Tourism sector in Hungary

Sectoral Analysis

Autumn 2005

Executive summary

Global boom In 2004 the revenue of the entrepreneurs working in the tourism industry

reached all-time high. Revenues from tourism and the number

of travellers increased at the same pace, by 10.3 % and 10.7 % respectively.

Total revenue grew from the previous year’s USD 525 billion

to USD 623 billion. Each continent, including all regions managed

to increase their revenues. Calculating in own currencies it was Europe

which had the weakest performance by its 2.3% growth, while Asia

grew by 23.9 %

Based on the preliminary data collected by the WTO it can be stated

that favourable developments were maintained in 2005 though growth

pace moderated. In the first seven months of this year 460 million

visitors have been registered which exceeds the figures of this period

last year by 5.9%. After the outstanding year of 2004 the degree of

consolidation is promising, though looking through conservative

glasses 4% average growth can be expected in the long run.

About impediments It might be rather early to draw far-reaching conclusions concerning

the long-term effects of Katrina and Rita, however a few short term

consequences can already be seen clearly. One sector, cruise liners

definitely came off badly. Before Katrina this subsector boasted 7-8%

increase in the number of travellers, but in the rest of the year the

growth is expected to diminish.

Increasing oil prices make a negative effect on air transport. Despite

the fact that assigning the impact of the increase in fuel prices is getting

widespread, it is not fully possible due to the intense competition.

Hungary keeps pace with the trends

12.7 million foreign tourists visited Hungary in 2004, who spent 100

million days here altogether. They spent 2.9 days in Hungary on average.

In the first eight months of 2005 occupancy rate of hotel rooms kept

on increasing. In August 61.7% of the rooms were occupied compared

to the 60% rate in the previous year and to the 57.6% in 2003. In the

January – August period commercial accommodations were used by

2.4 million foreign guests, who spent 7.6 million nights here. The former

figure is by 5%, the latter one is by 1% higher than that of 2004.

Within this, turnover of hotels increased by 1-5%, depending on the

type.

What are the prospects?

In our opinion in the next six months occupancy rates and room prices

are expected to be higher than those of base months. Yet growth rate

will probably decline, the dynamism of the past one and a half years is

not expected to continue. In the short term the weaker position of the

forint may have a positive effect on the returns of the sector.

 

1. Trends in the European Union and in the region

2004 was the year of change

Now there are finalised data available for the evaluation of 2004,

which exceed all previous expectations and even estimated figures at

the beginning of 2005. Revenues from tourism and the number of passengers

increased at roughly the same pace, by 10.3% and 10.7%

(the latter is counted at current rates of local currencies, that is without

the effects of currency movements.)

Each continent increased its revenue from tourism

Concerning the absolute figures in 2004 the revenue of entrepreneurs

working in the tourism industry reached all-time high, as revenues

grew from the previous year’s USD 525 billion to USD 623 billion. USD

98 billion seems outstanding, however it was considerably supported

by the depreciation of the dollar during last year. Calculations in euro

show that the total revenues increased ’only’ by EUR 36 billion and

reached EUR 500 billion in total. The relevance of these calculations is

supported by the fact that 52 % of the revenues originated in Europe.

Asia and Oceania added 20%, while America contributed 21% to the

total revenue. The remaining 6% is shared by Africa and the Middle

East. 

 

Each continent, including all regions managed to increase their revenues.

Calculating in own currencies it was Europe which had the

weakest performance by its 2.3% growth, while Asia grew by 23.9 %.

After a three-year-long gradual decline America also showed some

progress, it exceeded its 2003 figures by 11.2%.

Within Europe all regions reported increase in spite of their decrease

in the previous years. The most significant growth was achieved by

the Southern European region, its turnover increased by 2.2%, while

this figure was 1.2% in case of Western Europe, 4.0% in Northern

Europe and 5.1%in Central Eastern Europe.

Dynamic increase in number of visitors

Concerning the number of visitors WTO statisticians reported a dynamic

10.7% growth, so the number reached 763 million. Examining

continents it was Europe again which showed the smallest increase,

while Asia welcomed nearly 153 million tourists, which is 27.8%

higher than in 2003. The most popular continent is still Europe having

415 million visitors. Asia is the second with the above mentioned 153

million visitors, America is on the third place having 126 million visitors.

The most frequently visited country is still France

Examining individual countries France was preserving its stable leading

position. Last year 75.1 million tourists were interested in the

sights of the country, while ’only’ 53.6 million visited Spain on the

second place. The United States came in third as number of visitors

reached 46.1 million by 2004 following the 40.4 million in the previous

year. 

Breakdown of the revenues by countries does not show any significant

change, the countries taking the first seven places keep their positions.

It is still the USA which has the highest revenue from tourism,

in total USD 74.5 billion in 2004, followed by Spain and France with

USD 45.2 billion and USD 40.8 billion.

Favourable developments in 2005 as well

Based on the preliminary data collected by the WTO it can be stated

that favourable developments were maintained in 2005, though

growth pace moderated. In the first seven months of this year 460

million visitors have been registered which exceeds the figures of this

period last year by 5.9%. After the outstanding year of 2004 the degree

of consolidation is promising, though looking through conservative

glasses 4% average growth can be expected in the long run.

In the first quarter of the year 9% growth rate was measured, while in

the second one it was only 4%. The main reason for the difference is

that this year Easter fell in March unlike last year when it was in April.

This resulted in 15% growth in number of visitors by March and stagnation

in April. In May, June and July the figures were 7%, 6% and

5% higher than the base measured a year before.

Slowing down within the year is not surprising. Experts had forecasted

that dynamism would be more intense in the off-season and less in

the high-season. The reason for this is the relatively reduced capacity

of transport and accommodation capacities. Leisure tourism performed

better than business tourism again. The market was dominated

by short distance and short time trips. It seems that dominant

spreading of long distance and longer time holidays again will be a

slow and gradual process.

About hurricanes It might be rather early to draw far-reaching conclusions concerning

the long-term effects of Katrina and Rita, however a few short term

consequences can be seen clearly. One sector, cruise liners definitely

came off badly. Before Katrina this subsector boasted 7-8% increase

in the number of travellers, but in the rest of the year the growth is

expected to diminish. After the disaster the US government rented

three liners (room for 7 000 people) for the following six months for

the disaster recovery personnel. Further possible contingency is that

finding accommodation for 25 000 homeless people is still not solved,

so there might be need for further units.

Increasing oil prices make a negative effect on air transport. Despite

the fact that assigning the impact of the increase in fuel prices is getting

widespread, it is not fully possible due to the intense competition.

At the same time more and more analysts consider that airlines will

not be able to survive a new wave of increase in oil prices, thus they

will have to include the whole increase in the price of fuel in their own

prices.

 

2. Evolution of the sector in Hungary

Signs of improvement are experienced in Hungary as well

In Hungary travel related net revenues in 2004 were EUR 962 million.

In the same period current account deficit was EUR 7.1 billion.

The travel related net revenues in balance of payments resulted from

credit of 3265 million EUR (foreigners paying for services in Hungary)

and debit of 2302 million EUR (Hungarians travelling abroad).

The first half of this year was slightly more favourable. The revenue of

EUR 1711 million was offset by spending of 1181 million EUR, so in

the June period the balance was positive (EUR 530 million). Parallely,

current account deficit reached EUR 3246 million in the first half of

the year. 

 

12,7 million tourists arrived last year

In 2004 12.7 million foreigners visited Hungary with the purpose of

tourism. Besides that 24 million other visitors entered the country as

transit passengers or with shopping, employment, work or other purposes,

so passenger circulation exceeded 36 million. Nearly two thirds

of visitors came for one day and did not stay overnight, but also another

one fifth of them arrived for a short time of 1-3 days. The number

of the ones staying for a longer period was about 6 million (17%).

Foreigners spent 100 million days in Hungary on the whole, 70% of

which – 36% of visitors – spent more days here. It means that foreigners

visiting Hungary spent only 2.9 days here on average, which

is fewer than the numbers of European countries with considerable

tourist attractions.

Motivation of three quarters of visitors staying for more days is tourism,

within this proportion of business tourism is 13%. Most business

travellers came form Germany and Austria. The significance of business

travellers was the greatest in the case of visitors from the United

Kingdom (one quarter of all passengers). The half of the total number

of passengers arrived form the current member states of the EU.

Division of foreigners visiting Hungary by the purpose of visit

Leisure tourism has significant importance

60 % of the revenues from all foreign visitors, namely HUF 493 billion

was connected to holiday travels and 13% or HUF 105 billion to business

travels. Spending of visitors with the purpose of shopping made

up 17% (HUF 136 billion) and transit passengers accounted for 6%

(HUF 47 billion).

One-day visits accounted for 23% of the revenues, while longers visits

made up 77%. Average daily spending of visitors in Hungary was

HUF 8400.

Which are the most frequently visited regions?

Popularity of different regions shows significant differences. One day

travellers visited the regions near the borders obviously. More than

one third of the visits took place in the Western Transdanubia region,

followed by Northern Great Plain (22%) and Southern Great Plain.

The most popular destination for visitors spending more days in Hungary

was the capital (29%). Western Transdanubia (16%) and Balaton

(15%) took second and third place. Concerning quarters of the

year, the share of Budapest is the smallest in the summer period,

while the weakest quarter in the Balaton region was the first part of

the year.

Further increase in 2005

In the first eight months of 2005 occupancy rate of hotel rooms kept

on increasing. In August 61.7% of the rooms were occupied compared

to the 60% rate in the previous year and to the 57.6% in 2003.

In the January – August period commercial accommodation was used

by 2.4 million foreign guests, who spent 7.6 million nights here. The

former figure is by 5%, the latter one is by 1% higher than that of

2004. Within this, turnover of hotels increased by 1-5%, depending

on type.

Average room prices were gradually increasing until August by 10%

on average. This figure seems favourable especially in the light of the

more than 5% rise last year. The statistical office reported a slight

3.8% decline, as prices reduced from 12 000 HUF to 11500 HUF. 

 

REVPAR (revenue per available room) in the first eight months was

higher by 13.3% on average. Following the outstanding increase in

July (21.6%) in August there was a 1.1% decline. In all probability

the reason was Formula 1, which fell on 29-31 July this year unlike

the previous years, when it contributed to the increase in tourist

revenues and hotel room occupancy rates in mid-August.

Weakening forint The forint/euro exchange rate – which is an essential factor affecting

the prosperity of the tourism industry – was disadvantageous until

August, it was continuously stronger than base values. In this respect

there was a slight positive change during September and October, as

the Hungarian currency reached the stable rate of above 250 HUF

against the euro.

 

3. Market structure

Small enterprise dominance

As tourism is based on small and medium-sized enterprises, it is

rather restricted to measure the concentration of the complex sector.

By all means, it can be stated that within the revenues of commercial

accommodation revenues from accommodations are dominant, though

their share is continuously decreasing. While they accounted for 60%

of the total revenue in 1999, it fell to 52% by 2004. At the same time

revenues from catering were gradually and moderately growing, approaching

27% compared to the 25% five years before. 

Danubius is the biggest market player

On the accommodation market it is easier to identify the three main

players. The most significant player with its 15% share – approximately

6500 hotel rooms – is Danubius Hotels. One of the biggest

chains is Hungest Hotels with approximately 4000 rooms and a 9.5%

share, while the approximately 3900 rooms of Accor-Pannonia accounts

for almost exactly 9% share in the domestic hotel market.

Consequently the three biggest players determine 37% of the total

market. In addition, there are some more significant smaller chains

owning 4-6 hotels, but the rest of the market is made up of investors

operating 1-3 units.

Market is rather saturated, so entering of another significant player is

only possible by aquisition. Certainly a few new hotels are expected to

be opened, but rather in the higher categories and in the frequented

resorts in the country. We believe that investments in the hotel industry

will focus on the quality improvement of the current assets.

Visitors Number of visitors entering Hungary rose to a small extent during the

past three years. However, the composition of the visitor profile has

slightly changed since September 2001. Not taking into account the

neighbouring countries, traditionally most visitors came from Germany,

9% of the total number of visitors. However, considering the

total figures without the data about the neighbouring countries it

plays a more significant role, nearly 33%. This considerable exposure

is one of the weaknesses of domestic tourism industry, as weak performance

of German economy could result in discouraging potential

German tourists willing to travel and it may have a negative effect on

Hungarian tourism industry.

During the past three years number and proportion of visitors from

several large EU member states increased, while due to the terrorist

attack number of overseas visitors sharply fell until 2003, but in 2004

exceeded the 2001 level.

Comparing figures between 2001 and 2004 there was a significant

change in the number of visitors from Switzerland (+87%), from Belgium

and Bulgaria (+85%) and from Ireland (+81%).

With respect to Croatian visitors, their number fell to almost half, 8 %

more Russian and 14% more Finn tourists arrived. 

4. Regulation and policy measures

Forint exchange rate

As it has been mentioned, for enterprises living on tourism the exchange

rate of the forint is a key issue, as foreigners mostly pay for

services in euro. This is why tourism industry has interest in weak forint

exchange rate. Besides the strong forint, unpredictability of the

exchange rate causes further difficulties, for which policy makers

could partly be responsible for. The lack of co-ordination between fiscal

and monetary policy has already caused serious problems, at the

end of 2003 last. While fiscal policy makers had interest in the weaker

exchange rate which promoted recovery of the economy, the main

aim of monetary policy makers was to beat inflation, which was supported

by a stronger course.

In the past few months forint has slightly weakened and opinions

about the future vary. It is certain that excessive budget deficit and

its further increase expected in 2006 (in the past few weeks there

have been forecasts for approaching 10%) may discourage investors.

Joining the euro zone in 2010 seems only a dream.

Value added tax Changes about value added tax will affect catering units only indirectly,

as accommodation and catering services remained at the 15%

rate. VAT on electricity will fall from 25% to 20% from 1 January

2006.

I5. Short- and long-term prospects

Short-term global prospects

According to the forecasts made by WTO experts, number of tourists

this year may rise by 5.3%. This could be a rather conservative estimate

as during the first seven months there was a 5.9 % increase in

the number of travellers compared to the January-July period of 2004.

If there is no further shock affecting tourism industry, total number of

tourists could exceed 800 million, compared to 762 million last year.

Breaking down the forecast into regions, the biggest increase is expected

in Asia (10%), Africa is expected to grow by 7% and America

by 6%. Compared to these figures, 4% increase is forecasted in

Europe and only 3% in the Middle East.

Forecasts say that the dynamism is likely to slow down, which is not

surprising, taking the expected decrease of economic growth into consideration1.

It is also worth mentioning that the higher than 10 percent

rise in 2004 created a very high base for this year when we still

expect 5-6% increase compared to the average 4% between 1990

and 2004.

What is expected in the long run?

In global terms WTO is still optimistic about long-term prospects.

Their growth rates estimates have not changed since spring. According

to their forecast the slowdown of the past 2-3 years will be compensated

by the booming of the forthcoming period.

As a reminder, according to the concrete forecast of the organisation

number of travellers worldwide will have increased from the 760 million

in 2004 to 1 billion by 2010 and to 1.56 billion by 2020. This

would mean 4.7% yearly increase on average for the next five years

and 4.6 % for the next 15 years.

The same figures concerning Europe are 572 million travellers by

2010, 717 million by 2020 compared to the 415 million in 2004, which

would 4.1% increase for the next 5 years and 3.5% for the next 15

years. (See Appendix Tables 3 and 4 for details.)

Favourable trend in Hungary as well

The expected favourable developments described above and the ones

concerning Hungary explained in the second chapter tend to the same

direction. In our opinion in the next six months occupancy rates and

room prices are expected to be higher than those of base months. Yet

growth rate will probably decline, the dynamism of the past one and a

half years is not expected to continue. In the short term the weaker

position of the forint may have a positive effect on the returns of the

sector.

Concerning the supply side we forecast further but considerably

slower increase of hotel capacities. Booming of building new hotels in

the past few years which resulted in huge foreign capital inflows and

several new investments (Four Seasons, Corinthia Grand Hotel Royal,

Le Meridien) in the domestic hotel industry will stop.

The boom in hotel building is illustrated by the following chart which

shows that the average number of rooms being under 40 000 at the

beginning of 2002 reached over 42600, that is increased by almost

7%. In our opinion the pace of growth will be stabilised at 1% on a

yearly basis.

 

6. Sectoral SWOT analysis

Strengths Weaknesses

• International tourism has

completely recovered from

the shock three years ago.

Prosperity has not been affected

by the active hurricane

period this year

• Prosperity has been undiminished

on the Hungarian market

since autumn 2003.

• Figures of the first eight

months of 2005 are favourable.

Occupany rates are expected

to go on improving

• According to WTO tourism

growth in Central Eastern

Europe will exceed that of

western EU member states in

the next 10-15 years

• Gradually improving quality

of services. New entrants

make present players develop

as well.

• EU accession promotes business

tourism

• Exposure to global economic

growth

• High exposure to forint exchange

rate fluctuation (a

part of revenues received in

euros, all costs occur in

forints)

• Strong market competition,

continuously increasing supply.

This has been characteristic

mainly of Budapest

in the past few years, however

there has been a rapid

increase in capacity since

2003-2004 in frequented

spa resorts in the country.

High exposure to German

visitors

Opportunities Threats

• EU accession might attract

new visitors in terms of both

leisure and business tourism

• New hotels, first of all Four

Seasons might attract new

visitors to Hungary

• By more powerful marketing

activities country image

could be improved

• German economy still has

not recovered. Further recession

would have an unfavourable

effect on domestic

tourism based on German

travellers

• Potentially dynamic growth

of supply might threaten

long term productivity of the

sector, prosperity of new investments.

Evolution of room prices and occupancy

200

 


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