28 June 2006

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Business Today

It’s the bottom line, stupid

It’s not easy being the head of the Malta Hotels and Restaurants Association these days with the sector experiencing a dismal performance and government seemingly taking so long to react to the situation.
But Justin Zammit Tabona, president MHRA, will not be calling for the resignation of the tourism minister or anybody else since he believes that what is required for the time being is a concrete action plan that is implemented within short time frames.
Flanked by MHRA vice president Josef Formosa Gauci and the association’s director general George Schembri, Zammit Tabona laments the lethargy that characterises certain decisions at government level.
Low cost airlines are a case in point. Malta is late in responding to requests by the major carriers for reduced landing fees even if negotiations between the MHRA and government are ongoing.
Zammit Tabona also reiterates the warning that next winter may yet be another dismal show unless the Malta Tourism Authority does something about the situation. Last year’s warnings went unheeded and led to the bad results published last week by the MHRA.

The latest survey commissioned by the MHRA depicts a very dismal picture of the tourism industry, especially the three star category. This category of hotels gradually seems to be disappearing. What is wrong here?
The three star category is mostly dependent on tour operators and they are being hit the hardest because tour operator business is going down. The survey clearly shows that from the total business mix, three star hotels are 90 per cent dependent on tour operator business, which is less pronounced for the other hotel categories. Obviously, the bigger the dependence on one income stream, the harder the category will be hit when that source of revenue starts drying up.
It’s also about how trends develop. Globally there are more tourists booking directly without going through an intermediary. Tour operators are still an important part of our business mix but we also need to see which markets are emerging and determine how to tap them. A lot of bookings today are done via web sites. In these circumstances we need to make sure that our three star hotels also get their web portals online so that they will gain access to an emerging market.

What is making Malta less attractive to the tour operator?
Economies of scale is one of the main reasons. We are a small market trying to compete with other emerging markets in the east of Europe and around the Mediterranean basin.
Tour operators have invested in their own properties in some of these emerging markets and hence their efforts will primarily be focussed on taking tourists to these resorts.
There is also a lot of consolidation among large tour operators, especially on the long haul business. Tour operators are facing stiff competition on the short haul with the advent of low cost airlines and so they have diversified their business towards more exotic locations, in some of which they have invested heavily in terms of resorts and property. In these circumstances, Malta is less in demand and tour operators are finding it hard to sell our product.
There still are the Malta-specialist operators who will continue to work here and we need to maintain a good relationship with them.

The problems are not confined to the three star category. The four and five star hotels have also witnessed a drop in numbers, even if not as dramatic. What is the difficulty of attracting a five star tourist and charging him or her for a five star service?
By far and large five star hotels have managed to curtail the losses experienced by the three star category. They have done so by gradually shifting from tour operators’ business to conference business. During the winter months, five star hotels seem to have done fairly reasonable in keeping their occupancy levels to the previous year due to increase in conference and incentive travel. The statistics shows that this particular segment of tourist arrivals accounts for an increase of 10 per cent in the business mix of five star hotels. They have changed their business mix, moving along with what the market wants and which is also giving them better rates.
Conference and incentive travel is a niche, five star hotels can tap. It is also an important category for some four star hotels but irrelevant for three star hotels. We need to get a mix of business across the board.

There is this phenomenon that five star hotels have lowered their prices to such an extent that they have impinged on four and three star category hotels. How real is this?
It is more a perception. The Deloitte survey shows the average room rate achieved by a five star hotel in quarter one this year is substantially higher than last year’s. Every category has experienced higher room rates but the increase is more pronounced in the five star category.
It is important to note that despite the increased room rates, there has not been any increase in profitability since costs have continued to spiral up.

Is it justified to quantify the success or not of the industry solely in terms of tourist arrivals as is often done by politicians?
At the end of the day it is the bottom line that counts and it is the result of occupancy levels, rates charged and costs incurred. It is a combination of these three that matters to us in the industry. When we talk about the number of tourists that come here, we have to factor in the amount of money they spend.
When the National Statistics Office publishes the results it produces three different figures: the number of arrivals, their length of stay and how much they spend. Taking one figure out of context doesn’t make sense. If the three are improving then we will be making a success.

Where is our main problem at the moment?
There is no growth. Despite the increase in room rates to try and make up for added costs, occupancy levels have gone down as has the average length of stay. The length of stay has dropped by almost 10 per cent.
It is a fact that the more we get people who come here directly, by-passing tour operators, the lower their length of stay. But what normally happens is that room rates could increase since these won’t be discounted as is the case with tour operators. The problem is that costs have also increased.

With prospects for the rest of the year not looking so bright what short term measures would you advocate to try and stop the haemorrhage?
We need to concentrate on an aggressive on going marketing campaign for the Islands. Last year we warned the authorities that we were going to experience problems this winter but nothing was done in terms of marketing to address the problem. Other countries such as Greece and Cyprus are so present on international television. It is only now that we are starting to see Malta on CNN but it is important to continue marketing the island in a proper way.
Branding is now on the road and moving forward but the problem as MHRA sees it is the time span determined by the authority which is some what longer than what we would have liked to see.

What time frames do you consider acceptable?
Over the last two years MTA has been caught up in a restructuring exercise. It has also worked on a branding strategy, which is still developing. In the industry we would have liked to see these processes advancing at a much faster pace. MTA is still laden with bureaucracy renders implementation too slow.
The MHRA is frustrated with the situation because one year ago, we had told government that winter 2006 was not looking good. MTA did little about it in terms of specific marketing for winter. The results of our survey last week confirm what we had said as an organisation last year. Now we are once again pointing out that winter does not seem to be good and we hope that the authorities take heed of the warning signs to avoid the same situation we are in today.

What would you identify as the major cost factor for the industry?
Costs are going up across the board. Utility rates have gone up. The capping for hotels has helped to mitigate but it is still an additional cost. In restaurants, unfortunately, there is no capping and our restaurant members are suffering significantly because of the surcharge. You’ve got wage bills that are going up. There is also the inflationary effect created by the surcharge.
The increase in room rates has not been enough to make up for the increase in costs. The percentage of costs over revenue has increased, with revenue not increasing high enough to level out matters.
It is a vicious circle because higher costs make you wary of investing further but if you don’t invest you run the risk of losing your tourists. The worst things that can happen to the tourism industry in Malta is spiralling costs that eat into profitability.

Is the MHRA satisfied with the MTA?
The biggest problem with MTA has been the length of time it took and still takes to get things done. The time frames for restructuring and branding were too long. Now the segment leaders are in place and the industry advisory committees are also functioning, putting the private sector at the core of MTA’s operations. Had the segment leaders been in place by early winter, their impact would have possibly been felt by the summer. Delaying that process by a couple of months has postponed any positive impact for a later period.

Winston J. Zahra last week called for the tourism minister’s and the MTA’s executive chairman’s resignation. His call has been reiterated by Michael Zammit Tabona. Are these views shared by the MHRA?
As MHRA, we have to make sure that government lives up to its commitment of achieving the targets it set out to achieve. This is important for us. Where these targets are not being reached we need to understand why and make sure that the reasons for falling behind are addressed.
Resignations at this stage of the minister or others will not solve the problem.

Will the MHRA be calling for the resignation of the minister?
The MHRA will not be calling for any resignations. We have to make sure that targets set are achieved. We need to analyse which markets are failing us and address those problems accordingly and in so doing we need to make sure that we continue to look at new opportunities as market trends change from time to time. I would say that one of the reasons for the MTA not reaching its target is the delay in restructuring.

But government’s target set out in the budget clearly spoke of an increase of 150,000 tourists over three years…
We definitely would like to see this type of growth because it is necessary to sustain the new investment coming on board in the tourism sector.

Are you satisfied with government’s performance on the issue of low cost airlines and its announced subsidy schemes?
Discussions with government on low cost are still underway and they’ve arrived at a very delicate stage. The tourism ministry does understand our views on low cost and actually supports us but this is not a decision that simply concerns one ministry. Given the wide implications of having low cost airlines coming here it needs to be a collective decision taken by all the cabinet. There is still some resistance from certain parts of government because of the impact low cost airlines might have on Air Malta.
Experience in other countries has shown that legacy carriers have also grown with the advent of low cost airlines. They obviously have had to restructure but they’ve grown. In our case, maybe Air Malta will see a decline. We certainly cannot argue against Air Malta given five star travel to the island has increasingly become dependent on conference tourists. This category of tourists does not travel with low cost. We need Air Malta to be there but we also need to have the major low cost airlines operating here as well to gain from the exposure through their online marketing.
The low cost market is increasingly becoming a major attraction in Europe and we cannot be left out of this growing market. We do have low cost airlines operating here, such as Britishjet and Meridiana but we also need the likes of Ryanair and Easyjet to help us drive the market. Low cost airlines are expected to carry over 100 million passengers in Europe.
We are not saying there is no place for tour operators, we do not want to see established airlines suffer neither and we definitely do not want to see Air Malta dismantled.
Air Malta has played a major role in the tourism sector and will continue doing so. But we also maintain that Air Malta has to restructure.

But will we see the likes of Ryanair and Easyjet any time this year operating from Malta?
Negotiations are at a delicate stage and it is imprudent to speak while they are ongoing. We will carry on trying to persuade all of government that it is of benefit for Malta to have the major low cost airlines operating here.

Both Ryanair and Easyjet are planning their schedules for next winter. How late are we?
Every day lost is a day lost for ever and we will regret it. Ideally, we need to have these carriers here from next winter and we need to take a decision fast. We needed a decision yesterday. After all, these carriers are not waiting for us to decide.
It is disappointing however to see the length of time it takes for government to decide things. We presented our report on low cost on 31 May. We were promised that government had appointed its own experts to draw up a report and it would be ready within a week. We were given a copy of that report last Thursday; a two week delay. MHRA will be discussing government’s report on Tuesday (yesterday). This delay we regret because things have to move as fast as possible. We strongly believe that low cost carriers can play an important part in our business mix and just like in the past we found ways of supporting tour operators despite initial hesitancy, I am sure we can find a solution for low cost airlines. It is a challenge and we must not run away from it.

Justin Zammit Tabona was interviewed by Kurt Sansone

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