REPORT FROM AUSTRALIA—On the eve of federal elections at a time when hotel profit margins are lagging despite near record occupancies, the Australian hotel industry is keenly awaiting the election results after the 7 September ballot and the fallout on tourism and hotels.
The Australian Hotels Association has put accommodation sector investment issues atop its pre-election policy platform.
“Tourism Australia’s long-term strategy has identified a need for new investment in infrastructure, including hotel accommodation, in order for Australia to capitalize on the opportunities presented by the emerging economies of Asia,” said President Peter Hurley. “Achieving this requires governments to appreciate the impact of tourism and hospitality on the creation of employment and be actively engaged in partnership with industry. This means addressing key national objectives of sound economic and fiscal management, creating new jobs, fostering enterprise and reducing red tape on business.”
Industry players are waiting to see if there is a change of government and what that means for tourism policies.
Accor’s COO in the Pacific, Simon McGrath, believes the incumbent Labor government is largely putting its efforts in the right places, with Tourism Minister Gary Gray focused on developing the Asian market since coming into office in March.
“The government has put tourism on the agenda by making it one of four major economic pillars,” McGrath said. “The minister’s focus is capitalizing on what the Asian markets can do for Australian tourism, and by working closely with Tourism Australia we are confident the industry will be buoyed by already established and emerging Asian markets.”
Accor is investing heavily in the Asian market as well, McGrath said. The company earmarked India as a major emerging market, which was boosted by Air India’s launch of direct flights between Sydney, Melbourne and New Delhi at the end of August.
“In the year to date, we’ve seen a 54% growth in business from China in terms of roomnights,” he said. “We have also seen 21% growth from India and 11% increase in business from Indonesia.”
The current government shares the same priority. Last month it announced a budget injection of $12.5 million Australian dollars ($11.5 million) to Tourism Australia to encourage growth from Asia.
Though he declined requests for comment, Gary Gray said in a statement that the Asian region could reap more than AU$20 billion ($18.3 billion) for Australia's tourism industry by 2020.
“That would include targeting China's growth cities, dedicated marketing in Japan and South Korea, marketing Australia across Pan Asia through large-scale media platforms, a strong focus on aviation partnerships and further research into Asian markets by Tourism Research Australia,” he said.
The government’s Asia Marketing Fund, introduced in 2012, is pouring AU$48.5 million ($44.5 million) into promoting Australian tourism in Asia over a four-year period, and the hotel industry is expected to benefit greatly.
“It well help Australia capitalize on the strong growth out of Asia and spend dedicated marketing dollars to revitalize key Asian markets,” the tourism minister said. “In 2012 (to 2013), Tourism Australia expanded Australia's footprint in China, opening an office in Chengdu in the country's West, and undertaking marketing and trade development activities across three new Chinese cities of Qingdao, Chengdu and Chongqing."
But sources said the quality and quantity of Australia’s hotel stock needs to improve on pace with inbound tourism from Asia.
Accor’s McGrath said the government needs to do more to address the lagging investment in Australia’s hotel sector.
“The value of accommodation building approvals in the year to March 2012 was about $900 million. Around 17,200 rooms will be added by 2016, but we need another 40,000 more rooms to cater for demand by 2020,” he said.
“Not only do we need more hotels, but we need better hotels,” he added.
Melbourne is a shining light with more than 2,500 rooms added to the 4- and 5-star sectors between 2009 and 2012, according to forecasting firm BIS Shrapnel.
But do higher end hotels necessarily mean higher profits?
National occupancy rates are expected to increase steadily to 68.2% between now and December 2015, according to Deloitte Access Economics’ quarterly “Hotel and tourism outlook.” Revenue per available room is projected to increase 4.8% during the same period. The growth is being driven partly by an increase in international visitors and the domestic business segment.
Through July, occupancy had gone up 0.8% to 72.8%, average daily rate had increased 1.8% to AU$175.92 ($161.36) and RevPAR had grown 2.6% to AU$128.02 ($117.42), according to data from STR Global, sister company of Hotel News Now.
Despite the glowing predictions, John Smith, CEO of Horwath HTL Australia, said his company’s research shows profit margins of 3- to 5-star metropolitan hotels have failed to grow in the past five years, though occupancies reached a pre-financial crisis level of 78%. The findings were based on trading results in 2012 from more than 60 city-based hotels.
“Room rates over the five-year period grew by over 5% per annum,” he said. “Yet, despite the combined effect of both high occupancies and strong room rate growth, profit margins for both rooms and (food and beverage) failed to grow over the period despite the higher revenues. Gross operating profit as a percentage of revenue declined marginally over the period, from 36% in 2007 to 34% in 2012.”
Meanwhile a market research report on hotels and resorts in Australia, from research company IBISWorld, predicts a slight drop in hotel industry revenue of 0.4% per year over the five years through 2013. The report attributes the decline to stagnating revenue, due to weakened demand in the leisure and business segments.
“Hotels and resorts have also had to meet heavy competition from other forms of accommodation, particularly serviced apartments, which have been refined to cater for the lucrative corporate segment,” according to the report.
Addressing areas of concern
The government vows it is not being wishy-washy in the face of the opportunities tourism and hospitality represent. “The growth path established by the government’s Tourism 2020 strategy is critical,” Gray said.
As to the necessary investments, he points to a study by Jones Lang LaSalle, commissioned by Tourism Australia, to identify Australia’s key strengths, weaknesses, opportunities and threats for potential investors in accommodation real estate. The findings show investors favor Australia and believe it is set for an upswing in investment later in the decade.
“The government takes seriously claims of red tape hindering investment; that's why it is a key focus of the Tourism 2020 strategy. All state and territory ministers have agreed to cut red tape to make investment quicker and easier.”
The Tourism 2020 strategy also sets to tackle the serious problem of tourism labor and skills shortages hitting the hotel industry.
“The tourism industry is facing significant pressures in attracting, recruiting and retaining workers, particularly those with the necessary skills needed to service our global customers,” Gray said.
Tourism employment plans are being rolled out across the country, which will try to improve the workforce in the hospitality industry through innovative recruitment initiatives and improved training and career opportunities. To overcome the hospitality staffing problems, the AHA in its pre-election platform outlines measures such as improvements in workplace relations system in line with the 24/7 nature of the industry and “fair and simple access to overseas workers to fill labor shortages that cannot be met by the Australian workforce.”
Not all hoteliers are onboard with the proposed changes.
Steve Finlayson, GM of Radisson on Flagstaff Gardens in Melbourne, believes the commonwealth government needs to do more in the way of aiding and abetting investments in infrastructure, and removing administrative hurdles.
“The local government demonstrates strong support for tourism, but the Federal government is not as great,” he said. “Going forward we must continue to work on our attractiveness to India and China as key market feeders. The arrival of Air India is going to have a very positive impact, with many new arrivals from south Asia as well as providing a faster service to Europe.”
Attracting tourism investment, Gray said, “is a national priority.” Whether it continues to be so depends largely on election results.