Full Of Promise - The Development of India's Hotel Industry

With India capturing the attention of the world, Deloitte has responded by dedicating the 18th edition of the HotelBenchmark Survey to report each month on the country's hotel performance. In this article Deloitte explores the dynamics of India's domestic and international markets and the implications for its hotel industry. They also examine how the airline industry has paved the way for the improved infrastructure needed by India to ensure future tourism growth.

To put the size of India's gigantic domestic market into perspective, it equates to over one third of total international arrivals received by all markets globally. While current mid-market players like Choice Hospitality India, Best Western, Fortune Park and Sarovar Park Plaza have catered for domestic tourism for some time - this market has recently exploded and demand is growing.

As the domestic market continues to expand, the escalating economy provides the rising middle classes with increased disposable income. The arrival of low cost airlines and the associated price wars have given domestic tourists more options than ever before. The 'Incredible India' destination campaign has also helped the growth of many domestic markets including religious tourism. As a next step, the government has recently launched the 'Atithi Devo Bhavah' (ADB) campaign aimed at increasing awareness of tourism in India.

To respond to the needs of this growing giant, companies like Choice and Best Western plan to significantly increase their portfolio over the next two years, by 100 per cent and 50 per cent respectively. Other hotel companies have also taken steps to ensure they benefit from the country's huge domestic demand. Indian Hotels launched its IndiOne brand with huge success last June in Bangalore. Accor has entered into a joint venture with InterGlobe Enterprises to introduce 25 Ibis branded hotels, the first will arrive in 2006. InterContinental Hotels Group is also introducing their economy brand, Holiday Inn Express, with ten properties planned, starting later this year. Marriott has also announced plans to introduce the Courtyard brand in India.

Catching The Eye Of The International Market
Despite the international market being significantly smaller than India's domestic market, it also shows promising growth. The country's appeal to international visitors has previously been affected by the political situation in Kashmir as well as the global events of the past few years. However this has now improved due to relative geo-political stability and international economic growth. Tourism in India is also benefiting from the stronger economies of India's two major source markets, the United Kingdom and the United States. The peace talks with Pakistan have also improved the situation, with the ongoing cricket test series between the two countries further instilling confidence of future harmony.

Currently corporate travel dominates the international arena. The Indian subsidiary of Kuoni estimates that 80 per cent of foreigners staying in their hotels are there on business. While corporate business will naturally continue to expand as the economy grows, there is enormous untapped potential in the country's leisure market. ‘Incredible India’ has focused not only on promoting traditional holiday attractions and cultural experiences, but on defining unique markets from medical to religious tourism. In fact, India has already seen growing Japanese arrivals due to the promotion of Buddhist travel.

But India still faces many challenges in attracting the international traveler. This will continue whilst the government addresses the quality of India's infrastructure. Although the World Travel and Tourism Council rated India second in price competitiveness (after Brazil) there are many factors which need to be dealt with to encourage foreign visitors. Poor roads, overstretched railways and old airports discourage international travelers. Add to that hotel taxes higher than most Asian countries and a bureaucratic visa process - and you start to get a clear picture of the challenges facing India.

Maximising Hotel Performance
According to the new India edition of the HotelBenchmark Survey by Deloitte, the growth in hotel performance is impressive. All markets tracked by the survey reported double-digit growth in the twelve months to February 2005 compared to the same period the previous year. This is not surprising given the global economic growth in 2004, India's bustling domestic economy and reduced travel barriers.

Amongst the unique features of the hotel industry in India is the sheer volume of the domestic market. Hotels receive twice as many domestic guests as international guests. With most branded supply in India sitting in the top tier of the market, the hotel industry is currently very top heavy. While many companies are addressing the needs of the growing domestic market for more economical hotel products, most projects are still in development. Future growth of the hotel industry will not be helped by archaic land laws that make construction of new hotels time-consuming and expensive.

What is interesting to note, is that the demand for hotel rooms far exceeds the country's supply. While an opportunity exists to develop the hotel industry to meet this demand, India experiences large seasonal shifts in demand and corporate travelers currently represent the bulk of guests. Due to the lack of a widely distributed business mix, annual occupancies and average room rates in India did not rank very high in the 2004 HotelBenchmark Global Ranking Index. The industry must explore ways to seize untapped potential demand whilst addressing the down-time to maintain profitable operations. Developing a more diverse business mix is key.

The Advancing Airline Industry
The opening up of the aviation industry in India brings exciting opportunities for hotels; as they rely on airlines to transport 80 per cent of international arrivals. Increased airline activity has stimulated demand and has helped to improve India's troubled infrastructure. Increased competition will lead to the development of new and improved services. In addition to new aviation brands, many existing companies have ordered new planes. This is long overdue considering state-owned Indian Airlines has not purchased a new plane in 16 years.

The open skies policy has benefited both international and domestic travel. On the international front, the capacity and availability of destinations serving India continues to grow. In late 2004, India and the UK agreed to double (in phases) the number of direct flights per week. Earlier this year, Malaysia Airlines announced their plans to add 18 new routes in India within the next five years. Jet Airways and Air Sahara, two privately owned airlines have launched services to other South Asian destinations, and will shortly launch services to Singapore.

The increasing competition in the domestic airline industry will continue to drive the growth of India's domestic market. In May, two new private domestic airlines (SpiceJet and Kingfisher Air) are expected to enter the market. They will compete head on with current operators Jet Airways, Air Sahara and Air Deccan. It is expected that the tumbling cost of travel will continue, given the growing number of seats available.

The government has expanded the scope of airline liberalization with its approval in January for private airlines to fly all international routes excluding the Gulf. To qualify the government requires a company to have a fleet of at least 20 planes and five years domestic experience. Jet Airways and Sahara will be able to benefit immediately. In three years time India's state-run carriers will also have to share their Gulf routes. These routes currently earn them most of their operational revenue and profit. The recent IPO (Initial Public Offering) by Jet Airways was over-subscribed several times - indicating the confidence this industry has gained over recent years.

Opportunity Knocks
The aviation industry in India will drive future tourism growth, with the continued increase of flights and options for travel. But the question remains, can the country's accommodation meet the increasing expectations of the global traveler? Hotel supply must catch up with demand whilst creating a healthier business mix. Mid-market properties especially need to respond to the growing middle class. But even as the hotel industry joins the airlines in responding to India's thriving economy and driving future tourism growth - infrastructure challenges could still prevent India from grasping its full tourism potential.

Encouragingly major government initiatives such as 'Incredible India' and tax policy revision are well underway. With the growth of the economy expected to continue, and considering the size and dynamics of the domestic market, Indian hotel performance will be exciting to watch over the coming years. Future performance should reflect a country of vast opportunities, especially as mid-market products develop to satisfy the country's thriving domestic market