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Tourism: Weakening prospects

Sep 20, 2001

The global markets are in turmoil after the US attacks. In India too, the Sensex ended at 2,800 mark after gaining some ground in the last two days. Worldwide the airlines and hotel stocks are out of favour. Indian tourism industry is also expected to see a contraction in revenues in the current year. Hotel and tourism industry reported impressive earnings growth of 23% on an 8% rise in revenues for the year ended March '01. This was after a slack period in FY00 when net profits dipped by 35% on a negative sales growth.

The industry is again headed for a hit, with the attacks on the world's largest financial centre in the US. Topline growth of hotel majors, including Indian Hotels, EIH and ITC group of hotels, are expected to decline in the current year on large-scale cancellations and long postponements by international as well as domestic corporate customers. Already in the 1QFY02, the domestic air passenger market grew by just 1.4% as against a 12% growth recorded in the corresponding quarter of the previous year. The Indian tourism industry estimates a 5% reduction in inbound and outbound travel as of now, but this figure is expected to rise to almost 40% in the next few months.

India's largest hotel chain, the Taj group has indicated that it will cut costs aggressively due to the expected sharp drop in the number of customers in the next few weeks. As per the reports, ITC group of hotels has already registered 500 cancellations last week by international customers. October and November are considered to be peak season for tourism industry. Most hotel chains derive 60% of their business from European, American and Japanese clients. Now with the downturn in these economies, tourism business is likely to be on the lower side in the next two months. As per some reports, 20% of existing domestic ticket bookings have already been cancelled. Also, devaluation in Indian rupee is making foreign travel expensive for the Indian travelers.

The world travel industry is already taking a dip due to the heightened uncertainty about what actions the US would take in light of the attack. Tourism is the lifeblood for many countries, especially less developed nations that have no other major industries. According to the report of 'The World Tourism Organization' (WTO), the money spent by vacationers is the main source of income for almost 40% of the world's countries.

The US, which accounts for the largest share of the world's GDP, is likely to see a slowdown in spending on tourism industry. Americans were the world's largest spenders on the tourism in 1999 (US$ 60.1 bn), followed by Germans at US$ 48.2 bn and Japanese at US$ 32.8 bn. Following the attacks, the US airlines are cutting back services dramatically. The country's nine largest airlines have reported that they are incurring losses ranging from US $100 m to $250 m each day. Lack of consumer confidence in the safety of air travel is likely to affect the world tourism industry.

Since the beginning of the year 2001, the industry has recorded an increase of 3% (7.4% in 2000). According to the WTO report the industry is expected to grow at a slower rate of 1.5% in the current year. Even during the Gulf War, although International air passenger traffic fell from 280 m in 1990 to 266 m in 1991, tourism industry still managed to grow by almost 2.1%. Over the past 50 years, the industry has never recorded a decline in growth, despite several calamities.

In the short term, the outlook is very uncertain and it would be difficult to measure the exact impact on the industry. The rebound in the activity highly depends on the actions from the US. For the Indian travel industry, which is the largest foreign exchange earner, the real impact would be reflected after the beginning of the festival season (around November).

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