India is firmly cementing its position as one of the leading stars in the hotel industry, in addition it celebrated its 60th Independence Day last month.
With a 13% growth in the number of international visitors last year, and a rapidly expanding domestic market, India is looking good on both fronts. A strong economy boosted by continued inward investment, plus increased demand for business and health travel all point to a golden future for this giant powerhouse.
Hotels in India have seen impressive growth over recent years – with revenue per available room (revPAR) increasing 31% in 2005. Preliminary year-to-August results from the HotelBenchmark™ Survey by Deloitte show this rate of growth has continued in 2006 - increasing 30.3% to US$106. Even better news is the terrorism attacks in Mumbai in July have had no immediate impact on hotel performance with revPAR across India reaching its highest level ever.
The travelling classes The India economy generally, like tourism, is on a high. Gross Domestic Product (GDP) is expected to grow at 7-8% growth over the next five years driven by inward investment levels. Many companies continue to take advantage of the low operating costs in India and the quality of the local workforce choosing to relocate their operations there.
A strong economy means more disposable income and increasing affluence for India's middle classes. India has a population of just over 1 billion; of which just under a third are middle class. This figure is expected to hit 400m in 2010, overtaking the total population of the US – and given the current economic growth this trend is likely to continue.
Low-cost pioneers The growth of India's middle classes has spurred the development of low-cost airlines and has naturally helped boost domestic travel across the country by making it more affordable.
The first no frills carrier to hit the skies was Air Deccan in May 2003 and since then operators have entered the market at a rapid pace. During 2005 alone - Go Air, Paramount Airways and SpiceJet launched services and this shows no sign of slowing down. IndiGo took to the skies in August 2006 and Omega Air, Magic Air, East West, Indus, Premier Star Air and MDLR airlines are also all gearing up to make their debut flights.
Despite this, citizens still do not fully utilise the potential of air travel and with the sector in its infancy the market potential is huge. It is estimated that only around 80,000 people travel domestically by air in India every day. Although in India the trip per capita is still very small, ranked with Ethiopia and Nigeria, the growth of low-cost airlines is expected to stimulate demand over the next few years and revolutionise domestic travel.
Opening up the skiesMeanwhile, India's adoption of the open skies policy continues to bring in more tourists. In 2005, an agreement was signed with the US to allow unlimited flights between the two countries. Restrictions have also been lifted for carriers across Europe and Asia which has seen a rapid expansion of new services being offered. British Airways, Virgin Atlantic, Air France and Lufthansa have all introduced additional services or launched new routes to India. Last year alone, this increase in traffic saw the capacity between UK and India double.
New services have also been introduced from Hong Kong, Singapore, Taiwan and the Middle East. Cathay Pacific, Singapore Airlines and China Airlines of Taiwan, Emirates and Qatar Airways have all launched new services to India in last two years.
The sky is not just dominated by foreign carriers. Air India has been aggressive in adding new destinations to its network and launched Air India Express – a low-cost airline serving South East Asia and the Middle East. In addition, Jet Airways has entered the highly competitive London service and is looking to launch routes to the US.
More reasons to visit India's Department of Tourism continues to promote the country through its ‘Incredible India' campaign, while gradually shifting the development of tourism from primary cities to secondary locations. For example, Goa has seen a significant increase of luxury resorts and is now a popular destination for the growing wellbeing travel market.
Last year, 3.9m tourists arrived in India – a 13% year-on-year growth. This is expected to increase by a further 17% in 2006, before dropping to 11.7% in 2007. Although holiday travel now dominates the picture - with 95% of 2004 arrivals visiting India on vacation - increasing business demand, plus India's status as a hub for IT and commerce, is pushing up its share of the corporate travel market. India is also developing the well-being and medical care market, with the government introducing a ‘medical visa' for foreigners seeking long-term treatment.
Record breaking revPAR levels With strong domestic and international demand, it is no surprise that the hotel industry is flourishing. The rolling-12 graph below – which mitigates the impact of seasonality – illustrates this impressive growth. Average room rates have been the driving force behind hotel performance improvements in India while occupancy growth has slowed. Despite this like revPAR, at 70% occupancy levels were at their highest levels year-to-August since 2002.
What is interesting to note, is that hotel performance in India is exceeding that of most other Asian cities. With revPAR growth of 35.2% year-to-July, Delhi has the second highest revPAR in Asia at US$145 – behind only Tokyo.
It's a similar story across all India's primary cities, with Chennai, Kolkata and Mumbai, all seeing double-digit revPAR growth driven by average room rate increases. Despite the terrorism attacks on the 11 July, Mumbai has seen impressive revPAR growth up 32.6% year-to-August. Although occupancy levels in July dipped slightly by 2.4% to 68.3%, this is in line with other primary cities with occupancy falling across the board.
Chennai and Kolkata have also seen significant increases in revPAR up 31.6% and 26.0% year-to-August respectively. Despite impressive performances across all primary cities, Delhi still leads the way in terms of average room rate with Mumbai trailing US$25 behind.
India hotel performance rolling-12 percentage change (US$) January 2004 – August 2006
Source: HotelBenchmark™ Survey by Deloitte Shortage of supply Most major chains such as Hyatt, Hilton, Starwood and Marriott are all expanding across India. Most international brands have been focusing on the upscale segment of the market especially in major cities or resort destinations.
However, attention is now being given to fill the gap in the mid-market and budget sector. Accor will start to roll out its Ibis brand in Bangalore, Delhi, Jaipur, Pune, Chennai and Mumbai in 2007. Marriott has launched the Courtyard brand with its hotel at Chennai earlier this year, and at least four more properties will open in the next two years. In addition, easyHotel has plans to open eight hotels in India by 2009.
Amongst the Indian chains, Taj has launched seven Ginger Hotels (formerly, IndiOne) across India. Sarovar launched Hometel in Bangalore in February 2006 and is planning to introduce this new brand in Gurgaon, Hyderabad, Jaipur, Mumbai, Pune and Baddi; and Lemon Tree has launched two hotels in Gurgaon, and one more is planned in Chennai.
Despite the increase in supply, India still faces a shortage in accommodation. Across India the supply growth has been held back due to the difficulty of acquiring sites for new hotels. That said it is estimated that 35,000-40,000 new rooms are currently planned. However with hotel demand expected to grow at 18% annually for the next few years, major cities will continue to suffer supply shortages. Several cities, including Delhi, the host city for the 2010 Commonwealth Games, are now gearing up to meet increased demand with announcements of new hotels being made almost on a weekly basis.
Bringing it all together While there are many reasons to be optimistic about India's hotel industry, there are a couple of hurdles that also need to be overcome. As previously mentioned, there is a shortage of accommodation therefore average room rates can be expected to grow further and this could reduce the competitive advantage of India as a business and tourism destination.
Secondly, there is a pressing need to improve the tourism infrastructure. The airports at the primary gateway cities of Delhi and Mumbai have been privatised and work has commenced on modernisation. New privately owned international airports are expected to be commissioned at Hyderabad (2008) and Bangalore (2009), which will give a large boost to the economic growth of these areas. Despite these improvements, rail and road networks remain weak which means travelling across India is not easy and this could, potentially, keep tourists away from regional cities.
However, with the right balance of hotel accommodation and improved infrastructure, India should continue to maximise its incredible potential and maintain its status as one to watch in the global hotel industry arena.
Notes: All analysis in US dollars
Jessica Jahns
HotelBenchmark
+44 (0) 20 7007 0967
Email: jjahns@deloitte.co.uk
The HotelBenchmark™ Survey contains the largest independent source of hotel performance data outside of North America and tracks the performance of over 6,500 hotels and 1.2 million rooms every month. Monthly surveys are produced on the following areas:- Four regional rate and occupancy surveys covering Asia-Pacific, Europe, Central & South America and the Middle East & Africa.
- Twelve country/sub region rate and occupancy surveys for Australia, Benelux, China, Germany, India, Italy, New Zealand, Nordic Countries, Qatar, Southern Africa, Spain and UK.
- Two city rate and occupancy surveys for London and Paris.
- Monthly profitability surveys on Germany and London.
- On an annual basis we produce profitability surveys tracking performance across all regions of the world.
- Daily HotelBenchmark™ tracks rate and occupancy everyday for a number of markets across the Asia, Europe and the Middle East. Coverage continues to build rapidly since launch in 2005.
