The European hotel market achieved record demand in both 2017 and 2018, boasting the largest share of both international tourist arrivals (almost half of the world’s total) and tourism receipts of any global region, according to the World Tourism Organization (UNWTO).
High volume also translated into revenue and profit gains. According to data on full-service hotels from HotStats, for the 2018 financial year, RevPAR was up 5% compared with the same period last year, while TRevPAR increased 3.8% in the same period, boosted by a 1.8% uptick in F&B revenue, on a per-available-room basis.
Contributed by Michael Grove and Laura Resco, HotStats, London
It all translated into good news for hotel owners, who saw their gross operating profit per available room, or GOPPAR, increase 5.8% in 2018 compared with the 2017 financial year.
In Western Europe, growth is fueled by the recovery of the Paris and Brussels markets. After the volatility experienced in 2016 in the aftermath of terrorist attacks, 2017 and 2018 results show both cities recovering their pre-2015 demand levels. And although security is still a pressing concern, this rebound is evidence of the resilience and strength of the markets.
While the whole of Europe is set up for a propitious 2019, the U.K. is on more precarious footing. Even without a finalized Brexit deal, corporate travel already has started to suffer the consequences of relocations, with London enduring a drop of 0.3% in its corporate average room rate in the fiscal year compared with the same time last year (a larger 3.6% decrease in December 2018 versus December 2017), and a 1.2% fall in the segment’s revenue mix, compared with the previous financial year.
In the meantime, other European cities are stepping up as welcoming business destinations. Amsterdam, for one, has become the new home of the European Medicines Agency and expects to reap the benefits of the 40,000 annual room nights the organization generates. Meanwhile, Frankfurt is trying to capture the international banks that will conceivably leave London in the near future. A silver lining could come from the potential weakening of the pound against the euro, which would make the U.K. a more attractive destination for leisure travelers.
Another source of potential disruption is the euro-dollar exchange rate. Even though travel from intra-?European markets is strong, visitors from the U.S. are a significant part of the growth in overnight visitors in Western Europe. The recent inversion of the yield curve in the U.S., albeit partial, has spurred expectations of a more recessive economy. In view of this, some analysts estimate that the Fed will slow rate hikes, leading to a weaker dollar relative to the euro. This could deter inbound travel from the U.S., dampening the demand growth expectations for the European market.
Soaring oil prices and energy costs are other major concerns for 2019. Rising utility costs will continue to erode hotel profitability. This expense, according to HotStats data, grew by a pernicious 7% from the previous financial year on a per-available-room basis, the largest increase recorded for hotel overheads in 2018. At the same time, total hotel labor costs on a per-?available-room basis were up 2.7%.
Commission expenses also remain a concern, as cost of sales (a measure of travel agent commissions) on a?per-available-room basis increased 2.7% this year over last.
On the other hand, airline ticket prices are expected to increase to compensate for heightened fuel costs, which could negatively impact international travel. As per UNWTO reports, air travel accounts for 55% of international arrivals in EU destinations, making it the region’s leading mode of transport. Therefore, it is important to factor in the elasticity of this demand when forecasting hotel occupancy for the coming year.
In sum, 2019 is set up to be a positive year for the European hospitality industry. Even though disrupting variables exist that call for caution, the market has proven its resilience and is expected to overcome the difficulties posed by Brexit-induced uncertainty, currency flux, vacillating oil prices, and security and weather concerns. In particular, the expected strong economic results in the EU should continue to foster demand and fuel the region’s growth.