The race for revenue

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Paul Van Meerendonk.

There is no doubt that November’s Grand Prix will provide a major boost to Abu Dhabi’s hotel industry, but full occupancy and top rates are not guaranteed. To help hoteliers think strategically in the countdown to the race, IDeaS Advantage senior consultant Paul Van Meerendonk provides an exclusive report for Hotelier Middle East on winning strategies for revenue optimization.

Since the announcement that Abu Dhabi would be added to the Formula One Grand Prix Calendar in 2009, expectations within the travel industry have been growing about the positive impact this event will have on the local tourism market.

The 2009 Formula 1 Etihad Airways Abu Dhabi Grand Prix — to be held from October 30 to November 1, 2009 — will take place on Yas Island, a 6000-acre island that will include 18 hotels, an equestrian centre and three Championship-standard golf courses, five minutes from Abu Dhabi International Airport.

The event is expected to give the tourism industry a major boost.

Chairman of the Abu Dhabi Tourism Authority (ADTA) HH Sheikh Sultan Bin Tahnoon al Nahyan said: “The economic impact of the event on the overall population of Abu Dhabi will be enormous. It’s the best event that a destination could have”.

Although no concrete figures are available on the economic impact, the Bahrain International Circuit claims that its 2006 Grand Prix generated US $394 million in direct income to businesses and traders in the Kingdom, worth almost 3% of Gross Domestic Product (GDP).

As the excitement builds, hoteliers around Abu Dhabi are trying to evaluate how to best take advantage of the expected increase in demand through optimal revenue management and pricing strategies. With no historical data to base their assumptions on, many hotels are raising questions about the optimal rates to charge, what minimum length of stay restrictions to set, and what might be the potential impact on other revenues.

To provide clarity and confidence for hoteliers that are faced with implementing revenue optimisation strategies during Formula 1 events, IDeaS Revenue Optimisation has undertaken a comprehensive study of Grand Prix weekends in 2007, covering the Formula 1 events in Shanghai (races for the years ’05 and ’06), Kuala Lumpur (’06 and ’07) and Melbourne (’06 and ’07) to determine the effect of the Grand Prix in each of those markets and, therefore, provide guidance to the hotel industry in order to set appropriate strategies for the first Formula One Grand Prix in Abu Dhabi.

The methodology

IDeaS has analysed the Grand Prix events in each of three Asian cities, comparing performance during the race week with the surrounding eight weeks (four weeks prior to the week of the event and four weeks post).

The data from each city has been aggregated to provide a comprehensive view of the effect of the Grand Prix. Percentage variations and averages have been used to account for differences in average rates across hotels and markets.

All revenue data has been converted to USD using the average exchange rates for the period of September 1, 2005 to September 5, 2007.

The results: Impact of Grand Prix on RevPAR

As expected, the Grand Prix had a very positive effect on each of the markets analysed.

On average, revPAR is between 80–90 % higher on peak days; Friday, Saturday and Sunday as compared to the surrounding eight weeks.

This increase is seen to be mostly driven by higher average daily rates (40%–60%) and some increase in occupancy (10%–15%).

It is surprising to find, however, almost no significant positive impact on revPAR on the days immediately prior to the race weekend. This seems to be attributed to lower occupancy rates earlier in the race week and in some cases equal or slightly less average daily rates than the comparison weeks.

Also of significance is that both Shanghai and Kuala Lumpur hotels did not achieve full occupancy, with hotels achieving a maximum occupancy of 87% and 85% on Saturday night, which was possibly due to a lack of sufficient group (base) business and lower than expected transient demand.

A more detailed analysis of “unconstrained” demand levels for hotels in both cities shows, especially during the most recent events, the demand has been below room capacity, indicating even during the race weekend there has not been demand to fill hotels. It is important to consider the weekend in Abu Dhabi is on Friday and therefore demand patterns will differ from cities analysed here.

Corporate transient and group business will either continue to come on Sunday, generating additional demand on that day that would not have been there in the hotels analysed in this report. Or this group could avoid the event, causing a shift in regular corporate business to Monday and Tuesday, increasing demand on those days.

Market segmentation

How should hoteliers determine the best business mix for the race weekend, especially the allocation of rooms to groups?

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