EU enlargement brings hope for the East

On 1 May 2004, the European Union (EU) welcomed ten new members including eight from the former communist states. With the addition of Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia, the EU now comprises of 25 nations. Together these have a combined population of 455 million, making the EU the world’s largest trading bloc. The economic progression of the new members has over the last decade been very strong. In 2003, their collective gross domestic product (GDP) increased by 3.5 percent, much higher than the EU average of 0.6 percent. However, they still have some way to go. The Economist Intelligence Unit (EIU) expects that it will take the eight new Eastern European
Changing dynamics of tourism

The accession of the new countries from Eastern Europe to the EU is expected to change the dynamics of the tourism industry across Europe. According to The World Travel & Tourism Council (WTTC), the new Eastern European members are expected to generate an additional US$54.6 billion in travel and tourism GDP and create some 3 million jobs. Hungary and Poland are expected to benefit the most from joining the EU and are expected to generate some US$46 billion in travel and tourism GDP between them.

Although the new member states will benefit from relaxed border controls into other EU countries, they might also witness the reverse in the east, as border controls become more complex. As a result there could be a fall in demand from the traditional source markets such as Ukraine and Russia.

Growth of low-cost airlines

One of the most noticeable changes in travel in Western Europe over recent years has been the growth in low-cost airlines. These airlines are now turning their attention eastwards, to benefit from the new accessions to the EU. Not only have the current low-cost airlines started to introduce new routes into Eastern Europe but Eastern Europe’s home-grown low-cost carriers, such as Air Polonia, SkyEurope, Smart Wings and Wizz Air have also added a number of new routes. According to the Financial Times, airlines are expecting traffic to the new EU countries to increase by at least 20 percent a year.

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Historically hard times for hotel performance

Since 2001 the eight new Eastern European states have, each year, experienced consecutive declines in revenue per available room (revPAR). Between 2001 and 2003 revPAR fell by 28.3 percent. According to the HotelBenchmark Survey by Deloitte, this is twice as much as the euro-zone average for the same period. This decline over the last three years has mainly been driven by average room rates, as hoteliers have adopted price discounting in an effort to boost occupancy levels. In 2003, the average room rate of hotels in the new Eastern Europe states was €83 - some 20 percent lower than the average for the euro-zone.

Warsaw has seen the largest decline in revPAR over the last three years. Since 2001, this has fallen by an amazing 70 percent, to reach €52 in 2003. This decline has been driven predominately by falling average room rates as opposed to occupancy levels. Traditionally Warsaw has managed to achieve higher average room rates than many other key EU cities. However, the increase in new supply over recent years has placed rates under pressure. In addition from 1999 to 2003 the number of tourist arrivals to Poland declined by 25.6 percent. First quarter 2004 results unfortunately show no change in this trend, with revPAR falling by 22 percent, compared to the same period last year.

Riga’s revPAR on the other hand has almost managed to return to the same levels as in 2001. In 2003, the city’s hotels achieved a revPAR of €40. Latvia’s capital has predominately benefited from the country’s strong economic performance. The city has also been fortunate enough not to have experienced the level of new supply that many of its Eastern European counterparts have.

Between 2001 and 2003, Prague and Budapest recorded double-digit declines in revPAR of 26 percent and 19 percent respectively. Both cities have seen a large amount of new supply entering the market over the last few years, which has put average room rates under pressure. The current building boom (1998 - 2004) is expected to add some 4,800 new hotel rooms to the Budapest market. Prague also suffered from severe floods in 2002, which forced many of the hotels in the city to close. However, during the first quarter of 2004 both Prague and Budapest saw revPAR increase by 30 percent and 14.5 percent respectively. Both cities have benefited from an increase in corporate demand prior to the accession to the EU on 1 May 2004. Furthermore, Prague and Budapest have also seen growing demand from leisure travellers due to the expansion of low-cost airlines across Eastern Europe.

It is expected that the new Eastern European members will see a positive impact on hotel performance over the next few years as a result of joining the EU. Cheaper prices, a lower cost of living, the increase in routes provided by budget carriers as well an overvalued euro are all expected to help lure tourists eastwards. Hotel performance figures for the first quarter of 2004 bode well with revPAR up by 13 percent compared to the first quarter in 2003. However, this is set against some weak comparables in 2003.
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