Asia The Invincible
First it was SARS. Then it was the tsunami. Despite these crises, growing demand is driving occupancy, rate and development in Asia Pacific.
By Mary Scoviak, Features Editor -- HOTELS Magazine, 4/1/2005
 Although 5-star hotels like this 342-room JW Marriott Shanghai are still hot concepts for developers, China is fast becoming a multibrand play. Marriott will open 1,800 rooms within two years. |
Despite its beginnings in the tragic aftermath of December’s devastating tsunami, 2005 could be another record-beater for brands strategically distributed in Asia Pacific. Shangri-La Hotels & Resorts, which posted the highest profitability numbers in the group’s history last year, sees 2005 keeping pace. “Both domestic and inbound overseas demand continue to be robust. Occupancy, rate and RevPAR are increasing. Room rates are going up this year for the first time in several years,” says Martin F. Waechter, Shangri-La’s chief marketing officer. He terms the group’s outlook for 2005 and 2006 as “positive.” Paul Kirwin, president and managing director for Carlson Hotels Asia Pacific, is less restrained. Without a major crisis, he predicts that strong GDP growth in China and India “is set to fuel one of the best years in hospitality performance in recent memory.”
Demand Drivers
Hoteliers can thank the proliferation of discount airlines for 5% to 15%-plus
additions to their occupancy figures. “The introduction of Jetstar
Asia, Tiger Airways and Valuair amongst others is not only likely to stimulate
demand for the markets they serve, it may also catalyze lower-tier hotel
development in destinations such as Shanghai, Hong Kong, Jakarta, Manila,
Pattaya and Surabaya,” says Scott Hetherington, managing director,
Asia, Jones Lang LaSalle Hotels, Singapore.
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Clearly, China will be the biggest beneficiary as more routes are added. Most of its 50-plus airports are less than three years old and are bracing for more flights as international business moves out of the gateways into untapped secondary markets—with “secondary” often referring to cities with populations over one million. But, more affordable air travel also promises a bonanza for hoteliers in secondary hubs such as Singapore and Bangkok, as well as those in countries such as Vietnam with regulated aviation industries. Although its dominant Vietnam Airlines has code sharing agreements with international airlines such as Cathay Pacific Airways, pricing remains high compared with other Asian destinations. The government is considering a secondary low-cost airline and an air taxi service that would link the main cities of Vietnam to other short-haul hubs in Asia.
That could translate to initial 10% to 15% increases in average occupancy for properties such as the Furama Resort in Danang, says Paul Stoll, general manager. An award-winning figure in Vietnam’s tourism industry, Stoll worked with civil aviation authorities to pave the way for more international direct flights such as those launched by Singapore’s SilkAir in January. “The Furama’s US$90 RevPAR is on the higher side of Asia’s average. If low-cost airlines were permitted into Vietnam, it could increase to perhaps US$100. We would attract more leisure and business travel groups, which are limited now because of bottlenecks in the transportation system,” Stoll says.
New Destinations, Profit Streams
The launch of more low-cost airlines and the expansion of domestic highway
systems will have even more impact on performance and development as Asia’s
tourism markets mature. Domestic businesses in China and India are beginning
to put budget-conscious business travelers on planes and in cars on newly
built highways. Although they currently are stretching up to stay at 4- and
5-star hotels for now, there clearly is growing demand for mid-tier business
and leisure branded product.
That is why close to 70% of the projects in InterContinental Hotels Group’s (IHG) Asia Pacific pipeline are Holiday Inns and why Accor’s mid-market Novotel, Mercure and Ibis brands constitute the major thrust of its development. “Regional travel has grown substantially—and largely without the fluctuations of the long-haul market,” says Michael Issenberg, managing director, Accor Asia-Pacific, Sydney. “The impact of low-cost air carriers and the explosion of the Chinese outbound market will mean that Asian regional travel will grow even faster. We are now seeing India launch new low-cost carriers. These are the reasons we are concentrating on the mid-tier.”
China is the near-term play. Low-cost airlines are just one driver. Roland Jegge, WORLDHOTELS’ vice president, Asia Pacific, Singapore, predicts deregulation of global distribution systems will spur performance growth. Currency considerations are likely to be a non-factor. “As most Asian currencies are pegged to the U.S. dollar and the United States is their largest trading partner, the weakness of the dollar has not had a strong impact,” Jegge says. “We see strong performance this year for most areas of Asia with the exception of the coast areas on the Andaman Sea, which will take time to recover, and Japan, which is struggling with recession.”
India’s rooms shortage will be felt more keenly five years’ out, says Siddarth Thaker, consulting and valuation analyst, HVS International, New Delhi. India’s impending demand-supply imbalance is pushing rates to prohibitive levels for budget-conscious business travelers as well as the country’s growing mid-market leisure travel base. “With hotel rates as they stand in key destinations in India, travel to many Far East destinations is more economical than travel on domestic circuits. A hotel with mid-market orientation and budget brand affiliation has much to gain,” Thaker says.
 Indian Hotels Co. Ltd. will roll out 10 additional indiOne “Smart Basics” hotels across India within 10 months after initial success in Bangalore. |
Major IT players in India such as Infosys and Wipro “are actively considering the development of guesthouses at their campuses in Bangalore” to fill the rooms gap, according to Thaker. But branded alternatives will not be limited for long. Among the players to watch, Thaker says, are IHG’s Holiday Inn, Accor’s Ibis, and Country Inns and Suites by Carlson. Accor just announced a joint venture with Indian technology company InterGlobe Enterprise to invest US$200 million to develop 25 Ibis hotels across India and South Asia over the next 10 to 12 years.
On the local scene, the name to know is indiOne, a new budget brand from Indian Hotels Co. Ltd. After initial success in Bangalore, the company plans to add 10 hotels within 10 months.
Regional Focus
Increased regional travel is benefiting brands across the price spectrum. It
is also eliminating the volatility of over-reliance on long-haul travel to
build the bottom line. “Most of our business growth in Asia in recent
years is from intra-Asia travel,” says Grahame Carder, vice president,
marketing, Hyatt International Asia Pacific. “This trend is continuing
as Asian economies strengthen. Overall, 2005 should be a very robust year
for Asia.”
 Increasing air traffic to hubs such as Bangkok should continue to broaden opportunities for luxury hotels like the Regent Bangkok. |
Patrick Imbardelli, Hong Kong-based managing director, IHG, Asia Pacific, agrees. He estimates that 70% of the call volume through IHG’s new reservation center in Guangzhou is domestic—a figure that exceeds expectations by more than 150%. Those figures not only reflect demand for domestic hotels; they point to gains in outbound business. That is especially meaningful when, as Imbardelli says, performance “is not country-based but location-based.” He sees good times ahead not only for economic giants such as China, but also for Langkawi, Malaysia, which posts higher RevPAR than Kuala Lumpur, and Phuket, which bests Bangkok in the RevPAR race.
5-Star Story
Although most international operators would agree with Imbardelli that countries
such as China are “multibrand strategies all the way,” Asia Pacific’s
overall hotel profile is still a 5-star story—particularly in the resort
sector. The trend now is more and more toward unique projects in unique locations.
Whether writing regulations for redeveloping areas ravaged by the tsunami
or writing long-term development plans, most of Asia’s governments
want clean, “green” upmarket projects. That is leading the way
for new players, such as Orient-Express Hotels, and new products, such as
PT Hanno Bali’s private island concept.
Indonesia’s government has made it clear it would like to see ultra-luxury projects to balance the mass tourism of Bali. The problem, developers say, is the government’s reliance on the private sector to solve infrastructural and transportation problems. “Infrastructure is the number one challenge,” says Hanno Soth, chairman, Bali-based PT Hanno Bali. “Beyond developing the resorts, we have to develop the systems that will get people to them.” That has not stopped the company from proceeding with plans to develop 11 islands and three resorts on Bali. The lure will be strictly high-end and strictly one-of-a-kind experiences—from an Anti-Aging island being developed with the American Academy of Anti-Aging to chic boutique resorts. Co-branding will be a buzzword. Top contenders are brand names that “elicit a sense of ultra luxury, such as Bulgari and Louis Vuitton,” Soth says. He also will rely on the power of management companies’ brands that can deliver both regional and long-haul business through Singapore’s nearby airport.
 Asia’s resort story is decidedly about 5-star retreats like the Four Seasons Langkawi, Malaysia. |
Orient-Express’ decision to invest “up to US$8 million” in Hong Kong-based Hosia Ltd.’s Pansea Hotels group is just one of a new breed of deals aimed at tapping the potential of cultural destinations that are becoming more comfortably accessible. Pansea’s five hotels such as a former governor’s palace in Yangon; a property in the Luang Prabang, the ancient capital of Laos; or a resort close to Cambodia’s Angkor Wat offer the unique experiences that already draw some of Orient-Express’ customers. “We have a shared vision about the development of the tourism experience. Pansea has a number of development plans. This partnership will accelerate them,” says Simon Sherwood, president, Orient-Express.
Pockets of oversupply are not discouraging the race for 5-star city center presences. China’s key cities show why. In Shanghai, for example, the top-tier hotels are running near capacity. “Room rates are 35% higher than they were two years ago, and are topping US$250 for the market leaders—that’s annual averages, not peak levels,” says Scott Brooks, managing director, TransAct Asia. Conrad Hotels is “exploring opportunities” in China, in Japanese cities such as Osaka and in Australian destinations such as Melbourne or Sydney, according to its president, Clem Barter. Shangri-La has announced 15 projects in its key target, China, but is eyeing gateways from Seoul, Tokyo and Melbourne to various locations in India. North Asian cities such as Beijing, Shanghai and Seoul are important targets for Mandarin Oriental Hotel Group, says its chief executive, Edouard Ettedgui. Four Seasons’ Scott Woroch, senior vice president development, Asia Pacific, points to more opportunities in China “as it continues to grow as a business and cultural destination for travelers from around the world.”
Risk Profile
Investors surveyed by Sonnenblick-Goldman see
war/terrorism as “the greatest threat to the continued growth
and health of the hotel industry.” In fact, 49.3% of the nearly
500 participants shared that view. Over-development ranked second,
with 27.7%, followed by single-digit rankings for long-term price
erosion from the Internet, disease and “other.” What
risks do the brands see?
Paul Kirwin, Carlson Hotels Asia Pacific: “The greatest risk factors facing the region are bird flu, North Korea and a hard landing in China.”
Scott Brooks, TransAct Asia: “Keep an eye out for the impact of lending controls, as many real estate projects in China are under-capitalized. Energy is another hot topic. China’s economic growth is outstripping its capacity to generate power and energy-efficient buildings are seen as one way to address this imbalance.”
Clem Barter, Conrad Hotels: “The biggest issues in the region are security and the support of the Japanese economy. Asia Pacific is relying heavily on Japanese visitors as, on average, a quarter of the business originates from this market. The market can be volatile when times are sensitive.”
Michael Issenberg, Accor: “Much of China’s current hotel development is predicated on the continued growth of the domestic economy. A slowing of growth would lead to an oversupply in many markets throughout China.”
Roland Jegge, WORLDHOTELS: “The region’s biggest issue would include any change in the pegging of the Chinese RMB against the U.S. dollar and, possibly, the Malaysian ringitt against the dollar. Another issue is the possibility of an early change of the government of Hong Kong. We all will be challenged to tap into the right opportunities while there is a market of abundance.”
Edouard Ettedgui, Mandarin Oriental Hotel Group: “My feeling is that we are really only at the beginning of this new world of terror and that the result is a consequent reluctance toward long-haul travel—travel to far-off destinations. If this reduction of long-haul travel lasts several years, I fear for the consequences in terms of cultural exchanges and the growth of understanding between cultures. In this context, it can be challenging to find the right sort of locations for expansion. It is important that they not be inaccessible or in what may be perceived as being ‘difficult’ countries (as in not in striking range of direct flights).”
Operator's
Agenda
Operational challenges facing the region’s
hotel managers are:
The “people” issue. “Our company alone will need 50% more GMs, 50% more F&B managers and so on in the next few years,” says IHG’s Patrick Imbardelli. “Chasing talent is a real issue, especially if you are not prepared to participate in a Dutch auction to outpay for personnel. There is also a ‘poachability’ factor. Hotel companies will be investing more on training and development to maximize their employee retention rate.”
Distribution management. “From a marketing perspective, managing distribution and pricing in markets that are rapidly adapting to new technology, with all the attendant changes in customer behavior and expectations that implies, will be an issue,” says Grahame Carder, Hyatt International Asia Pacific.
Performance. “Management contracts in Asia Pacific are putting more emphasis on the hotel manager to perform. Contracts and fee terms are becoming more performance based and incentive driven,” says Paul Kirwin, Carlson Hotels Asia Pacific.
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