Turkey: All quiet on the (south) western front
It really is all quiet in Marmaris, where I am writing this column.
After a stellar start to the season, tourist arrivals dropped off sharply in the second half of July, and most hotels are only one-half to two-thirds full.
Here’s the intro. to last week’s latest Hurriyet Daily News (HDN) column, on the latest Turkish tourism developments, with another book/movie homage🙂 You can read the whole thing at the HDN website. I have several points to make, and I would like to start with a few of the dozen of the comments to the column:
A couple of readers suggested the Olympics and weak economic conditions in the U.K. as reasons behind the drop in British holidaymakers. This is what bankers who pay me a visit (we are planning a major renovation for next year and will cover part of that with bank lending) are wondering as well. But for one thing, I have been reading lots of articles noting that most tickets were grabbed by corporates, and many Brits just had to sit out. Besides, as any Londoner would agree, the cost of attending the Olympics would be much higher than coming to Marmaris for any Brit not within a day’s trip from London. As most Brits visiting Marmaris (and Turkey) are from middle-income and lower, a several-day Olympics vacation in London would be too expensive for them. As for the U.K. economy, a casual look at U.K. tourism statistics reveals that there is actually a yearly increase in the number of Brits going abroad. So Brits have not really cut back on their vacation; they are just not coming to Turkey. BTW, a reader reported, in the comments section to the blog, that Fethiye is in similar dire straits as well. So it probably isn’t just Marmaris!:(… Anyway, we’ll see in the July tourist arrival figures, to be released in two weeks, whether this is really a country-wide phenomenon…
From here, you have to get into the micro.: Let’s start by noting that there has been a huge consolidation in the tour operator sector in the last few years. Right now, the two major operators taking British holidaymakers to Turkey are Thomas Cook and Tui Thompson, with these two accounting for almost all the business. This is a a duopoly straight out of the textbook. Rather than boring you with producer/consumer surplus and the like, I’ll just make a few small observations. First, many resorts including Marmaris have an oversupply of hotel rooms, as a result of the government support extended to the sector for more than two decades. Too many hotels, too few operators, it is no wonder that margins are squeezed to the detriment of the hotels. Second, availability of flights is a major constraint in the high-season (July and August). In fact, when you look at the operators’ reservation web sites, you see that they stop sales to certain hotels/regions at certain times of the year. What may be going on is that the operators have algorithms running in their web pages, directing holidaymakers to more profitable destinations/hotels every day for certain periods, especially when flights are a binding constraint. So maybe Marmaris is just not providing enough margin for them in July and August. All I’m saying is that Brits may not be visiting Marmaris in July and August, not only because they don’t want to, but also because it is not available.
One final point on this: While Turkey has been successful, to a certain degree, in diversifying its goods exports away from the Eurozone, it has not been able to do the same for services exports (read tourism). There is some evidence that Turkey is becoming an attractive destination for Muslim tourists, but the country has not managed a diversification to the extent of Cuba, for example. I have argued before that concentrating on Middle Eastern markets for goods exports may have negative side effects, such as exposing companies to less competition and decreasing the technological content of their exports. You don’t have such a negative side effect in tourism, so I wish the country’s tourism sector could diversify into more markets. BTW, I do back my words with action: At our hotel, we have been trying to do deals with tour operators from the Middle East, but without charter flights to the regional Dalaman Airport, it ain’t easy!:( See, the flight constraint hits back at you again…
Switching gears, before going on to discuss the low revenues per tourist number I mention in the column, it is important to summarize how these statistics are calculated: You are sitting at the Starbucks in the International Departures of Istanbul Ataturk (yep, we do name everything after the country’s founder, but much better than if we named things after the PM, IMHO), and suddenly some dude from the Turkish Statistical Institute comes up, introduces himself and hands you a piece of paper, which you fill out. Other than the well-known problems with survey data, I know from my friends at KONDA that this isn’t the best way to do a survey- it is much better to ask the questions and jot down the responses.
Anyway, a couple of readers have accused the all-inclusive (AI) system as the cause for low revenues per tourist numbers. While that is certainly the case, the more interesting question is why many destinations in Turkey, such as Marmaris and Antalya, have ended with AI, the bad equilibrium in economists’ jargon. Well, there is demand for it, and besides, as I said before, tour operators have more bargaining power than hotels. The AI system, I suspect, is leaving more profit to the tour operators, since they capture a share of the food & drink as well. But I am just brainstorming here; I’d need a theoretical model and some data to back that up- Turkish microeconomists take notice, there are ample opportunities for research here! The AI system also makes forecasting almost impossible and leaves the business open to lots of uncertainty: You make the agreements with the tour operators a year in advance, not knowing how much the alcohol taxes will increase. If you weren’t doing AI, you could pass on some of that price hikes to the guests.
Unfortunately, the problems of tourism are much more than AI. First, there are general issues with doing business in Turkey: The regulatory environment is uncertain: If the taxman comes to inspect your books, she is sure to find something, even if you are not trying to evade taxes, as some regulations contradict each other, and there are many grey areas. The labor code is equally confusing and unfair. Just to give an example, one of the subcontractors we used last winter fell down and injured himself. It turns out he had not insured himself properly. Even though he is not my employee, the idiots at the Social Security claim he is and that I am responsible for his (lack of) insurance- we are going to court!
Then, there are issues specific to tourism, and more to seasonal tourism. Human capital is one: As a seasonal hotel, it is impossible for us to find high-quality workers, and even basic skills are lacking- and I am not counting English as a basic skill:) This is a simple case of adverse selection; seasonal hotels usually end up with lemons of workers. I could go on and on, but I guess you have heard enough complaining already: Switching gears again, let’s discuss why tourism is important for Turkey. First, it is a major source of positive entry in the Balance of Payments, alleviating the country’s current account deficit. Then, it is also important for seasonal/temporary employment.
This post has been more of a random walk than I intended to, so I’ll just conclude by referring to my earlier tourism columns, which used to appear in the now-defunct South Weekly supplement of the Hurriyet Daily News: One from 2011 and another from 2010. Some of the arguments I made here are there as well…
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