International tourism is set to be an important demand generator for hotels in Canada in 2023.
Last year, this segment started to recover as testing requirements and pandemic-related programs were removed. As of November, the most recent data available, international overnight visitors reached their peak for the year but remained well below pre-pandemic levels with more room for recovery.
The number of Canadians traveling internationally recovered more quickly in 2022, down 16% as of November. This indicates more recovery for the domestic outbound market, too, with many who travelled within the country over the past couple of years looking forward to more international travel this year. However, with potentially softer domestic demand, this places even more importance on the rebound of international inbound demand this year for Canadian hoteliers.
The recovery of international inbound varied by source market in 2022, with India and Mexico achieving the fastest return to 2019 levels in November and December, respectively. Meanwhile, at the other end of the spectrum, China was only starting to see a slight improvement at that time due to the country’s zero COVID-19 policy still in place.
Also trailing in the recovery was the U.S. outbound market, which presents the largest opportunity for Canadian hoteliers in 2023, particularly its largest cities and resort destinations, which rely heavily on American tourists. In 2019, American visits made up the lion’s share of international trips to Canada, accounting for 77% of the 30.23 million total visits. Although American trips rose to 71% of the pre-pandemic monthly comparable by November 2022, volume was down 45% throughout the first 11 months of the year or, in absolute terms, down 10.52 million visitors.
Even though the U.S. could face a recession later this year, it is positive to note that U.S. household balance sheets are in good shape, particularly in the top-income quartiles. According to Tourism Economics, of the $2.4 trillion in excess savings from earlier in the pandemic, about $1.2 trillion is still available to spend.
Additionally, the desire to travel is also evident. Recent travel sentiment research by Destination Analysts in January showed 33.9% of Americans surveyed are either likely or very likely to travel internationally in the next 12 months. This was one of the strongest readings of this question over the past 12 monthly surveys and suggests that international travel is growing in importance, despite economic woes becoming increasingly evident.
Even if the American outbound market does start to tighten its belt, Canada is well-positioned as a price-conscious option. The exchange rate between the U.S. dollar and the Canadian dollar provides immediate value for money, with the current U.S. dollar at 0.75 to Canada’s 1.00, which is below the previous peak of 83 cents to Canada’s dollar in early 2021. Additionally, comparable hotels still cost less in Canada, particularly in the luxury segment and key city-break destinations. For instance, ADR in Toronto last year was US$167 or, on average $121 less expensive than a hotel in New York City and $45 less than in Boston.
There are fewer structural headwinds for the American market, too, with many international air routes that were cancelled earlier in the pandemic now being reinstated. Overall seat capacity remains below pre-pandemic levels but is inching closer.
The Chinese outbound market is also notable now that its zero COVID-19 policy has been lifted and severe outbound restrictions have mostly been dropped. The source market accounted for 2% of Canada’s total international inbound market in 2019. However, given its propensity for high average spending and extended stays, it still presents a significant opportunity for hoteliers.
However, mobilizing the Chinese outbound market is expected to take some time, with considerable headwinds still to overcome. Similar to what's been happening in North America, reinstating air routes is a gradual process with many moving parts, including the difficult-to-remedy labour shortage. Furthermore, Chinese travel agencies are piloting outbound group tours to 20 specific countries, and Canada is not on the list. Therefore, for the time being, travel to Canada will be individual or transient. It is reported that China also has a backlog of passport and visa renewals due to the process being suspended earlier in the pandemic, which will further slow outbound travel.
The rebound of international travel has been slow. But this year, hoteliers positioned to attract the American outbound market should benefit greatly.