There is optimism in the hotel industry as signs of stability return

The Beatles hit song about getting by “with a little help from my friends” could well become a theme tune for kick-starting the recovery of Egypt’s tourism sector after more than three years of battering. By 2012 the Ministry of Tourism (MoT) was already appealing to Arabs in the Gulf region to spend their vacations in Egypt to help compensate for the disappearing millions of visitors from elsewhere and the lost billions in dollars, euros and sterling. Promoting vacation time in a country within easy reach and where Arabic is spoken was very much the formula that saw the rise of Beirut in the two decades before the outbreak of war in 1975.

Background

Tourism has long been an integral and major contributor to Egypt’s national economy – reaching 11.3% of GDP in 2010 – as well as a ready source of foreign currency. “The tourism sector accounts for roughly 20% of the country’s foreign exchange earnings,” Farouk Nasser, chairman of International Development Consultants (IDG), told OBG. The 14.7m international visitors seen in 2010 had decreased by more than a third to 9.1m by 2013. Almost as worrying was Egypt’s 85th position among global tourism destinations ranked by the World Economic Forum.

Yet, the MoT’s switch in emphasis to regional source markets paid off to such a degree that by mid-2014 it was forecasting 2m Arab visitors by the end of the year and an overall rise to 9.5m tourists despite a discouraging start. When official figures for the first half of the year were published in September, there were some signs to support the view that the tide was turning. Although an influx of Gulf Arabs was a welcome sight, Eastern European countries provided the highest proportion of tourists in the first half of 2014 – 1.9m, or 45.1% – according to the Central Agency for Public Mobilisation and Statistics (CAPMAS). Western Europe came second with 1.4m (31.9%). There were around 700,000 (16%) tourists from Arab countries.

Diverse

Russia topped the list of tourist-providers in the January-June 2014 period, followed by the UK, Germany, Ukraine, Italy, Saudi Arabia, Poland and Libya. CAPMAS reported the overall number of tourists coming Egypt fell to 4.4m, a 25.4% fall compared to the same period in 2013. Visitors’ total time spent in the country dropped by an even larger proportion. The 43.5m visitor nights were down a third on the 65.1m in the first half of 2013. Even so, confidence is gradually returning, with officials forecasting the possibility of a leap in visitor numbers by 2015 to return to the 2010 total of 14.7m, or at least to be well on the way. “We will not restore tourism overnight, but we can work on getting 12m-13m tourists in 2015 and try to increase them to 15m in 2016,” Hisham Zaazou, minister of tourism, told the Chinese state news agency Xinhua.

Neighbours

The increase in Arab visitors was aided by a promotional campaign in the UAE, Saudi Arabia and Kuwait. Travellers from the UAE grew by 35% to 10,250 during the first five months of 2014, according to Egyptian Tourism Authority figures, against an overall decline of 26.2%. Most Emiratis headed for the Red Sea resorts of Sharm El Sheikh and Hurghada.

In that same period Saudi Arabia accounted for 98,250 visitors, up by 6.3%, while the total from Kuwait rose by 10.8% to 41,362. According to the sub-accounts unit in the MoT, Gulf Arabs typically stay in Egypt for 10 nights and visit a minimum of three times a year. Their average spending is around $100 per night, whereas for Europeans it is less than $70.

Charter Subsidies

A subsidy scheme for airlines, including those that put on extra charter flights from Kuwait and Saudi Arabia, supported the promotional campaign. Haitham Nassar, chairman of the Cairo branch of the Egyptian Hotel Association (EHA), told OBG that the subsidies were based on the number of passengers needed for a plane to break even. If the actual number of seats booked fell below that figure the ministry would pay for enough empty seats to prevent a financial loss. Subsidies ranged from $150 to $250 per seat depending on the length of the flight.

By September 2014 the tourism minister was able to tell the Daily Star, an English-language news agency for the Middle East, “Charter flights form one way to incentivise tourism that is essential for Egypt, as each dollar invested leads to an average of $23 being spent in Sharm El Sheikh and $18 in Hurghada.” Zaazou said the MoT was sufficiently impressed by the results to consider extending the subsidy scheme to other resorts, especially in southern Egypt.

Extra income from Arab visitors was certainly a welcome boost for the long-suffering hospitality business, but it is perhaps more of a psychological uplift than a serious replenishment of the tourism industry’s coffers. Headlines inspired by figures cited by Shoaib Abdul Fattah, media advisor at the Egyptian Embassy in Abu Dhabi, who said the number of Emirati tourists to Egypt in July 2014 rose by 304% compared to the previous month may be heart-warming – and accurate insofar as they go – but tend to overstate the good news.

Vacationers were not the only valuable commodity coming in from GCC countries. Kuwaiti investments in Egyptian tourism totalled around $577m up to the end of the first half of 2014. The financing is intended for use in various transport, hotel and tourism services, with the General Authority for Investment and Free Zones as well as other government bodies preparing projects for review by the Kuwaitis.

Image Challenge

Despite the recent upswing, the thousands of extra high-spending visitors now returning barely makes a dent in recouping the lost millions. The devastating loss of almost 5m visitors in 2011 was partially compensated the following year when the total rose to 11.5m. The rally continued into 2013 until a series of attacks on tourist destinations prompted by the fall from power of President Mohamed Morsi caused the numbers to slump again, this time to 9.1m, their lowest level for seven years.

That drop was precipitated by a series of travel warnings issued by more than a dozen countries following the unrest in mid-2013. Ayman Altaranissi, director-general of the Egyptian Tourism Federation (ETF), told OBG, “Traditional source markets such as Europe have been disrupted not only by financial considerations but also by the travel advisories against Egypt. Some of these are for very wrong reasons. I see Cairo as safer than some European cities.”

The extent of their effect was apparent once the advisories began to be lifted. The MoT attributed the 43% drop in revenues, which totalled $1.3bn in the first quarter of 2014, directly to the travel advisories issued for the Sinai Peninsula. Almost one-third of the country’s hotel rooms are in South Sinai, which saw occupancy in its 62,000 rooms fall to around 35%.

Egyptian officials lobbied with various foreign governments to ease their warnings, forecasting positive results for tourism activity after decisions to lift travel bans by the Netherlands, Japan, Belgium, Spain, France, Germany, Italy, Denmark, Ireland and the US. Their optimism was well placed, as the third quarter registered increases for arrivals. Figures for the first nine months of 2014 showed that the 620,000 German tourists in Egypt, for example, represented a 60% rise over the number for the same period in 2013.

It was a far cry from the beginning of the year. During the first half of 2014, the 25% reduction in visitor numbers year-on-year to 4.4m was reflected in a similar fall in revenues over the period to $3bn, the government said in August. Adla Ragab, economic advisor to the tourism minister, confirmed to OBG that visitor nights for the first six months of 2014 were 43.5m, or just under an average of 10 nights per visitor. Although the total number of visitors fell, average daily revenue per visitor began to climb, reaching $74.70 by mid-year, compared to the $60.10 recorded in 2013.

Warnings Withdrawn

Despite the further setback of the February 2014 bombing of a tourist bus in Taba, in which three people were killed, the travel advisories were gradually removed. The US, Italy – the fourth-largest tourist source for Egypt – and Belgium were among the first to soften or withdraw the advisories, followed by Germany, France, the Netherlands, Denmark, Finland, Ireland and the other European states that had issued warnings. This enabled Zaazou to announce in July that Red Sea hotel occupancy rates had reached 70% after the bans were lifted, while those in South Sinai rose to around 55%.

What Next

Zaazou told the media in September 2014 that Egypt’s tourist total should increase by between 5% and 10% in 2014, with the improved security situation. “We still have a long way to go,” Zaazou told Reuters. “I cannot claim we have bypassed the low periods we have lived for the past three years, but I feel more optimistic now.”

With the travel warnings withdrawn, Zaazou was able to return to the ministry’s wider strategy for the restoration of the sector as a whole. “Our plan is to attract more than 25m tourists by 2020. Revenues generated will double from the 2010 peak of $12.5bn to $25bn within the coming six years,” he told Reuters. Just as one plank of the temporary quick fix was to attract larger numbers of Arab neighbours to feed at least some income into the sector, so the overall scheme to double revenues in the next six years from their 2010 peak will see a broadening of the source markets.

A three-year marketing campaign will try not only to recover the lost Europeans but also to encourage tourists and investors from India, China and Latin America. To this end, Egypt is exploring partnerships with the UAE’s Emirates Airlines and Etihad Airways.

Source Markets

In every year from 2007 to 2013, tourists from emerging markets rose by an average of 8%, according to the MoT, compared to an average annual decline of 3.1% for tourists from other countries. Continuing this trend, Zaazou expects the number of Russian tourists to reach 3m by the end of 2014, 25% up from the 2.4m of 2013.

Zaazou also signed an agreement with a number of Indian travel companies to encourage a target of 1m inbound tourists by the end of 2017. His ministry scheduled an international campaign from October onwards to promote tourism from India and several key European destinations. A decision to grant Indian visitors visas on arrival and to launch additional direct flights between the two countries should help attract travellers. EgyptAir announced in July that it would institute flights three times a week between Cairo and New Delhi. The director of the Egyptian Tourism Office in India, Adel El Masry, was quoted as saying the 170,000 Indian tourists that visited Egypt in 2010 had more than halved by 2013, although he expected the total to reach around 100,000 in 2014.

China

Zaazou told Xinhua news agency there would be “good news” in November on direct flights from China to Aswan in Upper Egypt. “We expect in November the first direct flights from four points in China to Aswan under an agreement with a number of Chinese tourist companies,” said Zaazou. After Aswan the itinerary will continue to Luxor, Hurghada and Cairo.

“If things go well, we expect 142,000 Chinese tourists in the first year under a three-year agreement that includes 500,000 Chinese tourists,” he added.

The EHA’s Nassar dispelled concerns that distance might present a challenge to achieving high visitor numbers from China. He told OBG, “We have seen over the history of incoming tourists that the Japanese represent a very good proportion of our long-haul visitors. They fly 17-18 hours on a direct flight. So distance is out of the way as an obstacle, whether we are talking of Latin America or Asia.”

Remy Lakah, the chairman and CEO of the Lakah Group, a tourism and aviation company, told OBG his firm had signed the agreement with Chinese tourism companies to bring in the 500,000 tourists. “After five years, our goal is to bring in 1m tourists,” he said. Lakah has hired 100 Chinese guides to support its objectives.

Cairo Room Rates

Hotel strategy for survival throughout the years of turmoil split into two basic approaches. Although not universally applied, the major hotels in Cairo maintained their room rates despite seeing big declines in occupancy levels. Revenue per available room (revPAR) was 55% lower in 2013 than it was over 2009-10, according to estimates published by hospitality consultancy group HVS.

However, there were some hopeful signs from the figures for June 2014. The average room rate (ARR) was up by 5.5% for the month, causing revPAR to rise by 2.7% to $57.64. “The improved hotel performance in June coincided with [Abdel Fattah] Al Sisi winning the presidential election which has provided a sense of stability to the capital,” said Peter Goddard, managing director of TRI Hospitality Consulting (TRI), in a 2014 report from consultancy group HotStats. “The concomitant positive market sentiment is expected to result in a gradual uplift in demand by year-end.”

Overall demand was down in June, with occupancy falling by 1.3 percentage points. One bright spot was a rise in the number of leisure visitors to the capital. This helped to increase non-room revenues and brought a rise in revPAR of 5.5%. Assisted by a small decline in payroll costs, profitability grew by 7.7% to give GOPPAR of $47.66 (the GOPPAR model is a matrix score that incorporates a gross operating profit calculation into an equation containing various key performance indicators). The following month saw an increase in occupancy rates. According to HotStats, occupancy at Cairo hotels was 29.3% for July, which, though low by international standards, was 8.7 percentage points up on the previous year. ARR of $114.85 was almost the same as that of Abu Dhabi.

Rebounding

Nassar, who is also general manager of the Ramsis Hilton, told OBG in May, “Occupancy levels in Cairo have increased in 2014. It is a start and I am extremely optimistic. Throughout the past year we have had three Nile cruise boats operating at an occupancy level of 30%. When I was there last week we had 27 boats. I know we have 280 boats altogether but even so that was a sizeable jump. And now is not a good time because of the temperature to do cruises.”

He said the government had been paying salaries for staff at establishments that were not making a profit. At least one major hotel in Cairo also reduced the rents of its on-site boutiques to help compensate for the fall in revenues caused by low occupancy.

“Cairo’s hotels did not drop the room rates although the resorts area had to lower them by an average of 30-45%,” said Nassar. “Cairo [in May 2014 had] occupancy of 47-48%; the year-to-date figure is 36-37%, and 2013 closed with 29-31%.”

Among the factors that helped Cairo through the difficult periods were medical tourism, foreign media and government meetings, Nassar said. “International chains supported the operations of the big hotels because they knew the business would come back,” he added.

The break-even point for a hotel is a combination of occupancy rates and revPAR plus whatever other income there is from concessions, or banqueting or food and beverage generally. “I can comfortably say that with 47-48% occupancy, hotels are beginning to be able to breathe,” Nassar told OBG. “We are above water and I think we will see some improvement from the GCC countries coming to both Cairo and the resorts. In winter I think Cairo will see another 10-20% improvement on the occupancy rates.”

Sharm Sheikh

As Cairo held the room rate, hotels in Sharm El Sheikh and Hurghada adopted whatever strategies they considered would improve the occupancy rates. Eman Hussein, research manager at real estate consultancy Jones Lang LaSalle (JLL), told OBG, “Sinai occupancy rates went up because of a change in strategy reducing the room rates and offering all-inclusive packages. That pushed occupancy in some places up to 50-60% after it had dropped to as low 20-30%. This was survival strategy.”

According to the consultancy EY, occupancy rates in four- and five-star hotels in Sharm El Sheikh and Hurghada went down from 75% and 73% in 2012 to 64% and 63%, respectively, in 2013. However, average room rates increased from a low 2012 base by 10.6% in Sharm El Sheikh and 12.5% in Hurghada.

The June HotStats report showed occupancy at Sharm El Sheikh hotels dropped by 9% to 59.7% in June 2014 over the same month a year before. Average room rates fell by the same percentage to $41.

“June typically generates strong demand from leisure tourists and charters across the Commonwealth of Independent States region and Europe,” said TRI’s Goddard. However, the travel advisories had diverted visitors to holiday destinations deemed safer. “Hoteliers were forced to lower the average rates for leisure visitors and tour groups by 18.1% and 15%, respectively, during the first half of the year,” added Goddard. “Since these two segments constitute the primary demand base for hotels in Sharm El Sheikh, substantial reductions in the top-line performance caused profits to plummet by 50.5% in June, which drove GOPPAR down by 49.2% in the first half of 2014.”

JLL’s Hussein told OBG, “The government needs to promote security. To return to 2010 occupancy levels and rates will take anything from two to four years. Each government department has a view of the time needed to restore confidence depending on what it does.”

Winter

The MoT said it is seeking to raise occupancy levels at Sharm El Sheikh and Red Sea hotels and resorts to 80% and 85%, respectively, over the 2014 winter season. Encouraged by the success of its Gulf campaign earlier in the year, the ministry is working on plans to increase the number of charter flights to Sharm El Sheikh and Hurghada airports.

Christopher Hewett, senior consultant for TRI, told OBG, “The tide is starting to change for the hotel market, and there is an increasing number of positive signs which indicate a recovery is under way. I believe that the country needs another year or so of stable economic and political growth and development before real tourism will start to return.”

Billion-Dollar Help

With occupancy or room rates or both showing substantial declines overall, the MoT and the ETF are jointly organising what they hope will be a $1bn fund to help hotel owners who are in financial distress. The ETF’s Altaranissi said the aim is to raise the money from within the tourism industry worldwide and especially in the Gulf. “The idea is to support companies that have financial problems, perhaps by becoming a partner or even buying the company,” he told OBG. “Later, say after two, three, five or 10 years, the owner of the project has the chance to buy it back by repaying the loan plus interest.” In short, the scheme is to try to prevent widespread bankruptcies in the tourism industry. Proceeds from the fund will mainly go to help businesses pay off bank loans.

“After a dry three years in the tourism industry people do not have the money to pay their bills and the fund solves the dilemma between banks and investors,” Altaranissi told OBG. Most of the loans bear interest rates of 16-17%. There is no finite end date for the fund, which is due to continue as long as there is demand from the industry. “It depends on whether the tourism industry picks up, but $1bn is enough to cope with what is known about now,” he added. Egypt is used to crises of one sort or another, he said, but “it has never been in a crisis that lasted as long as this”.

Even when the crisis fades into history and the bank loans are repaid, the sector’s problems may not all be over. “Many of the tourism industry’s staff have left the country to work elsewhere so we also need new staff training,” said Altaranissi.

TRI’s Hewitt told OBG, “The smaller hotels adopting low-cost strategies certainly face challenges, not only with marginal operating profits but also cash flow, especially if they are reliant on travel agency business which can create challenges.”

Tourism Tax

It is not only hotel owners that may be short of money. The state needs all the income it can get, as do public enterprises like Cairo Airport. Ragab, economic advisor to the tourism minister, was quoted saying that a $7 development tax would be levied on tourists arriving in airports in Alexandria, South Sinai, Hurghada, Luxor and Aswan. She said the tax should run for six months from its June start date.

In Cairo, the exit tax levied at the airport has been increased by $5 to $25, although it has been reported in some places as an entirely new tax. The EHA’s Nassar explained the circumstances: “There was already a $20 exit tax and it was increased by $5 at Cairo Airport, which will be added to the price of a ticket,” he told OBG. “There was no alternative for the government. EgyptAir has bank debts with time limits. The debts cannot be paid by the government because repayment by EgyptAir itself was stipulated in the terms of the loan.” The whole of the exit tax is to finance the airport and EgyptAir. “Compared to some countries, like the UK for example, it is not a significant amount,” said Nassar. “The UK once slapped on an increase of £60.”

E-Marketing

In an innovative effort to increase visitor numbers, the MoT has turned to e-marketing. The ministry inked a deal with Google at the end of May 2014 to promote 15 types of tourism in Egypt and a separate agreement with Visa for electronic payments to use internet marketing to promote the country. Zaazou said he has also signed cooperation protocols with the Ministry of Communications and Technology to take advantage of their experience. Zaazou also said his ministry intended to intensify its marketing programme in the major tourist source countries through Facebook and around 2000 bloggers.

New Hotels

Despite the troubles of the past three and a half years, global hotel operators have maintained their development plans for Egypt, with several high-profile hotel openings expected in the years up to 2019. A total of 35 new hotel schemes representing an increase of 14,118 rooms are expected to come on-line in the medium term, with most for Sharm El Sheikh. Four luxury hotels are being developed in the capital: the 248-room Royal Maxim Palace Kempinski, the 331-room Nile Ritz Carlton, the 292-room St Regis and the 350-room Shaza Cairo Nile.

Egypt currently has almost 209,000 rooms with another 204,000 in the pipeline in the next three years. Sharm El Sheikh has 63,000 rooms, Hurghada more than 70,000 and Cairo has 23,000.

Mounir Kamal, managing director of American Express/Thomas Cook in Egypt, told OBG, “There is a strong need for three to five new hotels in Cairo. Tourism is bound to return, and the investment climate is perfect now. The correlation between beds and the number of travellers before 2011 was very tight and we should anticipate, rather than react surprised when tourism bounces back.” Altaranissi thought otherwise: “There is no requirement for more hotels now or in the near future,” he told OBG. “When we have a plan for reaching 25m tourists, then perhaps. Of 200,000 new rooms in the pipeline, almost 90% of building operations were suspended. The situation is now more stable and maybe it is time to re-open those investments, especially since some of the rooms were 75% finished.”

For IDG’s Nasser, there were wholly different potential scenarios depending on the size of the operator. “Although big chains may still be looking to invest in Egypt given its long-term potential as a tourism market, smaller, independent hotels may be forced to close (temporarily or permanently) as a result of the shortterm challenges facing the industry,” he told OBG.

And the EHA’s Nassar could see priorities more pressing than extra hotels. “One proposal the association has discussed is to stop offering more hotel licences throughout the country unless we are talking about totally new areas to be developed,” he said. “We should concentrate on issues like entertainment, theatres like those in London, independent and varied new food and beverage outlets. We could be a destination for families, newlyweds and safaris. We have not even explored the desert yet.” Nassar told OBG. “We need to draw a line, take a deep breath and think what can we offer as new to this country. We have enough rooms… to increase them we need more roads, more airports, much expanded infrastructure and the metro if we want to go to 20m tourists.”

Connectivity

Underpinning the whole debate on how to restore and expand tourism is connectivity. Given the successful relationships between tourism and Dubai’s Emirates Airlines and Turkey’s Turkish Airlines for their respective markets, creating the same dynamic is a priority for Egypt. However, EgyptAir stands apart from those two airlines as being heavily in debt and overstaffed for the size of its operations.

Altaranissi put it plainly: “There is a problem with EgyptAir, with regards to an open skies agreement and having Cairo Airport as a hub,” he told OBG. “This is not a problem that can be solved overnight. EgyptAir has around 30,000 employees and it could be run with 8000. We need open skies. Creating a hub is more difficult because Dubai is close and has already done that. However, we could be a hub for Africa.” Altaranissi added that privatisation could be the answer, “although the level of its debts and its staff count against this”.

Achieving the successful complementarity seen in Dubai and Turkey between the national airlines and tourism could be aided through having just one minister run both tourism and aviation, according to Nassar. He also stressed that it was time to introduce open skies, describing it as “one of the most important factors that will change the dynamics”.

Security

Egypt plans to increase the number of CCTV cameras at hotels and popular tourist destinations as part of a series of new security measures, Zaazou said, adding that the country will also bolster airport security and plans to implement a comprehensive system for monitoring health standards in hotels. To all this will be added mandatory background checks on tourism industry workers, the minister told the Associated Press.

Outlook

Initial ambitions quoted by Zaazou to regain the same number of tourists – 14.7m – as in the pre-revolution days of 2010 by the end of 2015 are unlikely to be fully met. Continued stability is clearly key. The speed with which confidence returns to Egypt’s foreign source markets is impossible to predict. Retaining slightly over 9m tourists a year, even in the worst days, is perhaps a remarkable achievement and in any case a big base on which to build.

Alongside security concerns, a report by the OECD published in late September 2014 said the “shortage of an adequately qualified workforce, an underdeveloped transport network and infrastructure, and impediments in the structural and institutional framework”, all hindered development of the tourism sector.

Transport and other infrastructure improvements are already high on Cairo’s to-do list irrespective of their importance to tourism and, as Altaranissi told OBG, training new staff is a must given the number of experienced professionals who have left the country. The OECD itself recognised that the ETF was already developing training programmes in cooperation with the government to improve sector skills.

A little help from its friends was instrumental in getting Egypt’s tourism recovery programme on the road. Reaching its targets will require ongoing support.