Tourism, Security and Safety From Theory to Practice

Israeli Hotel Industry
Israel’s hotels and guest houses are scattered throughout the country, concentrated,
in descending order, in Eilat, Jerusalem, Tel Aviv, Tiberius, and the Dead Sea. During
the past decade, hotel capacity in Israel has grown at 4.5% per year (Figure 1). The
industry sells into two major markets: the local Israeli market and the international
or foreign market. Bed nights to foreign tourists have trended slightly upward, fluc-
tuating in correlation with regional political instability. They fell substantially
in 1991, the year of the first Gulf War, and in the 1996–1998 period, when terror-
ism was frequent. On the other hand, foreign tourist nights rose rapidly when Israel
signed peace treaties with Jordan and the Palestinians in 1995.
Israeli tourists are gaining an increasing role in Israel’s hotel industry. Local bed
nights have risen steadily in the past few years and now surpass the foreign mar-
ket (Figure 1). While violent events temporarily depress international demand, they
do not appear to affect Israelis’ local tourism proclivities in any significant
way. Instead, Israeli occupancy rates seem to rise somewhat during terror crises,
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possibly in response to measures hotels take to offset shortfalls in the international
market. The shape of the total occupancy rate curve (Figure 2) is similar to but
smoother than that of the foreign rate curve, suggesting that the local market acts
as a counterweight to swings in the international market but does not completely
offset them.
Although international visitors’ rationale for avoiding Israel soon after a terror-
ist incident may not be rational in the sense of minimizing the probability of their
own injury, it is understandable in emotional terms. More problematic is the hotel
industry’s apparent failure to reduce local prices enough to compensate fully for
the international shortfall. To explore this matter, we focus on Israeli hotel pricing
behavior, and especially on how hotels adjust prices to both foreign and local
guests in response to the demand shifts induced by exogenous events. We hypoth-
esize that, because of inelastic local demand and the intangible costs of large price
discounts, it generally is unprofitable for hotels to reduce local prices sufficiently
for local demand to serve as a complete antidote to international market swings.
Taken more generally, this study therefore provides insight into the common indus-
try practice of permitting excess capacity during some seasons of the year.
Model
Our econometric model consists of supply and demand in the local market and
supply and demand in the foreign market. The framework permits interactions
War, Terror, and the Tourism Market in Israel
51
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Year
Total
Foreign
Local