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ISET Economist Blog

A blog about economics in the South Caucasus.

Detecting Tourism Bottlenecks

Travel and Tourism Competitiveness Index of UN (T&T CI) ranked Georgia 73, in 2011. With this rank, Georgia topped South Caucasus region nevertheless, maintaining the same rank as in 2009. This could mean that not much had improved during those three years in terms of competitiveness of Georgia as a brand in the business of tourism.

Looking at the data on international tourist arrivals and international tourism receipts – they both have been steadily increasing since 2000.

From the first glance this upward trend seems promising. We have more tourists and more receipts. So, what is the problem?


THE PROBLEM:

Whatever the total volume of receipts and the total number of tourists, coming to Georgia for whatsoever reasons, another substantial fact is that receipts per tourist have been falling with the lowest level in 2009 (335 USD per tourist). This means that the marginal revenue from additional tourist is decreasing. For example, if we double the number of tourists then total receipts will less than double. This fact naturally makes us suspect that there are some bottlenecks which cause decreasing marginal revenue. I can think of three scenarios which might be explaining the phenomenon from which first two concern problems with data and the last scenario proposes possible bottleneck: 

  1. Because data is in USD then the phenomenon could be explained by appreciation of USD. However, during recent years USD has been depreciating with respect to GEL
  2. Increasing number of arrivals does not imply increasing number of business tourists and leisure tourists. A big share of arrivals might be just a transit or short-stay visits and/or there could be a switch taking place from business and “elite” tourists, who usually spend much, to hitch hikers and extreme sport tourists, who usually spend less
  3. Georgia does not have enough touristic destinations and entertainment activities to ensure that tourists spend money i.e. a) there is a lack of tourism infrastructure; or/and b)  there is no demand on activities, sites, museums, for whatever reasons related to tastes and quality, which are targeted for tourists and accordingly prices for such services is also low.

BENCHMARKING:

Another argument, strengthening our suspicion that decreasing marginal revenue is really a problem indicating at bottlenecks, would be to do a simple benchmarking exercise:

According to the insight from the data of T&T CI it turns out that each of the top 10 ranked countries exhibit increasing marginal revenue from additional tourists while among the lowest 10 ranked countries there is no clear trend. This means that increasing marginal revenue is a necessary condition for becoming competitive in tourism but not a sufficient one.

Once we look at the key indicators which are used to calculate the index, we see that Georgia is doing worst (comparison made between indicators for Georgia) in international air transport network, quality and availability; effectiveness of marketing and branding; property rights; openness of bilateral air service agreements; hotel rooms; ticket taxes and airport charges; hotel prices; quality of the educational system; local availability of research and training; staff quality; protected areas; number of international fairs and exhibitions; creative industries exports. In the rest of the indicators we are doing pretty well - those indicators are mainly concerned with country being physically safe place for tourists; that tourists will be treated well by local population and that they will be free of bureaucratic procedural burdens. Shortly, the bottlenecks are that there is a lack of exhibitions, fairs, entertainment, quality of protected areas and also it is expensive to fly to Georgia and find good living conditions here. Indeed, this indicates that Georgia does not have to offer much to tourists. So, even if tourists come to Georgia, for what will they spend money here?

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Guest - Leqso on Thursday, 20 December 2012 15:17

Indeed, expensive flight tickets are one of the key challenges for Georgian tourism industry, however bearing in mind that only small share of visitors fly to Georgia and most of them use other means of transportation (cars, railway, buses) to arrive here, I would put less emphasis on flight tickets as a bottleneck for Georgian tourism industry.
Last spring George Welton of GEOWEL research and me did series of interviews with representatives of airline companies doing business in Georgia, and the last thing they worried about was the taxes and airport fares, research showed that Georgian market was liberalized enough and no significant barriers to entry existed. Real thing that kept prices high on airline tickets was the Georgia's unfavorable location and very common pricing pattern in airlines industry called "hub and spoke" system. It means that airlines charge less prices to regional hubs and higher prices from hubs to more exotic locations, unfortunately we are in the second group of destinations for the time being.

I would support more for the idea of poor infrastructure, unqualified staff, low quality of services and lack of marketing activities as the bottleneck for Georgian tourism industry. If this everything is put in place demand for Georgia as a tourist destination will be spurred, higher demand will drag down the prices on flight tickets automatically, taking into consideration that airlines have high fixed cost of flights and more passengers on board means less cost per passenger.

Indeed, expensive flight tickets are one of the key challenges for Georgian tourism industry, however bearing in mind that only small share of visitors fly to Georgia and most of them use other means of transportation (cars, railway, buses) to arrive here, I would put less emphasis on flight tickets as a bottleneck for Georgian tourism industry. Last spring George Welton of GEOWEL research and me did series of interviews with representatives of airline companies doing business in Georgia, and the last thing they worried about was the taxes and airport fares, research showed that Georgian market was liberalized enough and no significant barriers to entry existed. Real thing that kept prices high on airline tickets was the Georgia's unfavorable location and very common pricing pattern in airlines industry called "hub and spoke" system. It means that airlines charge less prices to regional hubs and higher prices from hubs to more exotic locations, unfortunately we are in the second group of destinations for the time being. I would support more for the idea of poor infrastructure, unqualified staff, low quality of services and lack of marketing activities as the bottleneck for Georgian tourism industry. If this everything is put in place demand for Georgia as a tourist destination will be spurred, higher demand will drag down the prices on flight tickets automatically, taking into consideration that airlines have high fixed cost of flights and more passengers on board means less cost per passenger.
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