IMC FACHHOCHSCHULE KREMS

University of Applied Sciences

A critical analysis of the 2007-2009 global financial and

economic crisis and its implications for the travel industry

and associated businesses

Second Bachelor′s Paper

Submitted at the

IMC University of Applied Sciences Krems

Bachelor′s Programme Tourism and Leisure Management 2006

by

Manuel KAAR

Areas of emphasis:

Macroeconomics, Finance, Tourism

Academic Supervisor:

Mag. Bakk. Thomas Schmalzer

Submitted:

30 April 2009

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ACKNOWLEDGEMENTS

I would like to express my sincere gratitude to all those contributors whose efforts

made it possible for me to construct this paper. I would like to thank the team of

the IMC University of Applied Sciences Krems for their excellent support during

the time of my studies at this fantastic institution. In particular, I would like to thank

Mag. Bakk. Thomas Schmalzer and Mag. Kerstin Freudenthaler, M.A. for their

exemplary assistance during the research process for this paper. Above all, I am

deeply indebted to my parents, who are giving me the most wonderful and

invaluable support you can only wish for in all of my academic, professional and

private endeavors.

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Second Bachelor′s Paper

TABLE OF CONTENTS

1

INTRODUCTION 9

2

HOW THE 2007-2009 GLOBAL ECONOMIC CRISIS EVOLVED 12

2.1 Recent historical background 12

2.2 The problem of sub-prime lending 16

2.3 The end of an era 21

2.4 Effects of the financial crisis on the real economy 25

3

RESEARCH METHODOLOGY 28

4

IMPACTS OF THE CRISIS ON THE TOURISM INDUSTRY 31

4.1 General aspects 31

4.2 Key negative impacts 33

4.2.1

Decreased public funding for tourism projects and infrastructure

33

4.2.2 Restricted access to capital 35

4.2.3 Excursus: Unemployment in the tourism industry 37

4.2.4 Changing patterns in leisure travel 37

4.2.5 Changing patterns in corporate travel 41

4.3 Selected possible opportunities 45

4.3.1 Shift in source markets 45

4.3.2 Intensification of the trend towards `Smart tourism′ 46

4.3.3 New spirit of companionship 48

4.3.4 Other opportunities 49

5

DISCUSSION AND CONCLUSIONS 50

List of References 57

Bibliography 64

Appendix 70

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Second Bachelor′s Paper

TABLE OF FIGURES

Figure 1: Effective Federal Funds Rate 07/1954-02/2009; Source: Federal

Reserve Bank of St. Louis 13

Figure 2: S&P/Case-Shiller Home Price Indices as of October 2008;

Source: Case-Shiller Housing Whitepaper 2008, p. 3 15

Figure 3: The New Model of Mortgage Lending. Source: BBC 2007 17

Figure 4: The New Model of Mortgage Lending - How it went wrong.

Source: BBC 2007 19

Figure 5: Dow Jones and S&P 500 Indices 1996-2008;

Source: Newyorkfed.com 2009 21

Figure 6: U.S. mortgage delinquency rates 1998-2008;

Source: Case-Shiller Housing Whitepaper 2008, p. 10 22

Figure 8: Phases of Crisis Management.

Source: Adopted from Glaesser, 2003, p. 13 32

Figure 9: World Travel and Tourism Economy GPD and World Travel and

Tourism Economy Employment Forecasts.

Source: WTTC, 2009, p. 8 33

Figure 10: Consumer Price Index for selected countries 01/2007-07/2008,

including forecast until July 2009. Source: Advito, 2009, p. 5 43

Figure 11: Growth in outbound travel from selected markets in the Americas,

2008. Source: IPK International, 2009, p. 19 45

Figure 12: Advito 2009 hotel rate forecast by world regions.

Source: Advito, 2009, p. 13 49

Figure 13: Consumer Segment′s Changing Behavior.

Source: Quelch & Jocz, 2009, p. 56 51

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Second Bachelor′s Paper

LIST OF ABBREVIATIONS

Abbreviation

Explanation

ABS

Asset Backed Securities

BRIC

Brazil, Russia, India, China

CDO

Collateralized Debt Obligation

DMO Destination

Marketing

Organization

ETC European

Travel

Commission

F&B Food

and

Beverage

Fed

United States Federal Reserve System

GDP

Gross Domestic Product

IATA

International Air Transport Association

ICT

Information and Communication Technologies

SME

Small and Medium-Sized Enterprises

S&P

Standard and Poor′s

UNWTO

United Nations World Tourism Organization

USP

Unique Selling Proposition

WTTC

World Travel and Tourism Council

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Second Bachelor′s Paper

ABSTRACT

There have been numerous incidents in one or more countries in the past that led

to sudden and unexpected reductions in demand for tourism services and

confronted travel businesses with an economic environment of high uncertainty.

However, the current financial and economic crisis appears to be of a larger

dimension than most other crises before, and numerous experts around the globe

agree that the present economic slowdown has the potential to become one of the

most challenging and transformational disturbances on a supranational level since

the Great Depression. Predictions of future developments are vague and can only

be educated speculation at best, yet for the tourism industry the initial effects of

this first major crisis of the globalization era are already clearly perceptible.

Drawing on an extensive review of already existing literature, this paper explains

the various milestones during the period that led to the 2007-2009 global financial

and economic disorder, and subsequently considers a choice of selected key

implications for the tourism industry and associated businesses. The aim of this

paper is therefore to provide an academically substantiated reference guide for

market participants and policy-makers alike, with the ultimate purpose of making a

contribution to reduce the number of cases where wrong decisions lead to major

difficulties or even the failure of a destination or an individual business.

Results of the research indicate that the identified impacts are likely to intensify

throughout 2009 and 2010, and that the crisis will most likely also entail

fundamental changes for the industry on a long-term basis. In particular, it was

found that in the medium term decreased public funding for tourism projects and

restricted access to capital are likely to force many travel businesses into serious

liquidity problems. This may cause a series of reactions, including widespread

workforce reductions and severe cuts in the quality of the provided services.

Besides, the crisis is likely to have considerable effects on the way leisure and

corporate travel is conducted, as for instance shorter and less frequent trips or a

stronger tendency towards cost containment. However, the paper also points out

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Second Bachelor′s Paper

that every crisis embodies a great number of opportunities and provides an

analysis of a range of selected chances for destinations and tourism businesses.

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Second Bachelor′s Paper

1 INTRODUCTION

At present (spring 2009), the world experiences one of the most severe economic

crises in post-WWII history, precipitated mainly by the U.S. sub-prime mortgage

crisis which became apparent to the broad public in 2007. In 2008, the U.S. sub-

prime crisis turned into a global financial crisis, and subsequently into a global

economic downturn that forced numerous countries into recession. Stock markets

have fallen, large financial institutions have collapsed, and governments had to

come up with rescue packages to bail out their financial systems.

Although it can be argued that overall the tourism industry may not be as

vulnerable as other commercial sectors when it comes to fluctuations in clients′

purchasing power, in the medium term tourism businesses are still likely to be at

least as seriously affected by the upcoming new distribution of economic power as

any other industry. A long-term trade and industry downturn may bring about a

broad range of changes to the world, like altered roles of the United States, the

European Union and the Asian block, insecurity and crime, a different

understanding of handling energy resources, further polarization between rich and

poor, or changing values and therefore consumer preferences in general ­ to

name just a few. All these factors may potentially have adverse impacts on tourism

businesses, and thus require adequate attention and timely academic research.

However, change can also mean positive development and can open up new

chances and opportunities for the world economy. These opportunities need to be

identified, assessed and exploited. With an estimated direct and indirect

contribution of the travel and tourism sector of 9.4 percent to global GDP, 10.9

percent to world exports and 9.4 percent to world investment, the significance of

the industry′s role in the struggle for economic recovery clearly must not be

underestimated (cf. WTTC, 2009, p. 4). As the tourism industry is all about

pleasant experiences and the positive things in life, it is sometimes hard to think

about crisis management. When having to operate in an economically insecure

environment of the current dimension, numerous managers therefore face the

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