The Relationship of Thailand Tourism Demand and Supply towards Direct and Indirect Economic Determinants

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1 The Relationship of Thailand Tourism Demand and Supply towards Direct and Indirect Economic Determinants Presented by Etaya Rattanacheevorn Student ID: Master of Arts in Labor Economics and Human Resource Management Faculty of Economics, Chulalongkorn University July 2010

2 Abstract This paper is a briefly discussion on the relationship of Thailand tourism demand and supply and the direct and indirect economic determinants. It will first discuss on the evidences of the major factors that cause changes in the demand and supply of tourism in Thailand that have taken place within the previous decade. It will then conclude with a broad discussion of how the demand and supply adjust itself in the light of improvement and turbulence of economy. Introduction Situating beautiful scenery, Thailand attracts a lot of tourists every year with mountainous and historic sites in the north, pre-historic civilizations in the north-east, and crystal clear beaches in the south and the west. Tourists can enjoy warm weather, unspoiled nature and beautiful Thai cultures with relatively low prize. Thailand has been one of the world's most visited tourist destinations for the last thirty years Over the past decades, tourism industry of Thailand has been growing up significantly. According to Online Consumer Survey (OCS) on travel and tourism of CNN conducted in 2009, Thailand was chosen as the best value for money for travelers in the Asia Pacific region. The survey conducted across CNN English websites had more than 5,000 respondents globally. Thailand came out as the best value in Asia-Pacific for respondents over China in the second place and India in the third. Consequently, businesses which are related to the industry, such as hotels, airlines and tour agencies have been flourish and fully booked across years, especially, during high season (November to April). Millions of tourists increasingly pour in Thailand every year (see table 1 as an example of tourist arrivals to Thailand in December 2009 comparing to the figures in the same month of 2008) and drive the demand of quantity demanded, denoted as Q to go up and out of the original equilibrium, resulted in an excess demand in tourism (see table 2).

3 Table 2: Demand and supply graph during high season of tourism Excess demand in tourism Table 1: International tourist arrivals to Thailand in December sorted by nationality Country of % Nationality Number %Share Number %Share 2009/2008 East Asia 841, , ASEAN 498, , Brunei 1, Cambodia 8, , Indonesia 36, , Laos 56, , Malaysia 236, , Myanmar 8, , Philippines 20, , Singapore 91, , Vietnam 38, , China 93, , Hong Kong 33, , Japan 93, , Korea 80, , Taiwan 38, , Others 2, , Europe 517, , Austria 11, , Belgium 8, , Denmark 15, , Finland 27, , France 47, , Germany 68, , Ireland 6, , Italy 22, , Netherlands 23, , Norway 17, ,

4 Russia 53, , Spain 5, , Sweden 61, , Switzerland 19, , United Kingdom 93, , East Europe 25, , Others 10, , The Americas 95, , Argentina Brazil 1, , Canada 20, , USA 69, , Others 2, , South Asia 90, , Bangladesh 6, , India 68, , Nepal 2, , Pakistan 5, , Sri Lanka 5, , Others 2, , Oceania 79, , Australia 71, , New Zealand 8, , Others Middle East 44, , Egypt 1, Israel 12, , Kuwait 2, , Saudi Arabia U.A.E. 5, , Others 21, , Africa 15, , S.Africa 8, , Others 7, , Grand Total 1,684, ,156, Source: Office of Tourism Development However, due to unexpected situations, the figures of tourists in Thailand dropped in the year 2003, 2005 and 2009 (see table 3).

5 Table 3: Overall picture of tourist number during Source: Thailand Tourism Statistics In this paper, the study is focused on how demand and supply of Thailand tourism, especially of hotel business response to the internal and external factors which were currently taken place. Tourism demand Over the past years, the number of international tourists has increased sharply. Especially, during 1987 to 1996 after launching the campaign named Visiting Thailand Year, Thailand was termed as Golden Decade of Thai Tourism. The figures of tourists have been dramatically rising due to better international economy, expansion of international trade and investment and the improvement of technology in aviation which increases comfort and reduces the cost of long-haul travel. Tourism demand and options of tourist destinations have been influenced by many factors, both expected and unexpected. The demand function for tourism can be written as;

6 D = F(I, Pt, Po, R) where D is the demand for Thailand tourism; I is the income of tourists; Pt is the price of goods and service in Thailand; Po is the price of goods and service of competing destinations and R is other factors related to tourism demand, such as infectious disease outbreaks and political turmoil. In other words, the model of the demand predicts the level of optimal consumption depending on tourist income, price of Thai goods and service, price of goods and service of competing destinations that tourists prefer equally to Thailand or the destinations that tourist have the same utility towards and other elements e.g., pandemic outbreaks and political upheavals. Tourism supply Because of the increasing demand for Thailand tourism, the supply of tourism has rapidly grown, especially hotels and resorts which have been popped up and expanded in prime locations for tourism, such as Phuket, Hua Hin and Chiang Mai to meet the rising number of demand. Nevertheless, the number of hotels and resorts are not enough in some part of year as they have been fully booked across year during high season for tourism, during November to April. Table 4: Growing demand and supply in Thailand tourism From table 4, Thailand tourism demand and supply has originally met at the equilibrium; at point e0. Due to the increasing demand in tourism, the demand curve moves from the curve D0 to D1, causing excess demand when the supply is held constant at S0. However, with response to the rising demand, the

7 supply side is also expanding. Thus, the supply curve shifts from the curve S0 to S1. As a result, the demand and supply meet the new equilibrium at point e1. Although the supply side of Thailand tourism is growing, during some particular time of the year considered as high season when the demand for tourism is very high, the tourism industry faces a supply shortage. From the table 6, during high season, the demand curve moves from the curve D1 to D2, leading to a supply shortage and an excess in demand. The new equilibrium point (point e1) does not remain. Due to the shortage and the excess, the price of tourism is driven up until the demand and supply meet again at the new equilibrium at point e2. Though the room rates of hotels and resorts are very high, tourists are willing to pay to satisfy their need to travel. Table 5: An example of overall hotel room rate Source: Table 6: Demand and supply graph during high season

8 Literature review Pandemic outbreaks Contagious disease outbreak is one of the most important factors which negatively effects Thailand tourism industry. For example, during SARS crisis in 2003, Thailand tourism faced a significantly drop in tourist arrivals. The number of Asian travelers reduced because of travel restriction posed on them. The figures of tourists in other regions dropped since they were afraid of the increasing SARS infection level in South East Asia. In the year of SARS outbreak, 10,004,453 tourists visited Thailand, which showed a decrease of 7.36% compared to the previous year (see table 7). This caused a shrink in the demand towards tourism in Thailand and in turn led to an excess supply. The table 8 shows that Thailand tourism also faced a significant drop during high season in tourist arrival, especially from Asia during SARS outbreak. The statistic captured the period that covered Songkran festival in April which is one of the most popular Thai festivities. During the period, hotels and airlines are normally full. However, due to the unexpected infectious disease, the demand for tourism dramatically fell. As a result, tourism industry including airlines and hotels faces a loss as there was so little income while their fixed costs remained, such as cost of labor and maintenance cost. Table 8: Tourist arrival during SARS outbreak Source: Asian Market Research

9 Table 7: International tourist arrival to Thailand during SARS outbreak Source: Tourism Authority of Thailand Natural phenomenon Unexpected natural phenomenon, such as Tsunami also poses negative economic impacts on tourism. In 2004, Tsunami incurred a high negative affects in the tourism industry in the southern part of Thailand, especially in Krabi, Trang, Pang Gna, Phuket, Ranong and Satun, which are very popular among international tourists. The number of tourists visiting the tsunami affected areas mentioned above decreased significantly in the year 2005 (see table 9). Resulted from the figures dropped, the demand for the tourism in the southern part of Thailand also fell. However, with reference to the table 3 mentioned above and table 10, the overall tourists visiting Thailand during the period slightly dropped from the previous year. The impact of Thailand tourism in general was not large as expected since the Tsunami affected only the South. Tourists then changed their destination to the other parts of Thailand, such as Chiang Mai located in the north to experience the tropical weather or Koh Chang located in the east to enjoy white sandy beach. From the tables, it can be implied that if the natural phenomenon occurs only in some part of Thailand, the tourism demand of the certain part moves out of the initial equilibrium, while the demand of the rest not affected by the phenomenon remain the same or is driven up.

10 Table 9: Actual and projected recovery of international tourist arrival at Phuket International Airport in 2005 and 2006 Source (Oct 2004 to June 2005): Immigration Bureau, Police Department Table 10: INTERNATIONAL TOURIST ARRIVALS TO THAILAND BY NATIONALITY, January to December Country of %Change Nationality Number % Share Number % Share 05/04 East Asia 6,397, ,633, ASEAN 2,948, ,735, Brunei 9, , Combodia 105, , Indonesia 186, , Laos 203, , Malaysia 1,373, ,404, Myanmar 53, , Philippines 186, , Singapore 650, , Vietnam 179, , China 776, , Hong Kong 274, , Japan 1,196, ,212, Korea 816, , Taiwan 365, , Others 18, , Europe 2,848, ,851, Austria 58, , Belgium 57, , Denmark 103, , Finland 85, ,

11 France 276, , Germany 441, , Italy 120, , Netherlands 152, , Norway 85, , Russian 102, , Spain 51, , Sweden 222, , Switzerland 120, , United Kingdom 773, , East Europe 71, , Others 123, , The Americas 833, , Argentina 3, , Brazil 9, , Canada 156, , U.S.A. 639, , Others 25, , South Asia 542, , Bangladesh 42, , India 381, , Nepal 23, , Pakistan 42, , Sri Lanka 38, , Others 14, , Oceania 516, , Australia 428, , New Zealand 85, , Others 1, , Middle East 292, , Egypt 7, , Israel 98, , Kuwait 29, , Saudi Arabia 10, , U.A.E. 48, , Others 97, , Africa 85, , S. Africa 35, , Others 49, , Sub Total 11,516, ,650, Overseas Thai 50, , Grand Total 11,567, ,737, Source: Tourism Authority of Thailand

12 Table 11: Tourist arrival in Bangkok, Phuket and Chiang Mai Source: Tourism Authority of Thailand Table 12: Supply and demand in the tsunami affected areas compared to the supply and demand in other parts of Thailand Tsunami affected areas Other parts of Thailand Global economic crisis Global economic status is one of the factors, which can be positively or negatively related to Thailand tourism. As stated above, the demand for tourism depends on the income of the tourists (I). If the income of tourists is high, the demand for tourism will also be high. Considering the income alone as the determinant of tourism demand, the Marshallian demand can be expressed as D = I /Pt

13 If the price of goods and service of tourism in Thailand is fixed or remain unchanged and the income of tourists becomes higher, the demand for tourism will be higher. On the contrary, if the amount of tourist income is smaller, the demand will be less accordingly. One of the examples of global economic circumstances which has recently taken place and affected Thailand tourism is the Subprime crisis in the United States of America. The financial crisis has reached its peak since late 2008 and resulted in the decrease in the number of tourists to Thailand, especially in the first half of The greatest decrease included tourists from Northeast Asia, with a drop of more than 30%, followed by the United States of America and Oceania. The number of tourism from ASEAN and Europe are affected only slightly. Although the crisis has not directly influenced Thai economy, we are to some extent impacted by the decline of international tourism as the crisis has dampened and reduced the tourists desire and budget to travel. Table 13: International tourist arrivals to Thailand in January sorted by nationality Nationality % Number %Share Number %Share 2009/2008 East Asia 565, , ASEAN 316, , Brunei Cambodia 7, , Indonesia 14, , Laos 56, , Malaysia 160, , Myanmar 5, , Philippines 16, , Singapore 36, , Vietnam 19, , China 57, , Hong Kong 21, , Japan 83, , Korea 56, , Taiwan 28, , Others 1, , Europe 459, , Austria 10, , Belgium 7, , Denmark 21, , Finland 29, , France 43, , Germany 57, , Ireland 5, , Italy 19, , Netherlands 18, , Norway 15, ,

14 Russia 41, , Spain 3, , Sweden 58, , Switzerland 16, , United Kingdom 75, , East Europe 23, , Others 9, , The Americas 87, , Argentina Brazil 1, , Canada 19, , USA 63, , Others 2, , South Asia 52, , Bangladesh 3, , India 38, , Nepal 2, , Pakistan 3, , Sri Lanka 2, , Others 2, , Oceania 61, , Australia 54, , New Zealand 6, , Others Middle East 36, , Egypt , Israel 9, , Kuwait 2, , Saudi Arabia U.A.E. 8, , Others 15, , Africa 8, , S.Africa 3, , Others 5, , Grand Total 1,269, ,437, Source: Tourism Authority of Thailand Political Turmoil Political situation is another factor tourists use for considering their vacation destinations. Thailand ongoing political instability has put an enormous effect on its tourism. Thailand has experienced extreme political crisis since the military coup in Although, the political situation does not have direct affect on tourism, the continuous turmoil has gradually destroyed Thailand image as a peaceful destination in Asia which has been leading to the decline in the number of tourists. The political unrests, especially the seizure of Suvanabhumi International Airport in 2008 and the demonstration in Bangkok

15 main business area in 2010; Rajaprasong together with many travel advisories issued by tourists countries, such as United Kingdom, United States of America and Australia warning their nationals against travelling to Thailand have made tourists question on their safety while staying in Thailand. While the crisis and violence confine to a small part of Bangkok, the whole Thailand tourism industry has suffered from its consequence since the continuous unrest has been putting tourists off visiting Thailand. Alternatively, tourists may swing their holiday destinations to other Asian countries which have, on average the same quality and cost and can fulfill their satisfactions. In other words, tourists may choose other countries which they feel indifference to, comparing to Thailand or being on the same indifference curve as their destinations. Thailand has received increasing competition in tourism industry from Laos, Cambodia and Vietnam since they have opened up to international tourism. As they are considered as emerging international tourist destinations, of which the number of tourists grows at a very fast rate, Thailand has no longer been a monopoly tourism market in Asia. As a result from the political crisis, the demand in Thailand tourism has declined and moved out from the initial equilibrium point. Discussion The demand and supply of Thailand tourism from international tourists depends positively and negatively on many factors both controllable and uncontrollable. The factors which have recently taken place within 10 years, such as contagious disease outbreak, natural phenomenon, global economic crisis and political unrests have posed negative impacts on Thailand tourism. Under normal circumstances, the demand is steadily growing and in response to the growth of the demand, the supply side also expands (see table 4). However, during the components mentioned above, the demand shrinks as tourists cancel bookings and those who have already been in Thailand even shorten their stay and switch their travel destinations to other Asian countries which offer the same utility that the tourists can afford.

16 Table 14: An example of tourist indifference curve Since the demand for tourism reduces, leading to the supply excess, the supply side has to adjust itself to survive. Hoteliers have to cut room prices and launch active package promotions to attract tourists. They need to fill the room vacancies as they have been pressured by the fixed cost, such as wages of labor and maintenance cost that incur even though they do not operate. Although they do not benefit from the lower room rates, they can still cover some of the fixed costs. Some even offer half price rooms to bring back the tourists. Conclusion Thailand tourism demand and supply can automatically adjust itself during normal and unexpected circumstances. When the demand grows in competitive steps, the supply side also thrives. The supply and demand meet at the equilibrium. When direct and indirect economic determinants hit the economy and the demand for the tourism reduces, the supply also automates itself by offering low cost goods and service until the demand and supply meet again at the new equilibrium point. Automatic adjustment process will come into place when there are changes in the tourism industry.

17 References Asian Market Research News. APR 30 th, SARS, Thailand, tourism and business travel: How fast for recovery?, Diethelm Travel s Thailand Tourism Review. 2007, EPR Travel News. APR 28 th Bangkok Political Crisis Continues to Have Negative Impact on Thailand Tourism, to-have-negative-impact-on-thailand-tourism/ Fuller, Belinda. Thailand Development Research Institute. TDRI Quarterly Reiew. Vol. 12. JUN Thailand Tourism: Vision 2012, Immigration Bureau, Police Department, King, Mike. Thailand Tourism Report Q New Market Analysis Released, inside.com/thailand-tourism-report-q-r htm

18 Steinmueller, Acharee. Social and Economic Impacts of SARS Outbreak in Thailand. TDRI Quarterly Review. Vol. 20 No.1 Thailand : Tourist Arrivals from 1998 till Quarterly Data , Tourism Authority of Thailand. Statistical Report. Bangkok, Tourism Authority of Thailand. Thailand Tourism Overview for 2009 and Tourism Goals and Trends for 2010, Travel and Tourism Survey, MAY 27 th, CNN survey reveals Thailand offers best value in Asia Pacific region, asia-pacific-region Wikipedia. Tourism in Thailand,

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