Saturday, August 26, 2017

Tour Operators Holding Off On Hotel Contracts

Yesterday, I finished by mentioning that I had a startling "fact". This fact, as stated by Preferente magazine, concerns tour operator contracts with Mallorcan hotels for 2018. Negotiations for these contracts started, as they always do, around May time. At present, it is said that there are contracts for 15% of the available hotel offer. This is the fact. Why is it startling? In the recent past, such as last year, 80% of the offer had been signed up by now.

The reason for this massive discrepancy is simple. It's the price being demanded by the hotels. Mallorca isn't alone in Spain in setting higher hotel prices but generally speaking it is the pace-setter. Preferente adds that it is difficult to recall a precedent for the current contract negotiation situation. The tour operators believe that prices are exorbitant.

This doesn't mean they won't end up signing contracts. Mallorca has in its favour its capacity. Holiday demand is such that Mallorca will get its way, though it would be a surprise - given the current status - if the contracts matched those of this year. In order for that to happen, there will need to be some give on behalf of the hoteliers. But then one should bear in mind that tour operators were complaining about the prices this year.

Despite the prices as they are this year, figures for July show that hotel occupancy - in terms of overnight stays - was higher in Palma-Calvia than anywhere else in the country. (Palma and Calvia, for the purposes of this statistical exercise, are treated as one zone.) The rate was 92.1%. The number of stays was up by one per cent and prices rose by 6.9%.

So, things for the moment seem hunky-dory. It is 2018 that we have to consider. The revival of competitor destinations will be welcomed by the tour operators, and one only has to look at hotel performance figures to see why. In July (and these are numbers for Spain as a whole), the average daily rate (ADR) was 129 euros. The RevPar (revenue per available room) was 104 euros. In Turkey the ADR was 80 euros. The RevPar was 56 euros.

For tour operators, these types of difference are hugely attractive. And when one seeks to compare Mallorca (and Spain) with the non-EU destinations of Turkey, Egypt, Tunisia and anywhere else, there is an additional and potentially important factor to take into account for next year. The EU's latest directive on package holidays will kick in. Because of increased tour operator liability to compensate for (legitimate) failures, the prices of packages will rise.

In one respect, the tour operators are to blame for the hikes in Mallorca's hotel prices. Because of disruptions elsewhere, they were buying up every available bed in Mallorca in order to meet holiday demand. Inevitably, the rule of supply and demand kicked in. Big time. Moreover, Mallorca's hotels were wanting returns on their modernisation investments. The tour operators had been demanding modernisation.

Over the past few years, because of the insecurity elsewhere, the traditional model was disrupted. The tour operators have essentially always ruled the roost. They have forced prices in seeking to maximise their profits. The hoteliers saw an opportunity to amend that model, and it could work under conditions of instability in other lands. A correction in holiday supply is now under way. The hoteliers are therefore banking on their investments in quality to demand and maintain increased prices. They are also banking on demand for Mallorca and on the island's security. Barcelona, although I don't believe it will have much of an effect, will at least have shaken the hoteliers. And there is something else lurking in the background: the negotiations for hotel worker salaries. Mallorca's hoteliers are under great pressure to come to a settlement that is advantageous to their employees.

It is clear that the cost of package holidays for next year has gone up in general. In some instances it has risen significantly. Holidaymakers, savvy consumers that they are, can bypass the package holiday, which - much to the tour operators' delight - rebounded markedly during the years of economic crisis. Buying the separate components of a holiday usually means that the overall cost is lower. The online booking agencies such as Travel Republic are being scrutinised closely.

We'll see how the contract negotiations pan out. But for now, 15% versus 80% is a massive difference.

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