The Middle East Hospitality Industry:
Reaping the Benefits of Peace
 
Israel Report
Egypt Report
Lebanon Report
Jordan Report
By Tony Balch - Bahrain
Mark Roblit and Philip Levine - Tel Aviv
Tom McConnell - New York

After decades of political instability, the peace process in the Middle East continues to bear fruit with one of the chief beneficiaries being increased travel to a region with a unique abundance of natural, historic and cultural assets. Modern jet-age tourism is a relatively new phenomenon in many parts of the Middle East, although the region has been a magnet for travelers for millennia. Many existing hotels were developed in the late 197Os and early 198Os to serve the needs of business travelers, although Israeli resorts along the Mediterranean coastline have attracted leisure visitors for decades. In recent years, a wave of development in a number of other destinations in the region has brought new hotel resorts and leisure attractions associated with the growth in regional and international recreational tourism.

Notwithstanding political and mIlitary conflict - coupled with a lack of cohesive regional marketing initiatives - the Middle East has posted growth in visitor arrivals of almost 10 percent annually during the last five years. Israel and Egypt are the cornerstones of tourism by virtue of the volume of visitors. of the 10 million visitors to the Middle East each year, the countries of Egypt, Israel, Jordan and Lebanon together represent just over 50 percent of all arrivals. Egypt is the dominant market at approximately 3 million visitors, while Israel attracts 1.5 million each year.

What is clear is that there is much room for growth. The World Tourism Organisation reports that the region has approximately 150,000 hotel rooms, just over 1 percent of the world's supply. Total visitor arrivals to the Middle East annually amount to 2 percent of world arrivals, similar to Greece. For the hospitality industry in the Middle East, the challenge lies in tapping the broad opportunities for cultural tourism, as well as other types of leisure and recreational travel, and further developing the infrastructure and services to enrich and extend visitations. There is a significant imbalance of hospitality infrastructure relative to growth potential in certain parts of the region - notably Syria, Jordan and Lebanon. After 15 years of war, for example, Lebanon - and its capital city, Beirut - are undergoing a massive rebuilding effort with major hotel development in planning and under construction.

Transportation access continues to be an issue in tourism growth. Inter regional travel has been constrained by virtue of political barriers raised by countries. Lowering of these barriers as the peace negotiations progress would be a boon to tourism, allowing more fluid movement of travelers throughout the Middle East.

As peace comes to the region, the hospitality industry stands to gain significantly as it fulfills the potential for dramatic growth. The Middle East is an emerging market for tourism investment and development. Already far-sighted investors, both regionally and internationally, are capitalizing on the current status of the peace talks in the region. The trickle of investment could well become a flood during the next two to three years. For countries without the benefit of substantial oil reserves for the next century - including Egypt, Israel, Jordan and Lebanon - tourism may become an important engine of these national economies. This report on the Middle East hospitality industry explores these and other issues, drawing on insights provided by Arthur Andemen professionals who work in the hospitality sector throughout the region.

Peace to Hasten Growth

The historic peace accord between Israel and the Palestinians in September, 1993, inspired growing optimism for the political and economic future of the Middle East. Subsequent agreement creating the mechanism for Palestinian self-rule has added further to this profile of hope. Peace in the region will certainly hasten the growth of tourism, particularly given the region's attractions. The three major monotheistic religions of the world - Judaism, Christianity and Islam - have their roots in the region. A rich history of Hellenic, Roman, Byzantine, Crusader and Ottoman occupations has left its mark at scores of archaeological sites, shrines and holy places throughout the Middle East. The Dead Sea, the Pyramids of Giza, the temples of Luxor, Petra and Jerash in Jordan, and the historic and religious sites of Jerusalem represent just a few of the many superb visitor attractions in the region. Damascus in Syria is the oldest continually inhabited city in the world. Jerusalem holds its 3,000th year anniversary in 19%. In addition, the aquatic attractions of the Red Sea, the region's desert landscapes, beaches, sunny winters and other natural resources could conceivably make the Middle East the world's newest tourism "hot spot."

Potential of Region Recognised

The Middle East has earned increasing attention as a center for tourism by international bodies. The World Tourism Organisation named 1995 the Arab Tourism Year. The World Bank has helped to fund a number of important tourism development initiatives in the Middle East, among them Tourism Master Plans and loans for infrastructure, including airports and road networks, and water and power utilities.

The potential for substantial international tourism growth is evidenced by that fact that almost 60 percent of all tourists in the region come from within the Middle East. The traditional major international tourist markets of Europe and North America - which together make up almost 80 percent of all world tourist arrivals - currently account for only 30 percent of arrivals to the region. This suggests major potential for expanding the number of international tourists.

In addition, as the economies of the region mature and changes in the population demographics result in a more leisure - conscious and affluent middle-class, inter-regional tourism will continue to grow.

International Hotel Chains Dominate

The established international hotel chains, such as Sheraton, Hyatt, Hilton, Meridien, Forte and Intercontinental, currently dominate the management of upscale hotels in the region with more than 90 percent of the total rooms available in the Middle East being managed by these major groups. The only exception to this is Israel where the industry has had to develop domestically in the past due to the effects of political pressures from the Arab states on international companies wishing to do business in the region.

With the easing of these restrictions and developments in the peace process, new hotel companies to the Middle East are rushing to acquire suitable sites and management contracts. Particularly active are Marriott, with the first new hotel in Beirut, and hotels currently under construction in Sharm El-Sheikh, Egypt and Tel Aviv, Israel.

The Swiss group, Movenpick, has also been particularly active in Jordan,- with new hotels under construction or planned in Petra, the Dead Sea, Amman and Aqaba. Hyatt International, too, has been active throughout the region with new hotels planned for Tel Aviv, the Dead Sea, Amman and Sharm El Sheikh. Other active companies include the deluxe Four Seasons chain currently looking at hotels in Cairo, Beirut and Amman, and the Howard Johnson and Days Inn groups, which are looking at motel-style properties in Israel and Jordan.

Tourism Profile by Country

Israel -
Tourism represents one of the fastest growing industries in Israel. Indeed, so dramatic are forecasted increases that the need for additional facilities may become acute in the years ahead unless sufficient investment is made in tourism infrastructure.

The number of tourists visiting Israel climbed from 1.4 million people in 1985 to 2.2 million last year. Domestic overnight accommodations rose from 3 million in 1985 to more than 5.8 million in 1994. Income from tourists visiting Israel also has risen dramatically, reaching $2.3 billion in 1994. In addition, however, the $1.3 billion generated in the first half of 1995 is fully 17 percent above the first half of 1994. During the past two years, nearly two thirds of all tourists to Israel have come from Europe with Britain leading at 11 percent. More than 50 percent of tourists arrive as part of an organized tour.
 

Israel Visitation Staistics
Period
Number
% of change
1988 1,424,500 9.7
1990* 1,341,700 (5.8)
1991* 1,110,100 (17.3)
1992* 1,805,200 62.6
1993 1,946,000 7.8
1994 2,168,000 11.4
*Changes due to Gulf War
Source: Central Bureau of Statistics, Ministry of Tourism
 

Israel's Tourism Ministry Development blueprint forecasts that the number of person nights in hotels will grow more than 150 percent to almost 40 million domestic and incoming tourist nights by the year 2006. The prediction is based on the assumption that there will be no constraints accommodating these increased volumes of arrivals. However, the report calls for quick action by the Ministry of Tourism and other governmental and municipal bodies to create conditions conducive to the construction of additional facilities.
 
 

Room Occupancy Percentages
1st half 
1995
1994 1993 1992 1991*
Nationwide 66.7 64.6 66.5 67.4 53.6
Jerusalem 65.6 59.7 62.7 63.2 43.4
Tel-Aviv 70.3 64.4 67.9 68.4 50.6
Haifa 56.2 56.0 57.2 60.2 51.0
Eilat 77.8 77.6 78.2 77.7 67.6
Tiberias 62.9 61.4 64.7 68.9 51.6
Netayna 58.5 62.5 63.3 68.1 56.7
*Changes due to the Gulf War
Source: Central Bureau of Statistics, Ministry of Tourism
 

The development calls for the addition of about 50,000 rooms over the next decade with eight areas given geographic priority - Jerusalem, Eilat, the Sea of Galilee region, Nazareth and the northern and southern coastal regions. The government is now conducting studies into joint development and promotional activity with Egypt and Jordan on the Gulf of Aqaba/Red Sea and on the Dead Sea with Jordan. Also being considered by the government is legalising casino gaming. Finally, the Ben Gurion 2000 programme is aiming to increase the passenger handling capacity of Israel's major airports to 7.8 million.

Overall, the Israeli Hospitality industry has great potential, not only from traditional European and American markets, but also from yet untapped Asian markets and the Arab world. But a lack of necessary investment in tourism infrastructure, or a lack of required government planning and coordination, could act as a brake on development. Those willing to take this risk - and the risk of possible geo-political changes - have an opportunity to reap the dividends of peace.

Egypt -
Long the dominant tourism market of the Middle East, Egypt captures nearly 30 percent of all arrivals to the Middle East. Visitor arrivals, room supply and revenue generation from tourism have risen steadily since 1989. Arrivals are split almost equally between business travelers and leisure tourists. Fifty percent of visitors come from Europe, while 28 percent arrive from other Middle East countries.

The country's tourism industry in the future will be strongly influenced by the government's encouragement of tourism development away from Egypt's more traditional heritage sites. Such development zones include the Red Sea Riviera of Taba, the Sinai region, and Sharm El Sheikh and the Hurghada-Safaga area of the Red Sea. A major challenge for the government will be to limit the damage caused by continuing attacks by Muslim fundamentalists in upper Egypt.

Future cooperation between Egypt, Israel and Jordan will be key to boosting tourism in the area overall, as these countries benefit from the peace process and improved inter-regional cooperation.

Lebanon -
As the rubble is cleared from 15 years of warfare, the restoration and redevelopment of central Beirut has become the focus of national activity and pride. The intensive rebuilding of the city's once dominant hospitality industry is an important building block in this effort.

Prior to the outbreak of war in the mid 1970's, Beirut had the best developed hotel market in the Middle East. The city's appeal to leisure travelers was supported by the natural beauty of the Mediterranean and surrounding mountains, a world class urban environment, its resorts and a multi-cultural social base. To the Arab world, Beirut represented a window to the West, containing many of the benefits of a European-style environment located in a lush Arab country. To the Westerner, the opposite was the attraction - a truly Arab city, yet one with a comfortable French and European identity. This dichotomy appealed to the business world as well. Before the war, Beirut housed the regional headquarters of virtually every Western company doing business in the Middle East, particularly banks and financial concerns.

The combination of leisure activity and a strong transient, commercial environment supported a large hotel market. In 1975, Beirut contained ~01 hotels with 6,500 rooms, including several world-class properties such as the St. George, the Phoenicia and the Al Bustan. By 1983, there were just 54 hotels with 3,500 rooms. Today, due to the combined effect of war and the consequent out-migration of businesses and population, the inventory
stands at 30 hotels with approximately 2,500 rooms, with many former properties leveled or severely damaged.

The cessation of hostilities and relative calm that currently pervades the city has set the stage for the extraordinary level of restoration  now underway. Prime Minister Raffiq al Hariri has set a number of programs in motion, not the least of which is Solidere, a private company whose mission is the rebuilding of the Beirut Central District (BCD). The BCD, which measures 111 acres, was the locale of some of the war's heaviest fighting and destruction. Selidere was initially funded by a $900 million sale of shares to the pub lic, and is the coordinating force behind what is considered the largest urban renewal project in the world. Currently underway is the daunting task of rubble removal, site/infrastructure preparation and landfill. Central to the BCD is a loosely defined hotel district, which will eventually contain restorations of the St. George, the Holiday Inn, the Phoenicia and the Beirut Hilton, along with one or two newly built properties.

Outside of the BCD, especially to the south, hotel development activity is furious, including the development of a 306 room Meridien on a beachfront parcel, a 400-room hotel/marina proposed for a waterfront site near American University and a 174-room Marriott proximate to the airport, which will open in early 1996. Other important development activity includes the restoration of the Bristol Hotel and additions to the Commodore, the Carlton and the Riviera. The world famous Casino du Liban, located north of the city, is also the focus of rehabilitation efforts.

What is drawing the attention of Lebanese and international hoteliers is a tourist and visitation market which is underserved by the existing hotel supply, both in size and quality. Due to the war, the level of hotel development activity that has occurred over the past two decades in every major Middle East city has passed Beirut by. The current market is characterized by high occupancy and opportunistic pricing, against an inventory of over 20-year old hotel stock, much of which is still warscarred. Many hoteliers compare the current situation in Beirut to the early stages of other post-war (and cold war) hospitality markets such as Warsaw, Moscow, Prague and Ho Chi Minh City.

Arthur Andersen estimates that if all goes as planned, the Beirut market will contain approximately 3,500 hotel rooms by the year 2000, a return to 1983's inventory, but well below that of historical levels. Hope remains high in Lebanon for a return to its former self; gross domestic product growth has ranged from 5 percent to 10 percent during the past three years, the general Middle East peace process continues, Lebanese repatriation contributes to the country's economic and social stabilization and Beirut takes on characteristics of a major regional city. Due to the general exodus of the 197Os and 198Os, however, the city's international commercial base may never return to those levels reached prior to the war. In addition, the current restriction on travel imposed by the U.S. State Department will need to be lifted for growth to continue, and the presence of Syrian and Israeli military will have to be resolved eventually. Nevertheless, the newly. awakened hotel industry in Beirut will play a central role in whichever direction the country heads

Jordan -
Tourism to Jordan has grown steadily, with visitor arrivals up by 17 percent between 1989 and 1993. The future outlook for Jordan includes cooperative projects with Israel and Egypt to develop the Red Sea Riviera at Aqaba. A major tourism development zone is planned south of Aqaba, with a total of 5,000 rooms under discussion. Development planning also is underway for the "lowest Park on Earth" on the Dead Sea to include several hotel projects by major chains (Holiday Inn, Movenpick, Hilton). Future development of hotel accommodations is slated in Petra, with more than 800 to 1,000 rooms in various stages of development.

In addition, there are numerous private sector companies established to take advantage of the anticipated boom in tourism in the region, including Zara Investments and Al Dawhyah,  companies with a variety of projects that involve international hotel groups, such as Marriott, Hyatt, Sheraton, Movenpick and Hilton.

Conclusion

Collectively, the tourism markets of the Middle East comprise what may soon be one of the most dynamic regional destinations in the world. The Middle East might be described as one of the world's first "tourist" destinations, having served an extraordinary role in the confluence of cultures and religions for thousands of years. Restoring peace offers the exciting prospect of the region regaining its historic prominence with visitors from the "four corners" of the world.

The Middle East offers a remarkable collection of centers of great touristic appeal, creating a natural visitor magnetism. Indeed, many people rank the region's attractions among the most important places to visit in the world. The opportunities for expansion of cultural tourism given the region's concentration of religious and historic sites can hardly be overestimated. At the same time, there are tremendous opportunities in leisure tourism development that capitalizes on the region's superb climate and other natural gifts.

The negotiated peace - and a willingness to work cooperatively as a region - are among key factors that will dictate the strength of tourism growth and the success of private hospitality ventures in the future. One of the few constraints to the development of a substantial increase in tourism will be adequate infrastructure. For the Middle East to fully realize its promise, collaboration among tourism agencies and the easing of travel restrictions also will be of paramount importance. Middle Eastern countries with mature tourism sectors can be of great assistance to others with less developed industries. In the process the nations of the Middle East will all benefit as they cooperate to promote the region and its gifts to the world.

Tony Balch is a hospitality consultant based in Arthur Andersen's Bahrain office.
Mark Rotblit serves as the engagement partner in the firm's  Israeli hospitality and leisure practice,
while Philip Levine is a manager in that practice in Tel Aviv.
Tom McConnell is a senior manager in the firm's Hospitality Consulting Group and is based in New York

©Arthur Andersen

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