Euromonitor International has evaluated the potential impact of the EuroZone crisis on the region’s travel and tourism industry based on a review of previous economic downturns in times of macroeconomic instability. A correlation between arrivals performance and GDP means economic growth has a direct impact on tourism demand. Working within this framework gives us an insight into possible market scenarios for tourism demand over the short term in the Euro-Zone.
Spectre of a double-dip becomes a reality
In 2012, Europe continued to struggle its way through downgrades, bank bailouts and fear. The result has been many countries, especially those on the periphery, sliding into technical recession once again as confidence in the region falls. The increasing danger of default, weak labour markets and creaking banking industries are leading to a new period of uncertainty in Europe. As Germany continues to grow, the European slowdown is moving eastward towards transition countries.
According to Euromonitor International’s estimates, 13 of the 27 European Union (EU) countries are predicted to fall into recession (defined as two consecutive quarters of negative real GDP growth) in 2012 as demand remains subdued.
The recent double-dip recessions are the culmination of a four-and-a-half-year economic downturn in the EU following the global financial crisis of 2007/2008. Between 2008 and 2011, average annual real GDP growth was -0.2% in the EU. The EuroZone has suffered the most, plagued by problems stemming from its overleveraged banking industry, weak consumer demand and government austerity measures aimed to tackle high public debt.
Greece’s crisis is continuing, with anti-austerity parties threatening to renege on the country’s austerity targets after the June 2012 election, which may force the country out of the euro. However, Spain is increasingly becoming the focal point of the economic turmoil as its banking industry sinks into insolvency and more large state bail-outs are required to capitalise it, leading to an EU bailout of EUR1 billion for Spanish banks.
To best illustrate the potential impact of the EuroZone crisis on the region’s travel and tourism industry, Euromonitor International has modelled three different outcomes for 2012 – one best case scenario and two worst case scenarios, the latter two being a Greek exit and the complete break-up of the Economic Monetary Union.
Best case scenario
Even in the best case scenario, the prospects for Europe remain weak in 2012. The EuroZone crisis is unlikely to be resolved this year as the precariousness of Spain’s economy and Greek membership become more apparent. Based on the assumption that the EuroZone crisis is not exacerbated further, the EuroZone is expected to experience a 0.7% contraction in real GDP in 2012 due to recessions in its Mediterranean members, followed by a mild expansion of 0.8% in 2013.
Worst case scenario 1 – Greek exit
The 17 June 2012 second election in Greece marks a major event for the EuroZone project and the European Union as a whole. Increasingly seen as a referendum on EuroZone membership, there is a significant danger that Greece will default on its government loans, forcing the country out of the euro. The resultant cost of a Greek exit from the EuroZone would be heavy, albeit not marking the outright end of the euro, with GDP expected to decline by 2.5% for the EuroZone as a whole. However, there would be significant differences between the Member States. While economies in the north of the euro area would experience small declines, the remaining PIIGS would experience significant GDP contractions, aggravated by austerity measures.
Worst case scenario 2 – EuroZone break-up
The potential collapse of the EuroZone is also a possibility, and it cannot be ruled out that several Member States would be forced to leave the euro, which in turn could cause a chain reaction, ending with a complete break-up.
A complete break-up of the EuroZone would see the region’s economies shrink by as much as 9.8% in the first year, followed by a further decline of 2.8% in 2013. A recession would be experienced across the entire EuroZone, dragging down the global economy into a potential global double dip.
EuroZone % Real GDP Growth 2012
Source: Euromonitor International from national statistics, Eurostat, OECD, UN, International Monetary Fund (IMF), World Economic Outlook (WEO), ING
Inbound tourism – best and worst case scenarios
Amid growing uncertainty about the future of the EuroZone in 2012, travel and tourism in the region remains depressed. The austerity measures implemented in several European countries are expected to result in lower disposable incomes and rising unemployment, thus reducing intra-regional travel and spending.
The EuroZone saw strong growth in arrivals from emerging economies in 2011, particularly Russia, China and Brazil. It is hoped that this trend will continue throughout 2012, but it is unlikely to compensate for the decline in intra-regional visitors. The EuroZone is anticipated to continue to struggle, posting an expected decline in arrivals of 0.7% in 2012, down from 4.3% in 2011. However, it should be noted that the continued weakening of the euro against major currencies may have a more positive impact on the tourism industry than expected, attracting high spending North American visitors, for example.
In the event of a Greek exit or a disorderly break-up of the EuroZone, tourism arrivals in the EuroZone could drop by as much as 2.8% or 11%, respectively, due to the resulting sharp European recession and negative global economic consequences.
As unemployment rates rise, consumers start to cut unnecessary costs. In general, those related to leisure activities, which include travel and tourism spending, are viewed as discretionary and are scaled back. Consumers become more cautious and less likely to travel abroad. Incoming tourism receipts in the EuroZone are forecast to decline by 1.2% in 2012 or by as much as 4.4% or 17.3%, respectively, in the above-mentioned worst case scenarios. Pressure on prices, combined with falling or stagnating incomes, would limit spending on travel. In the Great Recession, business travel fell sharply in response and is likely to mirror this trend. Domestic tourism tends to be more resilient in a crisis as a weak currency encourages tourists to travel domestically instead of internationally. Domestic tourism volume in the EuroZone is expected to remain stagnant in 2012 but would slow in the case of a Greek exit or a EuroZone break-up by 0.1% or 0.2%, respectively.
EuroZone Tourism Demand Indicators % Growth 2012
Source: Euromonitor International
Note: % growth in volume of trips for arrivals and domestic tourism, constant value growth at 2011 prices for incoming spending
Hotels – best and worst case scenarios
GDP continues to have a huge impact on how well the hotel industry performs. According to STR, 12 of 26 European countries experienced a decline in the early part of 2012, and quite a few Western European destinations posted declines in hotel occupancy in the first two months of the year, including Greece, Italy, France, Belgium, Denmark, Ireland, the Netherlands, Switzerland and the UK. Overall, a slowdown is evident in hotel occupancy rates in most EuroZone countries. Hotel value performance is expected to decline by 1% in 2012 compared to growth of 2.4% in 2011.
In the event of Greece exiting the EuroZone, Euromonitor International estimates that hotel performance in value terms would decline by as much as 3.6% in 2012. Value sales would slump as overall travel falls and those who do travel seek out the best possible deals. Growth in supply would also slow due to a lack of credit and the cancellation of pipeline projects in the EuroZone.
The macroeconomic impact of a EuroZone disintegration would be catastrophic. Euromonitor International predicts a decline in value sales of 15% in 2012, with hotel demand and RevPar figures falling into negative territory over the short to medium term. Hotels would be particularly hit by the lack of bank lending, which would restrain hotel supply, particularly in Europe. The industry would focus on renovation rather than development and industry consolidation would be inevitable. Independent hotels would be particularly susceptible to volatile market conditions as credit became harder to obtain, and they would become potential acquisition targets for budget chains.
The next two years would be challenging for the hotel industry in Europe, especially as hotels is a lag industry and trails the economy and transportation by at least 6 months. As seen during the last global recession, consumers would start trading down to less expensive budget hotel options as well as resorting to camping and self-catering. Budget hotels would continue to benefit from domestic and short-haul tourism and large chains from placing special emphasis on developing economy brands.
With the current economic uncertainty bargain hunting will remain popular among consumers. European hotels may start to discount prices heavily during the summer season if bookings appear too weak. Aggressive offers, such as spa credits and free nights, are expected to continue.
Cost-conscious travellers will also continue to use online sites to find the best deals. Hotel flash sales, (discounts available for a limited period of time, often through a member-only site, run by a third party, destination or travel provider) will feature strongly to help hotels fill unbooked space at discounted rates, along with the continued exploration of new technology business models to seek ever-decreasing operating costs.
EuroZone Hotel Value % Growth 2012
Source: Euromonitor International
Air transportation – best and worst case scenarios
Starting with the best case scenario, in 2012 air transportation value growth for the EuroZone is expected to decline by 1.4% following a strong increase of 10.7% in 2009. This drop will be the result of increased discounting to drive demand for air transportation as tourists decide to stay closer to home to reduce their travel costs.
If Greece exits the EuroZone air transportation is expected to fall by 5%, while a decline of 19.7% is anticipated in the worst case scenario of a EuroZone break-up in 2012. Economic uncertainty would lead tourists to cancel travel or trade down to cheaper transportation alternatives such as trains and buses or coaches, while a decline in the number of business travellers would also be expected as a result of tight travel budgets.
Airlines would cut capacity significantly on scheduled flights to maintain profitability. Long-haul routes would be the worst affected as airlines responded to the slowdown in demand from European markets.
Low-cost carriers (LCCs) such as Ryanair and easyJet would be expected to capitalise on the fact that travellers become increasingly cost-conscious during periods of economic crisis by offering discounts and enhancing route networks by carefully adding and cutting capacity to markets as needed. easyJet recently launched a flexi-fare product aimed at corporate travellers. LCCs value growth is expected to decline by 2% or 8%, respectively, in these worst case scenarios, with scheduled carriers hit much harder, experiencing falling sales of 4.1% or 20.7%, respectively.
Mergers and acquisitions have been key during periods of economic downturn for airlines as they create space for increased global consolidation in what remains a highly fragmented industry. So far in 2012, the industry has witnessed the collapse of nine small European carriers, including Skyways Express, City Airline, Cimber Sterling, Pinnacle Airlines Corp, Malév Hungarian Airlines, Air Alps, Spanair, Czech Connect Airlines and Cirrus Airlines. Mergers between major airlines are set to continue whilst weaker airlines face being taken over or going under.
EuroZone Air Transportation and by Category Value % Growth 2012
Source: Euromonitor International