveekulchai, said that China emerged as a dominant market in the fourth quarter of 2013, with annual growth of 177%. International convention business accounted for the largest share of Thailand’s MICE market, attracting 58,682 visits, followed by incentives (58,564), meetings (38,315) and exhibitions (31,303). “MICE is a key driver of economic growth across all sectors. In 2014 visitor numbers are projected to grow by 5%, with revenue growth at 10%,” said Nopparat. Less optimistic views were expressed elsewhere. Newspaper reports had hotels in the main MICE destination, Bangkok, reporting falling occupancy and a loss of advance event bookings, particularly corporate meetings. International companies, and specifically US-based corporations, have shifted meetings to other destinations due to travel advisories, loss of insurance or increases in insurance premiums if they use Thailand.

Security

In statements made in July 2013, the minister of tourism and sports, Somsak Pureesrisak, said that “Tourist safety is now on the agenda, in particular a crackdown on mafia gangs in Phuket and Pattaya. Gangsters are now involved in businesses that affect tourists.” One element of this will be checks on work permits and visas to weed out those working illegally. The crackdown also involves setting up tourism courts in Bangkok, Suvarnabhumi Airport, Pattaya, Phuket, Samui and Chiang Mai to hear cases related to scams and petty crime against tourists.

Phuket

If Chinese and Russians are leading the charge to raise Bangkok’s tourism numbers, they are doing an even more striking job for Phuket. “Phuket International Airport (PIA) has consistently increased passenger numbers since 2010,” said Bill Barnett, managing director of consultancy C9 Hotelworks. “In 2013 a record high 3.2m international arrivals were recorded at PIA, amounting to 26% year-on-year ( yo-y) growth.” Mainland China and Russia accounted for 45% of international passenger arrivals that year, up from 36% in 2012. Direct international flights to Phuket have insulated it from the impact of the political situation in Bangkok. “The compound annual growth rate over the past five years was 21%,” said Barnett. “In 2013 China and Russia led the international markets, up 67% and 41%, respectively, y-o-y.”

The uninterrupted growth also enabled Phuket to push up average room rates with only a minimal impact on occupancy. According to C9 Hotelworks, market-wide occupancy was 74% in 2013 against 76% in 2012.

The overall average daily rate in 2013 rose by 3% yo-y, hitting $147. The very small changes in occupancy and average daily rate left revenue per available room flat at $110. Eight new hotels with 971 keys are scheduled to open by the end of 2014, bringing Phuket’s total hotel units to 47,112. Just over half of the new rooms are mid-range.

Outlook 

“So long as transport infrastructure keeps pace, which it should with the expansion of key international airports, visitor numbers will grow. Thailand will remain the region’s tourism hot spot,” Prab Thakral, the managing director of the Boutique Group of Companies, told OBG. The long-term relationship within the ASEAN Economic Community and the interest shown by other ASEAN states in the largest and strongest tourist market in the region will likely be on the agenda of many meetings. If the equity ownership opportunities in all tiers of Thai hotels are made equal throughout ASEAN, the government will find it more difficult to place financially weaker hotels in a protective cocoon, although it may be aided in this by the current legal restrictions on land ownership by foreigners. Without pre-emptive domestic consolidation, there may well be attempts to establish a regional presence within the Thai hotel market.