Oman's friendly cartel

Spectacularly cheap hotel rooms are hindering Oman’s tourism drive. The solution is a fixed minimum room rate.

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By  John Irish Published  April 1, 2004

|~|HOTEL_CARTELFINALIMAGE_COPY1.jpg|~|Hotel owners have teamed up to create a fixed minimum room rate.|~|A nybody who’s been to Oman will tell you one thing. The Omanis as a people are hospitable, charming and will generally have time for you. They sit proudly in the corner of Arabia claiming to be very different from the rest of the region. For starters, the oil and gas dollars spread out across Saudi Arabia, Kuwait, UAE and Qatar do not fill the coffers of Oman’s treasury. Rather than the plethora of migrant taxi drivers plying Dubai’s streets, Muscat’s local turban-clad men take to the roads to earn a buck. Its history suggests a nation not ready to take the lead from anybody else. As an independent country since expelling the Portuguese in the 17th century, the Sultanate is the only Arab nation to have avoided occupation during the last century. It has a cultural legacy ranging from pre-Islamic Bedouin traditions and control of the frankincense trade to its emergence as a Muslim nation after the Ridda wars in the seventh century and its rule over Zanzibar. However, as GCC nations forge ahead with economic growth, Oman finds itself at a crossroads. In its heritage, Oman possesses an alternative tourism product often lacking in the region. To raise the visitor numbers, it must develop infrastructure and spend millions on marketing, but all that within an appealing price frame for potential visitors. Until now, Oman and, in particular, Muscat’s hotel market have in effect become a free for all with establishments slashing prices to fill their hotels. Illustrating this is the average spend of visitors. The less price driven UAE visitors’ spend, according to a survey carried out by International Development Ireland (IDI) for Oman’s Tourism Authority, was a relatively low $148 per person in 2002. “Tour organisers in France were offering packages at around $1000 for seven days in Oman,” says Michael Smythe, a recent visitor to the southern Arabian state. “I decided to go off my own back and see what I could get. In the end, I went to three five star hotels and each one offered cheaper prices than the other.” If haggling is a way of life for many across the region, getting a bargain in a five star hotel has become the norm over the last few years. Political instability since 9/11, the wars in Afghanistan and Iraq as well as the ongoing spectre of terrorism seriously damaged visitor numbers. Additionally, the Gulf’s extreme whether conditions scarcely appealed to either intra-Arab tourism for the summer months or European travellers, who simply found it too hot. Just over a year ago, even in Dubai, a five star room, which would cost $450 in Europe, could be had in the emirate with some seriously good bargaining for as little as $68. Imagine this situation in Oman and the figures are fairly frightening. According to Deloitte & Touche’s Hotel benchmark survey for 2002, average room rates in Oman were just $68. Imagine the rate once your bargaining powers set in? On the surface it would appear paradise for the consumers. However, for the hoteliers and hotel owners the situation is very different. “Three, four and five stars were dramatically cutting their prices, creating a rate war between various hotels, be it government or privately owned establishments,” explains Abdul Al Nabri, owner of the Radisson SAS in Muscat. With the situation continuing in the same vein, the hotel owners in conjunction with the government, opted to look into ways of resolving the price war. After two years of research, the solution is gradually set to take Muscat by storm in the coming months. “If five star hotels are selling a room at the price of a two star hotel, then they are losing out and the country is losing out,” says Mohammed Ali Said, director general of Oman’s Tourism Authority. “The owners have therefore decided to set a fixed minimum room rate, which will also help us receive more income.” Effectively, Oman’s hotel owners have created something resembling a cartel. Where it differs, in their view, is not in destroying the competition, but helping to nurture the Sultanate’s hospitality industry. Rather than a standard one price for all, the hotel owners are creating a minimum rate. This will enable prices to go up during the peak seasons, but never go below a certain level in the summer months, for example, when visitor numbers are down. Additionally, the new initiative will vary depending on what the customer is looking for. Muscat’s most prestigious hotel, the Al Bustan, will have its own price. Meanwhile the city five star properties and four-star hotels will have group rates. Below that the three star establishments will again be subdivided depending on what they have to offer. For the moment, hotels outside Muscat will not be involved. According to Al Nabri, the move was inevitable. He claims the reasoning was just a simple question of demand against supply. “The demand on rooms was less than what was available, so to minimise the losses on hotels and to enable us to provide a high standard of service to guests, whether corporate, leisure groups or individuals, it had to be done.” Although Al Nabri dismisses any suggestions this is a cartel, the hotel owners will in effect dictate the system. A new Hotel Owner’s Association is due to be established in the coming months. Within this organisation regulations will ensure hotels keep to the minimum rate and penalise any group that attempts to break the price structure with fines depending on the number of nights and the room rate. It will also focus on keeping hotel standards high and providing a better service for guests. The current average room rate does suggest that Oman was in desperate need of some regulation. A quick comparison highlights just how far behind Muscat is compared to the rest of the region. The average five star room rate of $68 stands out in comparison to Oman’s GCC neighbours. In 2002, Kuwait City sat at $183, Jeddah at $108 while Manama had a $124 average. You have to look at Damascus with $89 or Amman at $63 to get near the Sultanate’s low figures. However, not everybody is convinced a fixed minimum room rate is the right way forward. One fear is it will harm the competitive element for the consumer. Sami Zoghby, Le Meridien’s Middle East managing director, speaking to Arabian Business last June, suggested fixed room rates in any shape or form would be a return to socialism, taking away the consumer’s right to choose. At the time, he argued any type of price agreement between hotels needed stringent mechanisms to work. He cited Kuwait as an example of a fixed price system not succeeding. “The result has been negative there [because] other hotels have been built and they simply don’t want to be part of the cartel. They sell as they want. Go and see how many hotels are doing well, which are not part of the cartel.” Several months later, he was proved right, when his own group opted to offer prices below the cartel structure, something the hotel owners were not able to prevent. Nevertheless, Al Nabri believes, this will not happen in Oman. The hotel owners, he says, are part of Oman’s drive to change the tourism dynamic. In his opinion, new hotels will not undermine the minimum room rate, because it will also benefit them. He sees Muscat’s hotel industry as one happy family, which will need to work harder to market itself internationally as a team. Elie Younes, senior associate at hospitality consultant HVS agrees to a certain extent, although he suggests things may not be so rosy as Oman’s tourism expansion forges ahead. “Sure, it will help the hotels,” says Younes. “It may have a short term negative impact on occupancy rates, but in the long term it’s good, as long as you don’t have a lot of hotels opening, which will put the pressure on the new cartel.” Zogby’s concerns on stifling competition would, given Oman’s current predicament, not seem to matter too much. Its main target market, the GCC, is not a price sensitive market. A price hike of say 40-50%, taking average room rates to around the $100 mark, would still put Muscat below the regional average, but at the same time is unlikely to cut demand by 50%. Likewise, Muscat caters to a large corporate market, so the price increase is unlikely to deter businessmen from coming to the Sultanate. The one area that may initially stand to lose out is the leisure travel segment. Michael Smythe, who came to Oman as an individual traveller, hinted he’d think twice about returning if prices increased substantially. “When I came, I could get a cheap hotel, but once you want to visit areas, which are hard to get to, then you start paying for it and you need to take separate tours. If the hotels were also expensive, then I’d really think twice about the trip. I’d ask myself whether it was really worth it,” says Smythe. Younes and Oman’s International Rally director, Jeremy Alston, agree, particularly when it comes to the more price sensitive European market and tour operators who rely on competitive pricing. “Off the bat, you would say it wasn’t a good idea to introduce rate caps or minimum rates, as it makes their offering less flexible and doesn’t allow travel operators to be competitive in terms of what they can offer to Oman,” says Jeremy Alston. “However, one of the problems is that once the hotel offers a certain rate to the tour operators, they want that rate every time, so when business picks up the hotels can’t raise their prices.” When Arabian Business spoke to several tour operators the consensus was clear. They will suffer in terms of commission, but Oman would stand to gain in the long term. “There’s not much we can do about it. Ordinarily I wouldn’t like the idea, because it takes away the competitive element,” says a spokesman for a UK-based tour group. “Yes, we lose out, but looking at it carefully, Oman has suffered terribly from price cutting and I don’t think it will harm our activities or the level of demand in the long term.” That Oman is undervalued is an understatement. According to figures recently released by Deloitte & Touche for five-star hotels, Muscat had 1,981 hotel rooms in 2002. Contrast that with Manama with 2,061, Jeddah 2,883 and naturally, Dubai, with 9,850, and you have a market crying out for expansion. However, the government set the tone last November. US $30 million was set aside to promote the Sultanate over two years, primarily in Europe and the GCC. Likewise, a better political climate has to a certain degree helped pave the way for a spate of lucrative projects. The Shangri-La Resort in Bar Al Jissah, is scheduled to open in 2005, providing a further 680 rooms. In February the government unveiled the $805 million ‘The Wave’ tourism development project stretching over 7.3 kilometres of beach. While the vibrancy resembles Dubai’s early days, ultimately, Oman’s tourism market is still in its infancy. The number of guests staying in hotels is still difficult to gauge. IDI came up with the following statistics for 2002. The number of visitors from the UAE staying in Omani hotels exceeded the 650,000 mark. The figure for other GCC visitors was substantially lower. Even in its second primary market of Europe, the numbers were disappointing. French tourists numbered a mere 2,289. UK visitors totalled 22,724, while Germans registered at just over 11,000. Again these numbers were a long way off Dubai’s 1.3 million European hotel guests. Cartel or not, one thing is clear. Oman’s forthcoming minimum room rate structure is aimed at creating a mature market and naturally to bring valuable income for the government. While the hotel owners may make a buck on the new system, their attention is not to squeeze every penny out of the consumer. In many ways, they see this as a safety net in case there is a sudden downturn in the industry. The Sultanate has fed a price cutting frenzy for too many years and the time has now come to bring the Sultans swinging into the 21st century. ||**||

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