Having celebrated New Year at least twice over the last month, the party is now over and Russians are returning to work to face the challenges of 2009. Since last year the value of the rouble has decreased by 18% mainly due to the reduction in the price of oil. The immediate affect of this is that foreign holidays will become more expensive. In its efforts to stimulate the economy, the Russian government has pledged more than $200 billion in loans to revive the economy but the affects are not likely to be felt until the second half of 2009. The predicted growth rates for Russian economy are still positive, but have been reduced to 0.2%. The implications for the travel industry are difficult to predict at present, but in general it is believed that the sector will benefit in the long run, as it will close a lot of unprofessional companies and create a more consolidated and coordinated industry. In the medium term, by 2012, Russia is still en route to become the 3rd largest outbound market in Europe.

Best regards,

Demand for the New Year Holidays

Luxury Market:  Positive
Russian tour operators dealing with high-end FIT clients reported that this segment  was the least affected by the financial downturn. TMI Consultancy interviewed over 20 different tourism companies, all of whom reported the same situation: their up-market clientele is just too rich to change their travel habits, in 2008 they were booking same level of services as before and will continue travelling to expensive and exclusive destinations in Europe, Asia or other continents just like before the crisis. For example,   the heads of FIT department of Inna Tour, one of the largest Russian tour operators, says their clients were booking luxury Christmas holidays quite actively and are likely to continue travelling in 2009.

Mass Market: Decrease
Companies dealing with the middle class segment going mainly to lower cost destinations, reported a decrease of demand for the Christmas holidays. Many customers preferred to either avoid spending on travel or postpone the trip to a lower season after the holidays. Countries like Egypt or Turkey remained much on the same level, but the sales of Western Europe and Scandinavia decreased. Operators dealing with the Russian regions reported 10-15% decline in demand. According to the Head of DSBW Tours which specializes in low-cost and bus tours to Europe, Karen Goncharov, the best sellers were the packages with a price of less than a thousand euro.

MICE: No Party
In the MICE sector the situation is difficult. Zelenski Corporate Travel Solutions, KMP Group, Interconnect Management Corporation and other large companies reported that many of their corporate clients cancelled their Christmas parties, or held them in a much more “moderate” format than in the previous years. Nevertheless, training and attending international events and exhibitions will continue.

Moscow Market Downsizing

Regional Markets Downsizing

Over 15% of travel companies have closed down in Yekaterinburg, one of the largest Russian cities and the “capital” of the Ural region. Market analysts say some more 5-10% of the local agencies may close during January – March, but mainly those dealing with the “budget” customers. Those working with high end FIT clients report no changes in demand and describe the situation as stable. Agencies in Moscow and other key Russian cities report a similar picture. Large tour operators from Moscow who work with Yekaterinburg market, continue to charter flights from the city for the winter season but report the demand for the mass market low-cost destinations dropped by 15-20%.

 

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Jumeirah Looks at a Moscow Property

Jumeirah Hotels Group is considering the purchase of 20% of shares of the Moscow Hotel Pekin owned by Intourist. The hotel’s market price is estimated to be around $ 75-80 million, due to its prime location in the city center. However, the current liquidity crisis may result in 20-20% discount for the possible deal.

 

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Decrease of Charters

Etihad Comes to Russia

On December 1, 2008 the Abu-Dhabi based carrier Etihad has launched the first direct flight from Abu-Dhabi to Moscow. The flight is operated 5 times a week by Airbus A319 aircraft. Etihad officials say they’re planning to make it a daily flight by summer 2009. The airline became the second OAE carrier flying to Russia. Earlier in 2008 Etihad also launched regular flights to Abu-Dhabi from Almaty, Kazakhstan, and from Minsk in Belarus.

 

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Change of Habits

Many agencies report that their clients are changing their travel habits, choosing to go abroad during the lower season, rather than for traditionally high and expensive period of New Year holidays (in Russia January 1st-10th). Thus a number of agents expect an increase of demand in the end of January and beginning of February, which are usually low and so cheaper months to travel. However, many other companies say December and the beginning of January were booked quite well, and the real decrease of sales should be expected in the spring.

 

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MICE Business – Still Alive

The MICE department of Megapolus Tours, one of top Russian tour operators, reported that they have several MICE requests for Europe for the early 2009. Inna Tour says their Corporate and MICE market is quite stable and there have only been a few cancellations since the crisis started, mainly incentive trips rather than corporate meetings. They receive requests for conferences, but the clients demand cheaper options for accommodation. STB Tours report they haven’t lost any clients and receive the same amount of MICE requests as last year. They also expect their clients to hold more focused MICE events, organizing them on a much more modest scale. Demlink, one of the leading MICE companies in Russia, reports receiving tender requests. Zelenski, Zeus Travel and Unifest describe the situation as “worrying” saying a lot of pre-booked incentive trips were postponed or cancelled, or asked to be held domestically rather than abroad. KMP reports little changes in the demand for incentive trips and corporate meetings.

In general MICE companies have to reduce their prices, as the main criteria for choosing a destination is now price competitiveness. However, the general tendencies for MICE requests at present is to choose the cheapest options like Turkey and Egypt, instead of more expensive European destinations, or hold events at home.

 

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Requirement

Forecasts for 2009-2010: Consolidation and Foreign Players

In December the heads of the key Russian tour operators held a conference to discuss the affect of the economic situation on the travel industry. They reported a decrease in demand from the Russian regions while Moscow remains stable at the moment. They also expect the Russian tourism market to change a lot by 2010. Most of them think the only way for the operators to survive will be through consolidation, but they should be aware of competition with large foreign players who are emerging in the Russian market.

The key foreign TOs already present in the Russian market are:

• TUI bought 34% of Russian tour operator Mostravel in 2004, increasing its share up to 51% in 2008.
• Kuoni Group acquired 80% of one of the leading Russian TO Megapolus Tours (formerly UTS Megapolus) in 2007.
• Hotelplan bought Russian tour operator Ascent Travel in 2007.
• Aurinkomatkat-Suntours (part of the Finnair Group) bought a leading St. Petersburg TO Calypso in 2007.
• In 2008 Thomas Cook announced its plans to enter the Russian market, having talks with one of the leading TOs Capital Tour and other companies.

The President of a leading TO Natalie Tours Vladimir Vorobiev, believes that only few companies which are market leaders are secure during the crisis, including his own company, Capital Tour, Neva and Tez Tour. These brands are well-known in the market and have a large and stable distribution system and efficient business strategies. Other companies with a strong position but less market share are Ascent Travel, VKO Group, Pegas Touristik, Mostravel, PAC Group, Intourist, Megapolus Tours and S7 Tours. Vorobiev thinks that many medium and small sized TOs may soon face a difficult financial situation. However, the head of UTS operator Alexey Krylov, disagrees saying that no company can feel secure, regardless of its size, and that to a certain extent small companies are in a better position as they can be more flexible and adapt their strategy to the new market conditions easier than the large players.

 

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Benefits

In the middle of December the World Bank released their forecasts about Russia’s economy. If during the next two years the average price of oil remains at $30 a barrel, Russia would find itself in a difficult financial situation and may need to borrow money externally. At $50 a barrel, the scenario won’t be so drastic, but Russia may still need to drain much of its reserves fund and run a budgetary deficit. The World Bank forecasts the GDP growth in 2009 to be not more than 2-3%, unlike 7-8% in the last two years. Russia’s Economy Ministry also unveiled their forecasts for 2009, based on the oil price of $50 a barrel, and the exchange rate of 30.8 – 31.8* roubles to the dollar. The forecasts include 2 scenarios – a base line and a pessimistic one:

Economic Indicators	Base Line Scenario	Pessimistic Scenario
GDP growth, %	2.4	-0.5
Inflation, %	10-12	10-12
Real income, %	2.5	0.2
Unemployment rate, %	7.4	7.6
People unemployed, millions	5.4	5.6

• Describing the current economic situation in Russia, the Economic Ministry has officially called it a recession and announced the GDP growth for 2008 to be less than 6.8%. For 2009 the growth is predicted to be 2.4% in a better case, which is in line with the World Bank and IMF forecasts. The Ministry also predicts a $90 billion capital outflow from Russia in 2009, only 1.5% investment increase and a fall in industrial production. Russia’s international reserves will fall by up to a third in 2009, and will amount $300 billion by the end of the year.

 

*As of January 20, 2009 the rate already reached 35 roubles to the dollar

 

 

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