The price of package tour to popular destinations like Japan, Thailand, Taiwan, Singapore and Malaysia is also decreasing due to the intense competition in the travel agency business, especially with the growing popularity of purchasing air-tickets and hotel accommodation over the Internet at heavily discounted prices. For example, a 4-day free and easy trip to Tokyo only costs HK$4,600 (A$1,095) now when it was about HK$7,500 (A$1,786) back in 1997. As for Thailand, the fare can cost as low as HK$1,500 (A$358) for return tickets with hotel accommodation.
The 911 incident has led to a surge in insurance premiums for airlines and the subsequent imposition of an insurance surcharge collected by travel agents on all airfares since the beginning of October 2001. As the collection of surcharge create increased workload and added risks to travel agents, the TIC has agreed that all member agents will be allowed to charge a service fee of HK$5 per sector for each ticket issued in respect of the collection of the insurance charge on behalf of the airlines (TICHK 2-Nov-2001). This has resulted in a slight increase in the price to consumers.
Trends in firm numbers
According to the Travel Agents Registry (2002), the number of licensed agents is as follows:
Back in early 1997 when HK was about to be reunited with China, many industry members took the view that the change of sovereignty would be a magnet for tourists and a golden opportunity for them. Based on that prediction, hotels and airlines raised their rates by a huge margin, resulting in a huge reduction in the number of tourists and the annual arrivals for 1997 plunged for the first time (TIC, 24-Aug-2002).
Five years later, tourism in HK has not only recovered all the lost ground, but set a new tourist arrivals record of 13.7 million in 2001. The first six months of 2002 also recorded a 13% rise over the same period of last year. This outstanding performance is largely due to the surge in visitors from Mainland China, which made up of 32 % of all visitors in 2001, up from 22% in 1997 (TIC, 24-Aug-2002). With the growing economy in China, Mainland tourists are travelling extensively during their public holidays such as Lunar New Year, Labour Day and National Day holidays, with HK being one of their favourite destinations.
According to Tung (2002), there are now 528 Mainland tour operators authorized to organize tours bound for HK and Macau. Many industry members worried that a sharp increase of tour operators may bring down the service standard of the tours. However, lesser market restrictions and barriers to entry will result in healthy competition, which will in turn increase value for tourists.
Trends in employment
Tourism in HK employed about 12% of the working population (Yuen 2002). In line with the increasing overall unemployment rate from 5.1% in 2001 to 7.6% in August 2002 (Economic & Trade Information, 2002), the employment numbers in the travel business have declined 2.3% from 192,147 in 2001 to 187,640 to mid 2002 (Census and Statistics Department-3 2002).
Trends in investment and profitability
HK tourism continues to grow in the last few years. Besides the 8% decline of tourists after the 1997 crisis, an increase of 11% in visitor arrivals were recorded in 1999 and another increase of 15% in 2000. Other positive factors include the gradual relaxation of restrictions on entry requirements for mainland tourists. Visitors from Mainland China were up more than 60% since 1997, which help to offset the reduction in visitors from other markets (Yuen 2002). In addition, the abolishment of a quota system for Mainland tours on 1 January 2002 will most likely bring more Mainland visitors to HK (Yuen 2002) and hence increase the flow of income from Mainland China to HK.
Since Beijing has been chosen as the host city of the 2008 Olympic Games, it will further boost the tourism industry by bringing a large number of visitors to Hong Kong either en route to Beijing or after visiting Beijing. Some events may be hosted in Southern China, especially Guangzhou, or in HK, which will attract more people coming over and hence highly profitable during that period (TICHK 14-Jul-2002).
Furthermore, in 2005, with the opening of the HK Disneyland and a series of new attractions and facilities will also be completed, such as fisherman’s wharf in Aberdeen, an International Wetland Park and a new cable car system on Lantau Island (Yuen 2002). These new tourist attractions will help to attract more leisure tourists and create more business opportunities for travel agencies.
For business visitors, the Cyberport in Telegraph Bay will be completed by the end of 2002. This port pulls together quality companies and professionals specialising in information technology (IT) application, information services and content creation, and helps to foster the growth of local and regional IT industries. It also offers a cyber-leisure experience for locals and serves as an added attraction for tourists.
An extract of the revenue earned by HK in the tourism industry for the last six years as shown as follows (HKTDC 2-2000):
The general expenditure by tourists in 1995/6 remained relatively high as they urged to visit this British colony before the hand-over of HK to China. When the hotel rates and package tours became too expensive and deeply impacted by the financial crisis in 1997/8, the revenue from tourism started to decline substantially. It improves gradually after 1999 when Mainland travelers started to visit HK for holidays coupled with their willingness to spend in HK. It is expected that the tourism receipts will continue to increase given the huge effort to promote tourism in HK.
Key determinants that affect changes in demand and supply and the magnitude of its elasticity
Key Determinants of Demand
(1) Population Size & Demographics
The demand for tourism services is related to the size of the population by affecting the number of potential customers in a market. An increase in population size would increase the number of potential customers, and in turn, increase the demand for travel services.
Hong Kong’s population size is about 6.72 million in 2001, 6.77 million in mid-2002 and expected to increase to 8.2 million in the next 30 years (Census and Statistics Department, May 2002) with 70% of the population size in the 15-64 age group (age group that is more likely to demand for travel services).
(2) Income
A change in income causes changes in the demand for goods – an increase in income usually means an increase in spending power and the quantity demanded for goods and services, and vice versa.
As average household income increases, the household can afford to have more leisure activities like travelling overseas or making local day trips. Research studies (Mak and White, 1992) have shown that the propensity to travel and tourism spending is positively correlated with household income. The HK’s average household is likely to increase at an average of 3.96% (Asian Demographics Ltd, July 2002) per year. According to the expenditure patterns of HK (Asian Demographics Ltd, March 2002), the average household spending on recreation and entertainment activities at approximately 2.4% in 2002 will increase by 20% in year 2006.
(3) Exchange Rates
The HK dollars (HKD) is pegged to the United States Dollars (USD). With the global economic slowdown currently, most currencies have depreciated against the US Dollars. With the peg, HKD has in turn strengthened against the other currencies. This has made outbound travel overseas attractive as the tour destinations’ goods and services are perceived to be comparatively cheaper. The general purchasing power of HK residents has increased and the demand for travel services will increase accordingly.
However, at the same time, this has caused a decrease in the demand for inbound travel both for leisure and business tourists (except for tourists from Mainland China as HK is more expensive than most places in the region.
(4) Preference and Tastes
Prior to 1997/98, people generally prefer long-haul trips like the ‘Luxury Europe Trip with Five-Star Hotel Accommodation’. However, with the decline in the willingness and ability to spend (result of the economic slowdown), more people preferred making cheaper, shorter trips to the neighbouring Asian countries, Mainland China or even local getaway day trips within HK.
As the population becomes more educated both in HK and other countries, the demand for travel services (both inbound and outbound) increases with the growing appreciation for leisure activities as a getaway from the stress.
(5) Prices of Related Goods
Related or complementary goods include airport taxes, travel insurance and visa application fees. The prices of these goods will affect the demand for travel services. If the prices of these goods fall, the demand for travel services will increase, and vice versa.
If the price of substitutes (mainly other forms of local entertainment activities like movies, shopping, dining in restaurants) increases, this will increase the demand for travel services. Most cinemas and restaurants have been introducing 50% discounts on movies tickets, food and beverages during weekends to increase the demand of these goods and services. With the general reduction in prices of these alternative entertainment activities, the demand for outbound travel will decrease.
(6) Convenience to Customers
Many travel agencies have introduced their own web sites that allow online enquiry of the prices and details of tour packages, and some even offered online purchase of air-tickets and booking of travel services. These on-line services offer greater convenience to the customers and help to increases the demand for travel services. Especially when the travel agency has built up a reputation for offering good value for money, the customers are more willing to make purchases over the Internet.
Key Determinants of Supply
(1) Technology/ Input Costs
There are two major costs for travel agencies – costs of premises and cost of travel consultants (serve as tour guides and customer service officers). Technological developments have provided a new marketing channel for the travel agencies by introducing their own web sites that allows online enquiries and purchases of travel services. This has greatly enabled the travel agencies to reach out to more customers without much additional costs as compared to the alternative of having to set up many branch offices in different locations and employing more travel consultants.
The downturn of the global economy has also caused the costs of other inputs including hotel rates, air-tickets, salary costs, etc to reduce substantially. The improved technology coupled with the lower costs of inputs has enabled the travel agencies to come up with a greater supply and variety of tour packages.
(2) Nature and Random Shocks
The supply of travel services is also affected by the weather conditions, political situation and natural disasters like earthquakes and typhoons in the tourist destination. For example, the unstable political situation in Indonesia and the bad weather conditions in many parts of China during the typhoon season have caused many travel agencies to postpone or cancel package tours to these areas. The supply of outbound travel services will be reduced accordingly.
At the same time, the political stability coupled with the all-year-round benign climate, HK is considered as a desirable tourist destination by many. The supply of such inbound travel services is relatively stable and less affected by the conditions mentioned above.
(3) Output Prices
The prices of the travel services and its related profit margin will determine the supply of such services provided by the travel agencies. If prices were to be depressed due to economic conditions, the profit margin will decrease if the prices of travel services fell greater than the costs of the inputs. The agencies will try to reduce its losses by reducing the supply of travel services.
(4) Travel Restrictions
If overseas countries practice closed-door polices and impose stringent conditions restricting visitors’ entry, the supply of outbound travel services will be greatly reduced. With the relaxation of entry restrictions in many parts of Mainland China, the supply of outbound travel services have greatly increased in the last few years.
The relaxation of the entry restrictions for business and leisure visitors from Mainland China to HK has greatly helped to increase the visitor arrivals numbers and the supply of inbound travel services by the agencies in HK.
(5) Number of Suppliers
The supply of travel services is dependent on the number of licensed travel agents in Hong Kong as stated in Table 3 above. The number of agents is increasing to pre-1998 levels. In the depth of the Asian financial crisis in 1997/98, many agents were forced into bankruptcy. With improvement in the general business climate, the numbers are beginning to increase once again.
The supply of travel services is also affected by the airline companies and hotels. With the declining economy, more hotels and airlines have joined efforts to co-market their products (airfare with hotel accommodation) at very attractive prices. With the increase in these products, the travel agencies are able to increase the supply of travel services to its customers.
Price Elasticity of Demand and Supply
Price Elasticity of Demand
The price elasticity of demand is dependent on the inherent nature of the product, the availability of substitutes and characteristics of the buyer.
Travel services are considered as a “luxury good” for many and consumers are generally price-sensitive ie. demand for such services is price elastic. An increase in price will drive consumers to other forms of leisure and entertainment activities (substitutes for travel services) like movies or shopping in HK instead.
At the same time, as the travel services offered by many travel agencies are close substitutes for each other, consumers would be able to search for the service that provides the greatest value for money. This means that a small reduction in the price offered by one travel agency will usually result in a great increase in quantity demanded i.e. demand for travel services is price elastic. Unless the travel agencies are able to differentiate its products, consumers will be less sensitive to price changes i.e. demand being less elastic.
The price elasticity of demand is also dependent on the peak/ off-peak holiday seasons. During off-peak seasons where the travel agents have more spare capacity (eg. when air tickets, hotel accommodation and tour guides are greatly available), the demand for travel services may not be greatly affected by the reduction in prices. Huge discounts have to be offered in order to attract customers. During peak seasons when all agencies are competing for air-tickets and hotels in the same timeframe, the travel agencies are able to charge higher prices without the fear that customers may go away – demand is comparatively more inelastic.
Consumers’ tastes and preferences would also affect the price elasticity of demand. If consumers are used to enjoying five-star hotels and travelling first class, an increase/decrease in price would have little impact on their demand – demand would therefore be price inelastic. However for the average household, demand is more price elastic – they are more interested in travel packages that offer reasonable hotel accommodations at affordable prices rather than luxurious holidays with five-star hotel accommodation.
Price Elasticity of Supply
Supply is price elastic if the travel agencies have surplus capacity. If there is an increase in prices of travel packages, tour agencies can increase the supply by leading bigger tour groups. Tour agencies can only do so if there is spare capacity, i.e. the maximum number to safely conduct a tour has not been reached. Supply would be price elastic. On the other hand, tour agencies cannot increase the supply of travel packages when prices increase when they are running at full capacity. Further increase to number of tours supplied may compromise the quality and affects the reputation of the travel agent. Supply will therefore be price inelastic.
Pricing strategies and interaction between firms
In view of the large number of travel agencies in the market that provides travel services that are close substitutes for each other, the market structure is similar to that of a monopolistic competition. As mentioned earlier, the price elasticity of demand is very high in the tourism industry, any price changes by the agents will bring a price war in the market. Hence, majority of the agents will not engage in price competition as they are easily affected by each other’s action. The government has also implemented regulations in order to maintain a healthy competition amongst the agents.
The travel agents preferred to compete based on the “high quality” and “good value for money” services provided to customers. With such reputation over time, the agents will be able to charge a premium or higher prices for “better and differentiated” services valued by customers. For example, Jetours and P&O offer pricey package tours but are still favored by many who preferred better itinerary, hotel accommodations, friendly and knowledgeable tour guides.
Other non-price strategies include offering special discounts or privileges (allowing interest-free installment payments) to “loyal” customers as a means of retaining customers and avoid losing them to competitors.
However, for certain special package tours like the ‘2008 Olympic Game tour to China’ or the ‘Concert Tour’ for concerts held by famous singers overseas, higher prices can be set for these once-off events as the places/ seats available (supply) are relatively limited coupled with high demand.
Nature of costs and Impact of technology changes
(1) Nature of costs
In order to maximize profit, a firm will attempt to do so by maximizing output and / or minimizing cost. Profits are maximized at the output at which marginal cost equal to marginal revenue.
The costs of inputs to a travel agent includes labour cost (salaries of travel consultants), costs of premises, transaction processing costs and marketing expenses. Since the cost of premises is a fixed cost, only labour costs can vary with the levels of output. However, the rental costs have been declining since late 1997 due to the economic slowdown in HK.
There is a growing trend of paying commission-based salaries (based on sales volume or trips made as tour guides) to the travel consultants to avoid making the salaries cost a fixed cost. The travel agents have also passed on a portion of its labour costs to the customers when they are required to pay tips (fixed amount for each day) to the tour guides (travel consultants) to reduce their costs.
In addition, the growing popularity of online booking of travel services substantially reduces the marketing and promotion costs for the travel agents. The Internet serves as a new marketing channel for promotional purposes but, a new medium for payment/ transaction processing which greatly reduces the processing cost per unit.
The lower input prices (falling prices for air-tickets and hotel rates) and resource costs (including labour and premise costs) will lower the marginal cost which, in turn, lower the average cost and total cost faced by the travel agents.
The following diagram illustrates the unit cost structure. When marginal cost is below both average variable cost and average total costs, the average cost falls. When the marginal cost or cost of producing the next unit moves above the average cost line the average cost will start to rise. Thus, the marginal cost curve crosses the average cost curve from below at the point of minimum average cost (David 1984, p. 16).
(2) Impact of Technological Changes
Technology is one of the driving forces that will determine the fate of the travel industry. This is mainly due to the rising cost of resources, the implementation of new technologies and the Internet to counterbalance these rising resources costs. With the growth of the e-commerce, travel agents will be able to successfully launch their own web sites that provides online customer service and support in place of traditional means of having travel consultants stationed in the agency or branch offices. This helps to maintain a long-term business relationship with the customer.
Improved technology will shift the supply curve to the right since the suppliers will be able to supply a larger quantity than previously at each price. Travel consultants are able to handle more bookings than before, thus lowering the labour cost per unit. The diagram shows that the impact of technological change.
Technological change will eventually increase the productivity rate and improve the profitability of the travel agencies (by minimizing overhead costs via saving on labour costs). This helps to the prices of the travel services due to the shifts in the supply curve for the tourism industry.
Nature and Impact of Government Regulation of Travel Industry
Fiscal Policy
The Government takes an important role in ensuring economic efficiency in the market. According to the Keynesian view, fluctuations in aggregate demand are the major sources of economic disturbances. If aggregate demand can be stabilized and maintained at a level consistent with the economy’s full employment capacity, the economic instability will be eliminated.
In the Aggregate Demand (“AD”) /Aggregate Supply (“AS”) model, weak consumer demand cause prices and output to fall. Expansionary fiscal policy that involves increases in government expenditure can have a significant impact on AD and push the economy back to full employment. As shown in the diagram, weak demand (AD1) causes an output level of GDP1 and price level of P1. Expansionary fiscal policy via reduction of taxes or increased government spending increases aggregate demand from AD1 to AD2. The result would be increased output (GDP2) and higher prices (P2).
In order to enhance HK’s position as a world-class tourist destination, the Government will invest over US$2 billion in tourism projects in the next five years. Major tourism projects include the transformation of Lantau Island into an “entertainment corridor” and the development of a new world-class performing arts venue; a US$64 million Adventure Bay attraction at Ocean Park; and a Fisherman's Wharf at Aberdeen.
The government and The Walt Disney Company have formed a joint venture to bring the world of Disney to HK. This project will generate substantial long-term economic returns and enhance HK’s international image as a world-class city. Disney's choice of HK as the site for its third international theme park is also a vote of confidence in HK.
Government Intervention and Regulation
The importance of tourism to HK prompted the government to regulate economic behaviour at all levels and set up the Tourism Commission in May 1999 which main role is to formulate policies and plans for the tourism industry.
The Travel Agents Ordinance in HK provides the legislative framework for the regulation and control of travel agents and for the operation of the Travel Industry Compensation Fund. In order to improve the quality of services of travel agents and enhance the reputation of HK as a tourist-friendly city, any person carrying on business as a travel agent in HK is required to obtain a Travel Agent’s Licence from the Registrar of Travel Agents. The licensing requirements include ensuring that the management meets the “fit and proper” criteria, having suitable premises and compulsory membership in TIC. These requirements are not extremely stringent reflecting relatively low barriers to entry for this industry.
Government Support
There are increasing numbers of social and cultural events organised by government agencies and industry players. This includes Annual Arts Festivals, Touring Theatre and Music Festivals. With the abolition of the quota system by the government, the increase in the number of Mainland travel agencies organizing inbound tours to HK and the extension of the multiple-entry business visa validity period for Mainland travelers, there is a boost in the number of Mainland visitors to HK.
Conclusion
From the above, it appears that the market outlook for the tourism industry in HK is extremely positive with a great potential for further growth and profitability in the next 20 to 30 years.
Moreover, in HK, the market drives the economy, and the results have borne out our free-market philosophy. Behind the scenes, the government has worked hard to ensure a strong, business-friendly environment, providing an essential support framework to enable the private sectors to prosper. Investors in HK will find a wide range of support services to promote the development and enhance the competitiveness of their business.
With the strong governmental support and the relatively low barriers of entry, it is recommended that Investor Company Limited should strongly consider investing in this industry.
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Appendices
Appendix A
Appendix B
Tourism Performance
Tourism Receipts
