The success story of Dubai's hospitality sector is souring, with hotel profit margins in January showing signs of the industry feeling the pinch of the economic downturn. In recent years, the Dubai market has performed strongly compared with the rest of the region as the supply of hotel rooms failed to meet demand. But with the economic crisis cutting tourist numbers, occupancy rates have fallen and prices are coming down. "What we are seeing is the classic knee-jerk reaction to a fall in occupancy, with waves of panic pricing. The last thing revenue managers want to do is to suffer twice - both from the fall in occupancy and then in rate", said James Chappell, the managing director of STR Global, a US-based industry research firm. During several days in January, hotel profit margins in the emirate fell by as much as 40 per cent, according to a recent report by the firm. The report said the decline was shared largely between drops in both occupancy and average daily rates. Looking at the situation in a global context, the market in the emirate was falling from a fairly high base, which somewhat cushioned the blow compared with Europe and the US, said the report. Jeff Strachan, the area director of Marriott Hotels in the Middle East and Africa, said Marriott's occupancy percentages in Dubai ranged between the 70s and 80s. "There are so many reasons why profits at Dubai hotels are slower than 2008, and one of them is that the general flow of tourism is a lot slower," said Mr Strachan. "This is slightly lower than the rates we had last year, but I also think that the exchange rate of the dirham to the euro has also been a factor in this drop. Before the exchange was about Dh7.20 for a euro, and now it is Dh5." The period in question coincided with the Dubai Shopping Festival, a month-long promotion when hoteliers and retailers offered discounts to boost tourist number in the lull after the New Year break. In an attempt to shore up numbers, the Dubai Department of Tourism and Commerce Marketing (DTCM) launched the shopping festival 10 days earlier than last year. Hoteliers said numbers were still down on the previous year, partly because shopping was less of an attraction to the price-sensitive traveller. "The shopping festival had no impact whatsoever on our occupancy rates, which were in the low 60s during that period," said the general manager of a major international budget hotel in Dubai. "Shopping in Europe and the US is now much cheaper than Dubai, so I think the DTCM should focus on other areas, such as cultural events." Adnan Aridi, the general manager of Alpha Tours, the largest travel agency in Dubai, said the company's business during the festival declined by 6 per cent compared with last year. "There are a lot of good deals out there in terms of packages, but people are just not interested in shopping any more." During the festival, DTCM had encouraged hotels to cut rates by as much as 60 per cent and early last month a spokesman had said the discounts would continue in a bid to shore up the declining occupancy rates. In Abu Dhabi, however, profit margins in January exceeded last year's figures, the STR report said, due to the chronic shortage of beds. The capital played host to the PGA European Tour Abu Dhabi Golf Championship during that month. "The increase in January's [revenue per available room] is due to the increase in average daily rate outweighing the decline in occupancy over the month," the report said. abakr@thenational.ae