Impact of war
With war raging in Ukraine, the hotel industry is adjusting to another disruption to the new normal, as it weighs up likely longer-term impacts on the sector.
Travel to the country has stopped, while a growing number of sanctions are being imposed on Russia, disrupting a broad range of activities for the foreseeable future. Travel company stocks have fallen, as investors express concern about the likely impact more broadly on consumer behaviour.
As the onslaught continues, official condemnation of Russia continues, with more organisations and businesses cutting off transaction routes with the country. In addition, a range of humanitarian initiatives have been quickly developed, to help the Ukrainian people.
At an official level, travel to and from Russia has been restricted, with cuts to air routes one of the range of economic sanctions now imposed. Across the travel space, Expedia was one of the first in the travel sector to stop transacting across the Russian border, with many more travel businesses now following. From payment providers to consumer brands, more are shutting up shop daily, while Russian products including vodka are being withdrawn from sale.
Official and governmental condemnation has included a request from a number of members, for Russia to be suspended from the UNWTO. The organisation met in Spain on 8th March, to approve the request.
At HotStats, chief operating officer Michael Grove said the impact of the conflict has yet to be seen in data – “but all of our sample in Ukraine are closed”. He expects to see an increase in bookings in European countries bordering Ukraine. “Obviously, Russian travel over the last couple of years has been minimal, but the key thing is we can see Russians being impacted more than anyone else.” Grove noted that while Europe has imposed sanctions, other destinations such as the Middle East currently remain open to Russians.
Grove said previous regional conflicts, while impacting local travel business, had little impact on a broader geography. The 2014 conflict in Crimea, and Iraq war, delivered small dips in travel activity, but no more fundamental shift in consumer behaviour.
Meanwhile, some are stepping up to support refugees from Ukraine. “Hospitality Helps”, an initiative led by Michael Widmann of consultants PKF, was quickly established to provide temporary accommodation for those fleeing Ukraine.
“Half my family is from there, with our 82 years old grandmother currently sheltering in Kyiv,” said Widmann in an appeal to the sector. “We have 20 team members in Ukraine, most of them still in Kyiv.”
Hearing stories of those fleeing the country, many exhausted after travelling for many hours, Widmann stepped in to help one family, calling in a favour from Norbert Lessing, the head of Hilton in Austria. The Hilton Budapest team provided free accommodation for the family, giving them much needed respite after 72 hours of driving. The appeal for help set him thinking – and the Hospitality Helps initiative is now focusing on providing temporary free hotel accommodation for exhausted refugees, in towns and cities across the Ukrainian border.
“Everybody wants to help – what was thought to be a small private initiative, became bigger.” Support from others including Bench Events and HotelSwaps soon delivered a platform to allow rooms to be donated, and refugees to book.
“The perfect scenario would be if large hotels (and serviced apartment providers) in Moldova, Romania, Hungary, Slovakia, Czechia, Poland, Austria and Germany could provide ten rooms for up to ten nights,” said Widmann.
Airbnb announced it will make free short-term housing available for up to 100,000 refugees, with the initiative supported by the company, by generous hosts, and with financial support from donors to the company’s refugee fund. The company is in contact with leaders of Poland, Germany, Hungary and Romania in a bid to help co-ordinate the offer.
The initiative is being offered via Airbnb.org, which since 2012 has supported emergency aid programmes around the world.
Airbnb is also being used as a route to supporting local Ukrainians with donations. Those keen to lend their support are booking accommodation in Ukraine – then messaging their hosts to confirm they will not be turning up. Airbnb has waived fees for the transactions, which will provide an additional source of funds to be used to ease hardship in the areas facing Russian attack.
Hoteliers in Ukraine have been active on social media, detailing the mounting attacks. Among them are Galina Petrenko, commercial director at the Hilton Kyiv, who has been posting images of attacks on the city, on Linkedin. On the same platform, David Mohren, general manager of the city’s Radisson Blu, told how his family had travelled with minimal personal possessions to a place of safety. “I thank you for your prayers and thoughts, but your help is needed MORE,” he commented. “There is a need to support people fleeing the country as well as for people remaining in the country.”
Research by travel platform Hoo suggests the conflict could cost the region USD10.6bn in lost tourism receipts. Prior to the pandemic, the research notes Ukraine enjoyed tourism receipts of USD2.6bn in 2019.
“The impact of the current conflict is likely to stretch far and wide and will no doubt reverberate across Europe for quite some time,” said Hoo co-founder, Adrian Murdock. “The current landscape for those hoping to make it home to loved ones in and around Ukraine is risky, to say the least, and travel to and from this area of Europe is now restricted unless absolutely necessary. In the long term, the tourism industry will obviously suffer and, as with other areas of forecast economic decline, with Russia standing to lose the most as a result of Putin’s actions.”
Among investors facing pressure is Alexey Mordashov, who is a major shareholder in tour group TUI, has been the focus of economic sanctions by the European Union across several of his other business interests. In a media interview, Mordashov commented: “I have never been close to politics and have always focused on building economic value at the companies I have worked for. I have absolutely nothing to do with the emergence of the current geopolitical tension and I do not understand why the EU has imposed sanctions on me.”
In a memo to staff, TUI CEO Fritz Joussen declared: “Mr Mordashov has been a TUI shareholder for around 15 years and has held about a third of our company since he propped it up during the corona crisis. Our company is run by the executive board, like any German public limited company, and not by the shareholders or the supervisory board. We therefore assume that any restrictions or sanctions against Mr Mordashov will not have any lasting negative consequences for us as a company.”
HA Perspective [by Andrew Sangster]: There are turning points in history where world events utterly change the established order: the invasion of Ukraine by Russia is one. It is too soon to tell just how momentous this period will prove but we already know that the humanitarian and political implications are bigger than anything Europe has experienced since the end of World War II.
The humanitarian crisis is horrifying and looks set to escalate significantly further. While the heart hopes for a Ukrainian victory the head looks at the forces arrayed against the country, and it looks improbable.
Refugees already number into the millions – around two million at the time of writing according to United Nations body the International Organisation for Migration– but there is the potential for this to become far larger.
Geopolitically, the events are going to create a hardening of Western attitudes towards those countries that do not share our values. And this is not just a sentiment shift: defence spending is being dramatically increased.
Perhaps Germany encapsulates just how far Europe has changed. It has shifted from a national consensus built around low defence spending and non-participation in foreign conflicts to a dramatic increase in Government cash going towards defence.
A German Government led by Socialists and Greens is spending an extra EUR100bn this year and is committing to spending 2% of its annual GDP on defence in the future. Last year’s defence expenditure was EUR47bn, about 1.5% of GDP.
Just as dramatically, Germany is sending anti-tank weapons, surface to air missiles and ammunition to the Ukrainian Government. This breaks the historic commitment to not sending weapons to conflict zones.
The EU as a whole, through the European Commission, has also joined Germany in taboo-breaking: it is sending lethal aid to Ukraine for the first time, setting aside EUR450m to finance weapons transfers.
The historian Niall Ferguson, in his book Civilization, talks about “the West and the Rest”. He attempts to explain why Western values had triumphed for the past few hundred years. Russia’s invasion is an assault on these values not seen since World War II.
Along with military security, measures are being taken to reinforce energy and food security. The past few decades of globalisation are heading into reverse. The impact of this is set to create a starker dividing line between autocrats and the West (a definition, by the way, that warps geography by including Eastern countries like Japan, South Korea and Singapore).
Unlike in the first Cold War, this time it will be harder to remain neutral. Within Europe we are already seeing evidence of this with Finland applying to NATO and significant pressure building in Sweden for that country to join too.
Today’s division is not about competing ideologies of capitalism and communism but between those that share enlightenment values and those governments that seek to repress them to remain in power.
For countries deemed to be outside the Western sphere, investors can expect to see a significant discount on their assets. Geopolitical risk is going to be taken more seriously. This presents challenges not just for countries like China which clearly does not share Western values but also for those parts of the world where political risk remains a bigger factor including the Asian subcontinent, and much of Africa, Latin America and the Middle East. The world has effectively shrunk.
For Russia’s leader Vladimir Putin it looks to have been a cold calculus that invading Ukraine will stop the risk of there being a prosperous and partially Russian speaking neighbour who would provide evidence that a different type of government was possible.
Putin does not need to occupy Ukraine and he can perhaps even survive failing to win the war. He just needs to inflict sufficient pain and suffering to ensure that Ukraine is no longer an attractive alternative to his rule.
Alongside the humanitarian disaster, the economic impact of the invasion is set to be severe. The National Institute of Economic and Social Research, a London-based think tank, estimates that about 1% of global GDP, or about USD1 trillion, will be lost. Global inflation will be increased by three percentage points this year and about two percentage points next year.
There will also be a significant impact on commodities, including titanium palladium, wheat and corn. “We envisage supply chain problems intensifying for users of such commodities including car, smartphone and aircraft makers,” said NIESR’s policy paper.
Sanction costs on Russia are significant but will be offset by higher prices for gas and oil exports. Russian GDP will contract 1.5% this year and more than 2.5% by the end of 2023. This is painful but probably not enough to cause Russia to reverse course and certainly not the “shock and awe” level of economic turmoil which some hyperbolic press reports have suggested.
In the UK, the Centre for Economics and Business Research, is forecasting that next year will see the economy teeter on the brink of recession with growth at zero. This year, GDP growth will be halved from 4.2% to 1.9%.
The main causes cited by CEBR are the rising cost of living, a reduction in consumption and reduced exports because of sanctions on Russia.
The effect of higher commodity prices reduces disposable income by 1.9% this year and by a further 2.1% next year, said CEBR. As a result, disposable income will be down 4.8% this year and a further 1.4% in 2023. The fall in 2022 is the largest since records started in 1955.
CEBR forecast that the fall in living standards in the UK this year will be GBP71bn, about GBP2,553 per household. Inflation had previously been forecast by CEBR to peak at 7.3% and then fall back sharply; it is now expected to hit 8.7% in the next quarter and remain above 7% until the start of 2023.
Further sanctions on Russian energy exports were expected by CEBR to be introduced. Although the consequences for the Russian economy would be worse, the rest of Europe would suffer significant economic hardship too. Louis-Vincent Gave, of GavekalReseach, points out that China would likely be a beneficiary of banning Russian energy exports as Russia would switch from West to East. Western countries risk inadvertently helping a country, China, that is a significantly greater threat to their values than Russia.
In a 4th March note Gave wrote: “If Beijing can now sign long-term energy deals in renminbi, China’s energy position will improve dramatically. Could this then mean that we are on the eve of another long period of Chinese asset price outperformance?”
Those calling for ever tougher sanctions need to think with their head and not just the heart: a consideration of the long-term consequences matters. And not just in Europe.
A Bank of America Securities report, published on 27th February called “Top 15 FAQ on the Ukraine Crisis”, pointed out that outside of Europe countries like Turkey, South Africa and Egypt will be among the hardest hit from higher energy prices. And in the case of Turkey, the report also said there will be a significant impact on Russian tourism demand due to devaluation (this was before news that Russia is stopping convertibility of the rouble).
At press time, USD1 could buy 136 roubles whereas just prior to the invasion, on 23rd February, USD1 would buy 80 roubles. This huge devaluation impacts the ability of ordinary Russians to travel even to those countries whose borders are still open to them. The Russian outbound market is substantial: in 2019, UNWTO figures show that Russians spent USD36.2bn overseas, the sixth biggest expenditure globally.
But Russia’s currency has been in decline for a while: In July 2008, USD1 was able to buy 23 roubles. This suggests that the outbound market has been dominated by wealthy Russians who can most likely absorb the current devaluation. They will begin travelling again when their currency can be exchanged for foreign cash.
The conflict is also proving problematic for hotel brand companies who have so far resisted terminating their contracts in Russia. Among the major players only Accor has issued formal statements about the crisis and this focused on its ALL Heartist Fund being activated to support teams and families in the regions.
There are calls for all Western companies to pull out of Russia and several big businesses in hospitality or associated with it are being criticised for maintaining a presence. KFC and Burger King are currently facing censure after McDonald’s, Starbucks, Coca-Cola and PepsiCo all capitulated in the face of rising social media pressure.
Hotel brands may yet be targeted too. Whether they are right to keep open or not, the current momentum of opinion is such that closure might be the best option for brand preservation. Closing operations will certainly hurt employees and customers but, as the public spat with other businesses is showing, there appears little forgiveness from the Western public right now. There could also be legal ramifications, particularly from owners, not all of whom will be pro-Putin oligarchs.
The decision is perhaps made easier given that the opportunity to repatriate money from Russian operations back to the West looks limited in the extreme. The situation is very different to say IHG maintaining its presence in Tibet where there was the risk of damaging the potential of a huge market.
In contrast to the hotel brand companies, online intermediaries such as Airbnb, Booking and Expedia have all quickly announced they are freezing their business in Russia. Their situation is in many ways easier than that of the hotel operators.
Tui, as well as being affected by the shareholding owned by Mordashov, pointed out that it had sold shareholdings in Russian and Ukrainian tour operators “some time ago” and it was rerouting trips away from the region.
CEO Fritz Joussen said in an internal statement later press released: “A war of aggression in the middle of Europe, an attack on a sovereign country, on innocent Europeans – all this was hardly imaginable after the end of the Cold War”.
He went on: “As Europeans, we have perhaps taken the right to live in peace and self-determination too much for granted. Although it gives us hope that the free world is showing unity, worries about further developments now predominate”.
The worries cited by Joussen are likely to see a significant increase in defence spending. The previously mentioned Bank of America report, , pointed out that the US spent about 7% of GDP on defence during the Cold War compared to the current 2.8%. The forecast was for this spending to rise to 3.5% to 4%.
This spending will suck cash out of the rest of the economy if taxes are raised to finance it. If debt is used, then inflation will get worse. In either case, economic growth is set to slow.
The BoA report said: “The world of geopolitical stability has changed. The largest country in Europe by land mass just attacked the second largest”. It added: “Europe has not seen anything like this since WWII”.
The BoA report also looked at the impact on stock markets. It said that shocks since the Global Financial Crisis had typically seen 7% sell-offs of the S&P500 that were typically recovered within three months. This time around, however, impacts could be magnified by oil prices, the USD strength (which typically weakens share prices in the S&P) and credit and rates.
For the hospitality sector, geopolitical tensions usually deliver a short-term shock but a quick recovery. The impact of the macro-economic downturn, however, could be much longer.
Hopes of a sharp economic recovery following the end of pandemic restrictions look to be dashed and risk of stagflation – low growth and high inflation – appear high.
In the short-term, the bad news will slow moves by central banks to tighten monetary policy which will continue to provide stimulus to real estate asset prices. But if inflation takes hold thanks to soaring energy and other commodity prices, the consumer spending power squeeze will damage demand. Critical to this is the oil price which is fluctuating but not yet surging as it did in the 1970s to create that period’s stagflation.
Morgan Stanley analysts point out that so far travel and leisure share prices have declined in line with the market, about 5%, since the start of the invasion. The 2003 Iraq war led to a similar situation followed by a recovery within a few days. The 1990 Gulf war, however, led to a 20% decline and prolonged share price weakness in the face of the recession. In both 1990 and 2003, travel and leisure under-performed the market.
It may seem inappropriate to be so focused on share prices at a time of such extreme human suffering but if Putin, and the values that his autocracy represents, is to be defeated then it will be through long-term delivery of superior peace and prosperity.
And there will be peace, even if it is an unjust peace. Your correspondent went to Sarajevo in 2002, about seven years after the war. My then girlfriend (now wife) was working for the BBC helping to set up a public broadcasting service.
The still raw feelings of the people there are etched into my mind. My wife had the unenviable job of recruiting people to work for a media company that had to draw from all sides of the conflict: Croats, Bosnian Muslims and Serbs. As a psychologist, she understood better than most the damage done to individuals by the conflict.
Despite significant support for Russia within Serbia, the country voted at the United Nations to condemn the Ukrainian invasion (although not for sanctions). Memories of the NATO bombing of Serbia in 1995 to end the Bosnian conflict and again in 1999 to enable the breakaway state of Kosovo to be created remain. But the pull of joining the EU appears greater. Getting the right combination of guns and butter matters.
As a society we will have to spend a little more on guns rather than butter to secure the peace but it is our ability to produce enough butter that makes the peace worth fighting for. Travel, tourism and hospitality is an essential, substantial and growing part of the butter offer. The sector has stepped-up to help in the short-term needs of the crisis but it has an even more critical role in winning the peace.
