2010 bleak, but there are a few positives

OTTAWA—Maxim Armstrong, economist with The Conference Board of Canada doesn’t paint a pretty picture, when asked about the board’s findings in its semi-annual study of the accommodation industry.

He cites the increasingly familiar litany of problems. The accommodation industry is struggling with the effects of the recession, as domestic travellers continue to choose more economical ways to spend their vacation and fewer foreigners visit Canada. During the recession, 8.4 million jobs were lost in the United States and over 400,000 jobs disappeared in Canada, thereby limiting the willingness and capacity of Americans and Canadians to travel.

And the rise of the Canadian dollar also discouraged potential visitors, as it increased the relative costs of travelling in Canada. As a result, occupancy rates are now well below year-ago levels in every major region of the country.

But, looking through the report, there are a few, selective positives on the horizon. CLN has chosen to appeal to the optimism that helps keep Canadian hoteliers in the business, and list these in the following excerpts from the report.

Thankfully, the threat of the H1N1 flu pandemic has passed without significant impacts. Indeed, a widespread outbreak of the H1N1 virus could have greatly reduced willingness to travel and eventually led to outright travel restrictions being put in place.

In the medium term, rising international travel from countries other than the U.S. will help the industry (as it has in recent years). Although a decline was recorded in 2009, the number of visitors will begin to improve alongside the economic recovery. The 2010 Vancouver Olympic Winter Games will also contribute to the industry’s recovery.

As a result, sales and profits will begin to recover this year. From 2010 to 2014, profits are expected to increase at a solid pace. However, they will not return to their 2007 record high before the end of the forecast horizon.

Labour Market

Canada’s economy came out of recession over the second half of last year, as real GDP growth turned positive. The recovery has also helped to turn labour markets around. After falling by over 400,000 (peak to trough) through the economic cycle, employment recovered strongly in the final quarter of 2009.

According to Statistics Canada’s labour force survey, job gains continued in January 2010, helping to lower the unemployment rate to 8.3 per cent—a nine-month low.

Moreover, recent data point to a reversal of the recession trend toward growing self-employment and declining full-time employment—a reversal that has positive implications in terms of generating future labour income.

On an annual basis, after losing 270,000 jobs in 2009, the Canadian economy is forecast to generate 170,000 jobs this year, a growth rate of just 1 per cent. As labour markets improve so too should interest in leisure travel.

International Travellers

Over much of the past decade, a rising number of travellers from other countries helped to at least partially offset some of the loss coming from the U.S. market, but the recession has negatively affected travel from overseas as well.

Thankfully, rising incomes in emerging economies are giving rise to a new generation of middle-class travellers. The number of visitors from China and Mexico, for example, increased by 150 per cent between 1998 and 2008.

On a positive note, the granting of Approved Destination Status to Canada by the Chinese government is expected to significantly boost visits from China.

Regina a bright spot

Almost every market across Canada has been affected by the recession. Most cities across Western Canada—with the exception of Regina and Saskatoon—have been struggling.

Regina has been the bright point. With the third-strongest economic expansion among the 27 Canadian metro areas in 2009, the city’s accommodation market recorded increases in daily rates and revenues per room. The Olympics will have a strong but temporary impact on the Vancouver area in the first quarter, as the number of rooms sold and room rates are well above norms. However, a more robust and broadly based recovery won’t begin to take hold until later this year.

Revenues

While the Vancouver Olympics have provided a small boost to first-quarter sales, the gains will be offset by low prices in the rest of the country. With little growth in prices, revenue growth will remain weak, reaching only 2.5 per cent in 2010. In the medium term, revenues will return to above-average growth.

As the Canadian economy recovers, demand will start growing once again.

Price appreciation will also return to an above-average pace of growth—2.5 per cent annually between 2010 and 2014. With prices and the number of rooms sold both showing solid improvement, revenues are expected to rise by more than 5 per cent a year between 2010 and 2014.

Costs

The industry has been able to cut costs in response to weaker demand.

Falling investment has allowed the industry to cut its capital costs. Layoffs and lower wages helped reduce labour costs, while lower energy prices have also helped to reduce operating costs. Looking forward, though, controlling labour costs will continue to be a major challenge for the industry.