Holiday maker: Domestic travel is the main market, but efforts are under way to increase foreign arrivals

As rich in natural beauty as regional tourism leaders Thailand and Malaysia, the Philippines’ history of underinvestment, weak promotion and security troubles has made it one of the least-visited large countries in the area. But the Philippines is pushing hard to develop the potential of its tourism sector. Visitor numbers and revenues have been climbing steadily, though less quickly than those of neighbouring countries.

Under the administration of President Benigno Aquino III, the sector has received greater attention and growth has accelerated. His government has begun systematically upgrading roads and airports, and has boosted international promotions. However, his administration has been slow to address the lack of airport capacity in Manila, an increasingly important bottleneck limiting expansion. The private sector meanwhile is investing in hotels, casinos, resorts and budget airlines.

Growth has been seen most in domestic tourism and from package vacations for the Korean and Chinese mass markets, but luxury and business tourism are also growing strongly. There is still much work to be done, especially in beefing up infrastructure, but the industry is gaining confidence and feels it is on the right track.

LATE BLOOMER: While the country has had a significant tourism industry since the colonial era, the Philippines until recently enjoyed little of the boom in tourism to South-east Asia that began in the 1980s. As Thailand and Malaysia developed into top global tourism destinations, the Philippines remained dependent on its traditional ties to the US. The sector’s fortunes largely followed the US economic cycle, booming in 2004-07 and busting in 2008-09.

Since 2010 stronger and more diversified growth is under way. International arrivals reached 4.3m in 2012 after increasing by 16.7% in 2010, 11.3% in 2011 and 9.1% in 2012, according to the Department of Tourism (DoT). That compares to 25m international arrivals in Malaysia in 2012, 22.3m in Thailand, 14.4m in Singapore, 8m in Indonesia, 6.8m in Vietnam and 3.6m in Cambodia, according to the respective countries’ official data. Arrivals to the Philippines were up another 11% year-on-year (y-o-y) in the first seven months of 2013.

EARNINGS: Receipts from international tourists climbed from $1.5bn in 2003 to $3bn in 2007, then dropped back to $2.2bn in 2009. By 2011 receipts had recovered to $3bn, and in 2012 they jumped by 27.5% to reach $3.8bn. That represented 1.5% of GDP, up from a 1.2% share in 2009 but down from a 2.2% share in 2005.

The average stay of international tourists was a relatively lengthy eight nights in 2011, while average daily expenditure was a relatively low $92. Those figures are skewed by an unusually large proportion of family visitors, who tend to stay longer but spend less money than other types of tourists.

International and domestic tourists contributed a combined P571bn ($13.8bn) of value added to the economy in 2011, up 10.2% (14.6% in dollars) from 2010, according to the National Statistical Coordination Board (NSCB). That represented 5.9% of 2011 GDP. The sector’s share of GDP has hardly changed for the past decade, as the growth rate of the dominant domestic tourism segment tracks the wider economy.

KEY MARKET SEGMENTS: Domestic tourism is by far the largest segment of the sector and is also among the fastest growing, driven by the strong economy and the rise of budget domestic airlines. Local, non-tourist residents are also an important and rapidly rising source of income for tourist-oriented businesses.

According to the NSCB, Philippine residents, including non-tourists, spent P548bn ($13.2bn) in 2011 on accommodation services, travel agencies and tourist-oriented restaurants, transport, entertainment, recreation and shops. That was up 27% from 2010 in peso terms (32% in dollars) and compared to $3bn spent by international tourists in 2011.

Domestic travellers’ hotel stays were up 24% in 2011 to 21m, which compares to 4.9m hotel stays by foreign visitors. While most domestic tourists are frugal, growing numbers are as willing to spend as foreigners. The high-spenders are mainly young professionals looking for active vacations. In summer, locals flock to highland resorts such as Baguio and Tagaytay.

MASS MARKET: Mass-market package holidays for Asian tourists are the fastest-growing segment of international tourism. Korea is by far the leading source of foreign visitors to the Philippines. Most recently there has been a boom in package tours from China, a huge and still mostly untapped source of potential demand that is quickly developing into a top growth driver for Philippines tourism (see analysis).

Taiwan is also an important source for mass-market package tours, which typically include four to seven days at easy-to-reach resorts. The island of Boracay, renowned for its white beaches, is reached via the Kalibo airport by direct flights from Seoul, Taipei and several Chinese cities. Laguna de Bay and Tagaytay, reached by bus from Manila, and Mactan, a resort island near Cebu, are also popular. Package tours account for about half of all tourists from Korea and Taiwan and some two-thirds of tourists from China, according to 2011 survey data.

INDEPENDENT TRAVELLERS: Independent tourists and luxury package tours are also growing. These tourists come from all around the world, including Asia, North America, Europe and Australia. Those from Asia tend to stay for about a week, while those from North America, Europe and Australia typically visit multiple locations over two weeks. Most fly in and out of Manila, but increasing numbers are flying directly to provincial cities and resort areas. Business visitors account for about one in six foreign tourists, according to a 2011 survey, and come especially from Singapore, Malaysia, Hong Kong and Japan. Business travellers tend to stay only a few days but spend liberally, staying mostly in Manila’s high-end hotels.

FAMILY & FRIENDS: Because of the Philippines’ history of emigration, family visits by ethnic Filipinos make up one of the largest tourist segments. Some 44% of all inbound tourists surveyed in 2011 were visiting friends or relatives and 23% stayed in friends’ or relatives’ homes. Besides ethnic Filipinos, Koreans and Chinese come to visit friends or family within the large Korean expatriate and ethnic Chinese communities. Family visitors usually stay for about a month, spending only a portion of that on typical tourist activities.

Among the niche markets, ecotourism is growing quickly and is being strongly promoted by the government as a means to bring income to remote, undeveloped areas (see analysis). There is also a significant medical tourism market supported by the Department of Health, and a growing meetings, incentives, conferences and events (MICE) sector that serves both international gatherings and the domestic market.

SOURCE MARKETS: The biggest natural markets for Philippines tourism are the East Asian countries of Korea, Japan, China and Taiwan, which together account for roughly half the international tourism market. The Philippines is the nearest tropical neighbour for these countries, and it is becoming increasingly cheap and convenient to get here with a proliferation of low-cost airlines and mass-market tours. Many independent, luxury and business travellers also come from these countries, especially Korea, Japan and Hong Kong.

Korea is by far the leading source, accounting for 25.3% of international tourists to the Philippines in the first seven months of 2013. Korean visitor numbers are also growing rapidly, up 22.3% y-o-y through July 2013 after 11.5% growth in 2012. Mainland China and Japan each accounted for 8.8% of foreign arrivals in the first seven months of 2013, but the Chinese market was growing far faster, by 48.6% y-o-y through July 2013 after 3.2% growth in 2012, compared to Japan with 6.2% yo-y growth through July 2013 after 9.9% in 2012.

FURTHER AFIELD: North America, Europe and Australia are the main sources of independent and luxury travellers and important sources of business travellers. The US is the largest of these markets, accounting for 14.9% of foreign arrivals through July 2013, while Canada accounted for 2.9%. North American visitor numbers have grown slowly due to the sluggish US economy and rising prices for long-haul flights, which have especially hit ethnic Filipino family visitors. US visitors were up 2.7% y-o-y in the first seven months of 2013 after 4.5% growth in 2012. Europe, including Russia, accounted for 10.2% of visitors in the year to July 2013, with 7.7% y-o-y growth and 9.9% growth in 2012. Australia accounted for 4.2% of visitors in the same period, with 11.4% y-o-y growth in 2013 and 12% growth in 2012.

South-east Asia is also an important market, dominated by business travellers but also including luxury and independent tourists and a Malaysian package tour market. ASEAN member countries accounted for 8.7% of international arrivals through July 2013, with 15.6% y-o-y growth in the first seven months of the year and 13.1% growth in 2012. The predominant markets are Singapore and Malaysia, accounting for 3.5% and 2.7% of arrivals, respectively. Outside the main source regions, India and Saudi Arabia are significant markets, supplying 1.1% and 0.8% of visitors, respectively, in the first seven months of 2013.

TOP DESTINATIONS: Manila is by far the biggest markets for foreign tourists, accounting for 35% of their 2011 hotel stays. Other top destinations for foreign travellers were: Mactan, with 10.9% of foreign visitors’ hotel stays; the Camarines Sur (CamSur) region, visited for its picturesque coasts, with 10.1%; Boracay, known for its white sand and turquoise sea, with 7.3%; and Cebu, with 5.6%. Among the fastest-growing destinations were Laguna, a resort area convenient to Manila, with 4.5% of foreign tourist stays, and Palawan, a remote and pristine south-western island, with 2.8%.

For domestic tourists the largest markets are resort and beach areas near Manila: Laguna with 12.6% of their hotel stays, Cavite province (including Tagaytay) with 8.4%, and Zambales with 5.4%. CamSur is also popular, with 9.4% of domestic tourists’ hotel stays. The main cities of Manila, Cebu and Davao accounted for 4.7%, 3.7% and 3.2%, respectively. With their higher numbers and greater willingness to go off beaten tracks, domestic tourists are the lifeblood of hundreds of minor tourist destinations around the country.

HOTEL ROOM SUPPLY: The Philippines has a relatively ample supply of hotels, with more than 162,000 hotel rooms as of June 2012, according to the DoT. That compares to about 195,000 rooms in Malaysia, according to government figures. However, much of the Philippines’ hotel stock caters to domestic tourists and is in locations little-visited by foreigners. Luxury hotels and resorts in the country’s top destinations such as Manila, Mactan, Boracay and Palawan are relatively scarce and generally more expensive than comparable hotels and resorts in competing markets of Malaysia, Thailand and Indonesia. Average occupancy rates in deluxe hotels in Metro Manila was 71.5% in 2012, up from 70.5% in 2011, according to the DoT.

A hotel construction boom is under way to meet the pent-up demand, with a strong focus on Manila. According to Smith Travel Research (STR), Manila has the fastest-growing hotel room supply of all major Asia-Pacific markets, with 9968 rooms in the construction or planning stages as of April 2013, representing 43% of existing supply (see analysis).

Hotel investment in Manila has received a boost from Entertainment City, a government-driven project to develop Manila as a centre of gaming. Four large casino resorts are being built on an 8-sq-km territory in Metro Manila’s Parañaque City, aimed especially at drawing big-spending Chinese gamblers. Investors are receiving tax holidays and other incentives from the Philippines Economic Zone Authority (PEZA).

However, the Aquino administration has generally been cutting back access to tax incentives. Implementation of a 2009 law meant to grant tax holidays to hotel and resort investors has been delayed. The law created a Tourism Infrastructure and Enterprise Zone Authority that was tasked with identifying priority Tourism Enterprise Zones (TEZs) where investors would receive tax and other incentives, similar to those offered by PEZA. But TEZs won’t be effective until the Bureau of Internal Revenue publishes implementing regulations, which have been delayed over concerns the incentives would cut into revenues. Further, in April 2013 the Board of Investments ruled that TEZs in Manila, Cebu, Mactan and Boracay would receive only capital import incentives and no income tax holidays.

SPREADING THE WORD: Promotion has been significantly improved under Aquino, who in 2011 appointed a prominent former advertising executive, Ramon Jimenez, Jr, as secretary of tourism. Jimenez’s signature contribution has been an international promotion campaign launched in 2012 under the slogan, “It’s More Fun in the Philippines”. The DoT received a P1bn ($24m) budget for the branding campaign in 2013, roughly doubling its promotion allocation, which is still relatively small compared to the tourism promotion budgets of neighbouring countries. Creative work on the campaign is done by ad agency BBDO Guerrero.

Domingo Ramon Enerio, chief operating officer of the governmental Tourism Promotions Board, told OBG the slogan had been especially effective in social media. It works by tapping into the pride of Filipinos, who have aided the advertising effort by sharing images from the campaign on Facebook and other sites. “With social media what counts is the number of people who share and produce their own responses. Instead of just one official advertisement, we have 150 generated by users.”

The World Economic Forum cited “increasingly effective” promotion among its reasons for naming the Philippines the most improved Asia-Pacific country in its 2013 Travel & Tourism competitiveness rankings. The Philippines also scored relatively well on rules and regulations, price competitiveness, natural resources and the public priority put on tourism. But although up 12 spots from 2012 in the forum’s global rankings, the Philippines remained at a middling position of 82nd out of 140 countries, due to poor marks on environmental regulation, health care, safety and infrastructure.

OVERSTRETCHED AIRPORTS: Indeed, the Philippines’ archipelago geography makes its tourism sector especially dependent on air travel. However, airports haven’t received the correspondingly greater investments required. As a result, facilities across the country are too small and are holding back the tourism sector’s growth. The primary bottleneck is in Manila, where the sole airport, Ninoy Aquino, is running beyond its rated capacity of 30m passengers a year, handling nearly 32m in 2012. While the airport was ranked the world’s 34th-busiest by the Airports Council International, that’s small for the main airport of a large archipelago nation. The main airport of Jakarta, neighbouring Indonesia’s capital, handled nearly 58m passengers in 2012 and was the world’s ninth-busiest.

The government has been slow to decide on a plan to deliver more airport capacity for Manila, and as of November 2013 it was still studying options. Among those are competing proposals for new airports in Manila’s southern suburbs and a plan to convert Clark Airport, a sprawling former US military base just under 100 km north of Manila, into the country’s main airport. Any of these projects would cost several billion dollars, not including transit links to Manila. The government is expected to use an investor-financed, build-operate-transfer (BOT) model for financing.

The Manila International Airport Authority, the government body that manages Ninoy Aquino, was also studying options to boost the capacity of the airport’s terminals by 10m passengers a year. But Ninoy Aquino’s limited runway space is also stretched and its location within urban Manila limits expansion. Ninoy Aquino has few long-haul flights, due largely to restrictions placed on Philippines airlines in the US and EU over safety issues. In 2007 the Federal Aviation Administration (FAA) banned Philippine airlines from adding new flights to the US until safety systems were improved. The EU completely banned Philippine airlines in 2010 after the International Civil Aviation Organisation (ICAO) found Philippine air safety standards lacking.

However, the EU lifted its ban in July 2013 after a new ICAO review gave the Philippines a passing grade, and the FAA was expected to complete a new review by early 2014. Philippine Airlines is planning flights to four European cities. As of 2013 US and Philippines airlines flew to Manila from three US and two Canadian cities.

INTERIM SOLUTION: While mulling its long-term options, the government has been developing Clark as a secondary Manila airport. Clark handled 1.3m passengers in 2012, up 70% from 2011. A terminal expansion, financed by state-owned Land Bank, is scheduled to boost its capacity to 5m passengers a year in 2014. Clark attracts mainly low-cost airlines with cheap service fees, but with Ninoy Aquino fully booked, more full-service airlines are being pushed to Clark.

Clark’s main drawback is that it is about a three-hour drive from central Manila. That could be improved with upgraded highways and a train link, but the costs are daunting. The government is also considering a less ambitious proposal, included in the DoT’s National Tourism Development Plan 2011-16, that would add 10m passengers a year of capacity at Clark while keeping it targeted at low-cost carriers. Low-cost airlines are beginning to develop Clark as a hub connecting their international and domestic flights, allowing passengers to skip Manila on their way to provincial cities or resorts. Clark also serves as a regional airport for the central and northern Luzon regions.

REGIONAL AIRPORTS: Cebu’s Mactan-Cebu airport is the country’s second-busiest and serves as an alternative international gateway and hub for domestic flights. It handled 6.7m passengers in 2012 despite a rated capacity of 4.5m, with traffic driven largely by the success of Cebu Pacific, a low-cost carrier that is the country’s largest airline by passenger numbers.

Meanwhile the government is pushing airlines to offer international flights directly to other regional airports, but success has been limited due to provincial airports’ limited capacity and service levels. Domestic airlines fly internationally from Cebu, Kalibo (the gateway to Boracay), Iloilo and Davao. Access to Philippines airports was liberalised for foreign airlines in 2010, but as of 2013 only Ninoy Aquino, Clark and Mactan-Cebu hosted regular foreign-operated flights.

A further important step will be a series of planned upgrades to regional airports. Two were being tendered out by the Department of Transport and Communications (DoTC) in 2013: a P17.5bn ($422m) expansion of Mactan-Cebu, offered under the investor-financed BOT model, and a $79m expansion of the Puerto Princesa airport, the main gateway to Palawan, which is being financed mainly by a loan to the Philippines government by the Import-Export Bank of Korea.

The DoTC was also preparing tenders for airport upgrades in Ilioilo and Davao and has been upgrading many roads in tourist areas. The government’s 2013 budget allocated P12bn ($289m) to upgrade access roads to tourist destinations.

SECURITY ISSUES: Security remains one of the biggest problems for Philippine tourism and one that has defied government efforts at improvement. While crimes against tourists are statistically rare, some dramatic cases have tarnished the Philippines’ reputation.

There are also communist and Islamist rebels who operate in different remote areas of the country. In recent years the communist rebels haven’t targeted foreigners and the Islamist rebels have been easily avoided by staying out of the remote southern regions where they operate. However, the few foreigners who visit those areas, in the Sulu archipelago and the western parts of Mindanao Island, are at very high risk of being kidnapped for ransom. Seven foreigners were kidnapped by Islamists in those areas in 2010-12 and as of October 2013 four were still missing.

OUTLOOK: The tourism sector is likely to roughly maintain its current growth rates over the next few years, with foreign tourist receipts growing at 10-15% annually and domestic tourist receipts rising at 20%.

Despite this expected expansion, government targets for the foreign tourism sector of 10m arrivals and $8bn in receipts in 2016 seem too ambitious, implying a sustained annual pace of growth of more than 20%, which is unlikely to happen given the lack of a near-term solution to Manila’s cramped airport capacity. On the other hand, the domestic tourism growth is likely to exceed targets. The rise of discretionary spending power among young urban professionals is greatly increasing the number of Filipinos who can afford hotels, restaurants and other tourist services when they travel. The acceleration of overall economic growth in 2013 suggests that domestic tourism growth could also rise further.