Budapest: Europe’s Rising Star

5th April 2006 (Last Updated April 5th, 2006 18:30)

With tourism at an all-time high, Budapest has plenty to be optimistic about, write Elana Bader and Hadrien Pujol, HVS International.

Budapest: Europe’s Rising Star

With a population of 1.7 million, Budapest is Hungary’s capital and its cultural and industrial centre. Palaces, churches and hotels are to be found in Buda, on the west bank of the Danube, and clubs, bars and nightlife are in Pest, on the east bank. Two recent events have helped Budapest enjoy a significant increase in tourism over the last three years. Hungary’s accession to the EU and an increase in the number of flights operated by low-cost airlines have played important roles in developing accessibility to and the attractiveness of Budapest as a European destination.

Budapest has significant potential to develop its tourism through its wide variety of attractions, its central European location and its accessibility from main feeder markets throughout Europe. Forecasts by the Economist Intelligence Unit predict that annual GDP growth between 2006 and 2010 will average 3.7%, indicating a suitable environment for stable economic growth.

HOTEL PERFORMANCE

Several events in the last decade have negatively affected the performance of hotels in Budapest. The number of tourist arrivals dropped by several million between 1997 and 1999 as a result of the Kosovo crisis and conflict in the Balkans. The events of 11 September 2001 also affected performance. As a result, occupancy steadily decreased, from 69% in 1997 to 58% in 2003. However, occupancy had increased to 74% by November 2005.

Hotels’ Average Daily Rate (ADR) decreased from a high of €120 in 1999 to the current low of €76. At the same time, revenue per available room (revPAR) decreased from a high of €80 in 1999 to €47 in 2003. RevPAR did subsequently recover to reach €56 in 2005.

In 2005 there were 135 hotels and more than 15,000 rooms in Budapest, mostly in the three- and four-star segments. Growth in the number of hotel units and rooms since 2000 has been significant, especially in the three- to five-star segments. The one- and two-star segments have registered only slight changes.

TOURISM GROWS FROM MAJOR SOURCE MARKETS

The number of tourist arrivals in Budapest increased by 50% between 1991 and 2004, to reach almost 2.4 million: a total compound growth rate of 3%. Over the same period, tourist arrivals in Prague doubled to 3.9 million, a compound growth of 9%. However, both cities witnessed a similar decrease in the average length of stay of accommodated tourists, from 3.2 and 3.7 nights to 2.6 and 2.8 nights for Budapest and Prague, respectively.

The European source markets alone have enjoyed a compound annual growth rate of 14% since 1999 and they provide almost 80% of the total number of room nights, compared with 56% in 2000, an increase fuelled largely by increasing numbers of visitors from the UK and Germany. The most important source countries for Budapest currently are Germany, the UK, Italy and the USA, with the largest growth in arrivals stemming from the UK – a 150% increase since 1999. The number of tourists from the UK increased by 60% in just one year and the country is now second only to Germany. This trend will continue: there are currently 17 flights daily from the UK to Budapest, in contrast to four or five in the recent past.

“Budapest has significant potential to develop its tourism through its wide variety of attractions.”

Since 2000, a decline in the number of bednights has been recorded by the largest source market – Germany. The number of bednights fell from 4.4 million in 2001 to 3.3 million in 2004 as a result of the German economic recession, the appreciation of the forint against the euro and higher inflation. However, this continued decline in German bednights in 2004 was compensated for by growth in other feeder markets such as Italy and the UK. Despite this, Germany is still the leading source market for accommodation in Budapest, accounting for 14% of all visitors.

The UK as a source market experienced a compound annual growth rate of 20% over the period between 1999 and 2005, and now generates some 13% of the total number of room nights in Budapest, an outcome explained largely by the surge in the number of flights operated by low-cost airlines.

DEVELOPMENT OF TOURISM

Perhaps the single biggest factor in the development of tourism in Budapest is the airport. Budapest’s Ferihegy Airport is one of Central Europe’s fastest-growing hubs. Since 2002, passenger arrivals at Ferihegy airport have increased by 98%, to just over eight million in 2005. In fact, passenger arrivals at Ferihegy have increased by more than 20% every year since 2002.

The recently completed €40 million (estimated) renovation of Ferihegy Airport’s Terminal One produced a terminal dedicated to low-cost airlines, similar to Stansted Airport in London, with no VIP lounge and minimal services. Low-cost airlines flying to this terminal include easyJet, Germanwings, Malmö Aviation, Norwegian Air, SkyEurope, Sterling and WizzAir. Hungary’s accession to the EU also aided the significant growth achieved by low-cost airlines.

According to airport figures, almost every airline serving Ferihegy airport saw traffic increase. However, low-cost airlines flying into Ferihegy now account for almost 28% of all traffic, with growth up by an unprecedented 169% on 2004. The results of a recent survey indicate that by 2010 the market share of low-cost airlines will be 35% of the total number of passenger arrivals. The share at present is 15%; it was practically nil at the beginning of 2004. According to a new survey by the Travel, Leisure and Tourism Group of KPMG in Central and Eastern Europe: “By 2010 low-cost carriers are expected to reach about four million passengers, which is a 35% market share.”

CURRENT AND FUTURE PLANS

“Ferihegy is an airport with huge potential,” says Chris Woodruff, CEO of Budapest airport. “With the massive developments we are planning, we can reach 12 million passengers a year by 2011. Budapest Airport will be the number one airport in the region.” Similarly, BAA plc, which recently acquired a majority stake in Budapest Airport, hopes to raise passenger numbers to 20 million by 2020.

The Hungarian Government has produced long-term plans designed to develop other international airports in western parts of the country in order to increase capacity and services at Ferihegy, and to provide a high-speed rail connection between Budapest airport and the city centre.

The rail network is also being improved to further facilitate its integration into the greater European railway network. In the longer term (2015), the government has plans to implement a north-south corridor across western Transdanubia, including the development of the Vienna- Graz railway line, across Sopron and Szombathely.

OUTLOOK FOR HUNGARY

Prague was for a long time the favourite city break destination in Eastern Europe. This was due largely to its improved accessibility thanks to the low-cost airlines – and its attractiveness to international visitor source markets such as the USA and Japan. In order to assess Budapest’s potential, it is important to consider the place of tourism and travel in Hungary’s economy compared with an established destination such as Prague and the recent surge in tourism visitation experienced in Dubrovnik and Croatia in general.

“The number of tourist arrivals in Budapest increased by 50% between 1991 and 2004.”

The data derived from the simulated Tourism Satellite Account (TSA) system by the World Travel and Tourism Council (WTTC) shows that the tourism industry made a direct contribution of $4.7 billion to Hungary’s total GDP (4.2%). The number of people directly employed in tourism was 213,805, which is 5.5% of those in work. In 2005, government expenditure on tourism reached $0.5 billion, and 7.4% of capital investment, amounting to $2.3 billion, flowed into the industry.

BUDAPEST’S TOURISM TRENDS

Thanks to the favourable cost and tax conditions for film production, Budapest has witnessed a continuous rollout of international productions. Among the latest productions is Munich, filmed by Steven Spielberg. In addition, some Hollywood majors are investing in the creation of new studios. This will undoubtedly enable Budapest to compete fiercely with destinations such as London, Munich and Berlin.

Indeed, the capital is eminently suitable for films set in the 17th, 18th or 19th centuries, with filmmakers able to portray the glittering boulevards of Europe in its heyday as well as grim post-war cityscapes. Locations in the Hungarian countryside can pass for rural Germany, France or Italy. While these productions generate room nights at properties in Budapest, should Hungary remain competitive as a film production destination, international tourists are likely to visit the places where their favourite stars have performed.

Since Hungary’s accession to the EU, Budapest, like capital cities in the other nine new member states, is benefiting from the ‘curiosity factor’: international tourists will favour these destinations for a short break over traditional holiday destinations in Western Europe in order to discover the cities’ heritage.

Another potential source of increased visitation for Budapest is the creation of an internationally recognised circuit for Asian and American travellers. This will imply a closer collaboration between those cities that have some sort of common cultural and artistic theme: cities such as Budapest, Vienna and Prague.

One could argue that Budapest does not offer tourists mountains or seashores. However, the city’s central location in Europe – it is within two hours’ flying time of most of Europe’s significant feeder markets – and its wide variety of features – historical buildings and monuments, world heritage Sites, spas, rich and varied culture, culinary experiences, and meeting and convention facilities – will together play an important role in Budapest’s development as a city break destination in the near future.