Forecasting h(m)otel guest nights in New Zealand

Christine Lim
a,
*, Chialin Chang
b
, Michael McAleer
c,d
a
Department of Tourism and Hospitality Management, University of Waikato, Private Bag 3105, Hamilton, New Zealand
b
Department of Applied Economics, National Chung Hsing University, Taiwan
c
School of Economics and Commerce, University of Western Australia, Australia
d
Faculty of Economics, Yokohama National University, Japan
1. Introduction
The last two decades have seen a surge in studies on tourism
seasonality, which shows a rising interest in this important aspect
of tourism demand. In their review of past studies on seasonality,
Koenig-Lewis and Bischoff (2005) argue that a substantial part of
the time series literature is related to tourism demand forecasting.
While the ndings of these studies are useful, they do not
contribute directly to management and policy-decision issues
related to the hospitality industry. In this paper, we will analyse
tourist accommodation demand and forecast guest nights using
models which should have considerable practical value to the
hotelmotel (henceforth h(m)otel) industry.
The lodging industry, like any other industry, faces challenges
in the process of formulating actions to achieve future goals. It tries
to monitor key micro- as well as macro-environmental factors to
assess its strengths and weaknesses, and to discern opportunities
and/or threats. While it is important for hotels and motels to
analyse, for instance customer satisfaction (or lack thereof) in the
product and services of the industry, it is also worthwhile
examining guest demand patterns over time and in the foreseeable
future. Whether the lodging industry is considering short-term
operational planning whereby the environmental conditions are
xed or long-term strategic planning, where environmental
conditions are uncertain, an analysis of historical demand patterns
and demand forecasting is essential for effective planning and
revenue management. This is equally true for the lodging industry
in New Zealand and throughout the world.
The interest shown towards forecasting has come from both
academics and practitioners. Predictions generated by various
forecasting methods are often used as inputs for planning, policy-
making, purchasing decision, inventory control and other business
decision-making activities. Additionally, information on demand
forecasts is essential in the lodging industry for yield management
process and room revenue maximization (Rajopadhye et al., 2001;
Upchurch et al., 2002). It is important to bear in mind that
forecasting is not based on gazing at crystal balls. Any business
forecasting method used is often based on tting a model to a set of
data. Every model has underlying assumptions which are relevant
for forecasting. Temporary or structural changes can occur in the
future due to changes in consumer attitudes, political/economic/
nancial events, and technological development, among others.
Such dynamics could cause the existing patterns of travel and
tourist accommodation demand to alter, and forecasting errors are
inevitable.
2. Literature review
Increases in disposable income have seen a rise in recreational
travel demand. The vast majority of domestic and international
tourists who do not stay with their friends or relatives use
International Journal of Hospitality Management 28 (2009) 228235
A R T I C L E I N F O
Keywords:
Lodging industry
Guest night demand forecasting
Time series models
Monthly data
HoltWinters
BoxJenkins
A B S T R A C T
The purpose of this paper is to highlight some time series models which hotel and motel industry
practitioners could use to forecast guest nights. Given their considerable practicality, the lodging industry
can easily benet from using these models as forecasts can be obtained at low cost for effective
management and planning. Monthly observations are used for estimating the model from 1997(1) to
2006(12). The HoltWinters and BoxJenkins ARMA models are able to forecast guest night demand
accurately as 99% of the variations in the guest night forecast are associated with variations in actual
guest nights in 2007.
2008 Elsevier Ltd. All rights reserved.
* Corresponding author. Tel.: +647 838 4299; fax: +647 838 4331.
E-mail addresses: clim@waikato.ac.nz (C. Lim), changchialin@nchu.edu.tw
(C. Chang), michael.mcaleer@gmail.com (M. McAleer).
Contents lists available at ScienceDirect
International Journal of Hospitality Management
j our nal homepage: www. el sevi er . com/ l ocat e/ i j hosman
0278-4319/$ see front matter 2008 Elsevier Ltd. All rights reserved.
doi:10.1016/j.ijhm.2008.08.001
commercial tourist accommodation. With the proliferation of
research in tourism demand using time series models since the
1980s, very few past studies are directly related to the
hospitality industry. The latter is based mainly in the USA and
European destinations and the research undertaken is quite
varied, ranging from estimating visitor hotel expenses, hotel
labour market, and hotel seasonality, to hotel room demand/
occupancy rate forecast. Choi et al. (1999) examined the US hotel
business cycle from 1966 to 1993 and analysed possible turning
points for the industry during this period. In a subsequent paper,
Choi (2003) developed a forecasting tool for the US hotel
industry based on economic (leading, coincident and lagging)
indicators.
Krakover (2000) examined the relationship between labour
turnover and accommodation demand (measured by bed-nights)
in the hotel industry in Israel. Using Danish hotel nights by
regions and tourist nationalities from 1970 to 1996, Sorenson
(1999) proposed an analysis of seasonal unit roots and found that
seasonality is more stochastic than deterministic in nature. In
contrast, Lundtorp (2001) found that the seasonal demand for
Danish hotels was very stable from 1989 to 1998, as measured by
the coefcient of variation and Gini coefcient. In addition to
testing for seasonal unit roots, Gustavsson and Nordstrom (2001)
examined the forecast accuracy of various models for the
Swedish lodging (hotels and cottages) industry. Jeffrey and
Barden (1999) used principal component analysis to measure
seasonality of English hotel room occupancy. Koenig and Bischoff
(2004a, b) used a similar technique for the accommodation
sector in Wales.
Choy (1985) and Law (1998) used annual data on tourist
arrivals to forecast the hotel room occupancy rate in Hong Kong.
Since hotel room demand or occupancy rate changes from month
to month, seasonal patterns are ignored in their studies when
annual data are used for forecasting. In a separate paper, the hotel
room rate and occupancy rate in Hong Kong were used as
explanatory variables, among others, by Law (2000) to estimate
and forecast visitor hotel expenses. Rajopadhye et al. (2001) used
the HoltWinters procedure to forecast room demand for a hotel
which provided the data for the purpose of developing an
intelligent system, presumably for the organization. Cranage and
Andrew (1992) and Olsen and Jose (1982) used time series models
to forecast restaurant sales in the hospitality industry. Of the few
empirical forecasting papers we have identied, Cranage and
Andrew (1992) and Rajopadhye et al. (2001) are the only studies
which have used a substantially large sample of 79 and 58
observations, respectively.
Tourist accommodation can be measured as a ow or a stock.
For instance, the number of hotel and motel rooms available at any
point in time is the stock, whereas the number of room nights
occupied is considered as a ow which changes over a specied
period. The number of roomnights occupied in a hotel or motel per
month as a percentage of room nights available in the enterprise
gives the room occupancy rate during a particular month. Other
important ow concepts include the number of guest arrivals and
guest nights, from which we can estimate the average length of
stay of visitors per month. For practical reasons, the owconcept is
the preferred proxy to use as a measure of accommodation demand
in the lodging industry.
The purpose of this paper is to forecast h(m)otel guest night
demand in New Zealand. The rest of the paper is structured as
follows. An overview of major tourist destinations in New Zealand
is given in Section 3. In Section 4, alternative time series models
used for forecasting are discussed. The unit root tests, methodology
and forecast results are presented in Sections 57, respectively.
Some concluding remarks are given in Section 8.
3. Overview of major tourist destinations in New Zealand
In this paper, the data set used on monthly short-term lodging
guest arrivals and guest nights for New Zealand ranges from 1997
to 2007 (Statistics New Zealand, 19972007). In addition to total
guest arrivals, which include domestic and international visitors,
the data are divided into 71 territories, which comprise cities and
districts. Guest arrivals vary from as low as 10 456 in Waimate
district (situated half-way between Christchurch and Queenstown
in the South Island of New Zealand) to as high as about 1.9 million
in Auckland city in 2007.
The ve major tourism cities and districts in New Zealand
which receive the most guests are Auckland city, Rotorua district,
Wellington city, Christchurch city and Queenstown-Lakes district.
Their locations in New Zealand are shown in Fig. 1. Auckland,
nicknamed the city of sails, is the largest city and also the
business capital of NewZealand. It is located in the fastest growing
region, which also accounts for more than one-third of the
countrys economy. In Rotorua, tourists experience the natural
wonders of simmering hot springs, erupting thermal geysers and a
wide range of Maori culture. The amazing Waitomo limestone
Glowworm caves are also situated close to the Rotorua district.
Wellington is located at the southern end of the North Island of
NewZealand. As the capital city of New Zealand, Wellington city is
also home to a wide range of museums, galleries and theatres,
among other attractions.
Christchurch, also known as the garden city, is the largest city
in the South Island. The Southern Alps to the west, and the Banks
Peninsula and Pacic Ocean to the east, where marine activities
such as whale and dolphin watching can be enjoyed, are among the
many attractions in close proximity to Christchurch. Queenstown
and the Lakes district are renowned for adventure tourism
activities like rafting, skiing, bungy jumping, and its proximity
to stunning landscape in the Fiordland National Parks (AA Travel,
2008). Together, these ve tourism regions accounted for about
41% of total guest arrivals in the country (see Table 1). Additionally,
total guest arrivals increased by 56% nationally from1997 to 2007.
With the exception of Rotorua district, guest arrivals in the other
four cities and districts grew faster than the country in general.
Fig. 1. Top ve cities and districts in New Zealand by guest arrivals, 2007.
C. Lim et al. / International Journal of Hospitality Management 28 (2009) 228235 229
While the regional seasonal patterns are similar to the national
pattern, what is not known is the concentration of guest arrivals in
these destinations in any 1 year. Among the few papers published
using the Gini coefcient technique to provide evidence on tourist
distributions, we are only aware of one study which examined the
distribution of guest arrivals in the lodging industry in Europe
(Lundtorp, 2001). The Gini coefcient is a very simple and useful
concept borrowed from economics. If the accommodation
enterprise has the same number of guests each month, the Gini
coefcient value is zero. At the other extreme, where all the guests
arrive in one particular month, the Gini coefcient would be equal
to or close to one. Given the monthly variations in guest arrivals,
we would expect the Gini coefcient to lie between 0 and 1. A
lower concentration of guests is expected the closer the Gini
coefcient is to 0. When guest arrivals are more spread out
throughout the year, this could alleviate seasonal pressures on the
resources of the enterprise and destination concerned.
As shown in Fig. 2, the three cities and districts in the North
Island of New Zealand have lower Gini coefcients than the two in
the South Island from 2000 to 2007. While Wellington is ranked
fth in terms of guest arrivals, it has the lowest Gini value and has
only been surpassed by Auckland in 2004. Among the ve
destinations, Queenstown-Lakes district is the only one with a
higher Gini value than that of the country. In Lundtorp (2001), the
Gini coefcients for Danish hotels in Copenhagen city and
Copenhagen country from 1989 to 1998 range from 0.12 to 0.14
and 0.11 to 0.15, respectively. In comparison to these ndings,
Wellington citys Gini values are lower and range from0.05 to 0.07.
Information related to short-term tourist accommodation in
the country is collected by Statistics New Zealand as part of their
monthly accommodation survey of commercial lodging providers
with a minimumannual turnover of NZ$30 000. They are classied
under the following ve categories: hotels (include resorts), motels
(motor inns, apartments and motels), hosted (private hotels,
guesthouses, bed and breakfast and farm stays), backpackers/
hostels, and caravan parks/camping grounds. Fig. 3 shows that
tourist accommodation available from 1997 to 2007 is predomi-
nantly hotels and motels. On average, they accounted for more
than 63% of all accommodation establishments in New Zealand
during this period. Given the larger share of total guest nights from
hotels and motels in the country, we will concentrate on a national
level and forecast the guest night demand patterns of only these
enterprises.
4. Theoretical models
Quantitative techniques used for forecasting consist of regres-
sion models and time series (extrapolative) models (Frechtling,
2001). Econometric models are based on economic theories, and
involve identifying functional relationships between one depen-
dent variable and one or more related explanatory variables.
Essentially, these models are able to forecast based on regression
analysis. In time series models, the current and past behaviour of a
single variable is extrapolated to predict the future values of the
time series. Extrapolative or univariate time series models have
been standard tools used in tourism and hospitality forecasting for
a number of years because of their low complexity and
computational intensity. In addition to being relatively simple
models, they are especially suited for short-term forecasting as
these models place heavy emphasis on the recent past observa-
tions rather than the distant past.
Examination of the empirical tourism literature on forecasting
methods has found conicting results. Arguably, statistically
complex models do not necessarily perform better, or are no more
accurate than, simpler methods in forecasting (see, for instance,
Burger et al., 2001; Cho, 2003; duPreez andWitt, 2003; Fildes, 1985;
LimandMcAleer, 2002; Makridakis, 1986; SongandLi, 2008; Turner
and Witt, 2001). As hotel and motel guests are both domestic and
international visitors, theuse of regressionmodels is not particularly
appropriate given the complexities associated with the different
demand characteristics and explanatory variables across market
segments. Thus, the use of extrapolative (time series) forecasting
models is more appropriate for this paper. The EViews 5 software
package is used for data analysis and forecasting.
There are numerous extrapolative models of varying degrees
of complexity. They range from basic, intermediate to advanced
methods (Frechtling, 2001). The basic extrapolative methods
Table 1
Summary statistics on guest arrivals in NewZealand by major cities/districts, 1997
2007
Territorial authority Share (%) 2007 Growth (%) 19972007
New Zealand (total) 100 56.2
Auckland city 11 63.9
Christchurch city 10 60.1
Queenstown-Lakes district 8 74.2
Rotorua district 6 25.0
Wellington city 6 88.8
Fig. 2. Gini coefcients of the top ve regional destinations in New Zealand, 2000
2007.
Fig. 3. Short-term tourist accommodation in New Zealand by type, 19972007.
C. Lim et al. / International Journal of Hospitality Management 28 (2009) 228235 230
include naive and single moving average, while the single, double,
triple exponential smoothing, and autoregression methods belong
to the intermediate category. The BoxJenkins approach is
undoubtedly the most popular advanced extrapolative method
used. More complex forecasting techniques which are rarely used
include, for instance, adaptive ltering, ARCH and GARCH models,
neural network, the State Space approach, and Bayesian forecasting,
some of which are based on engineering principles. For instance, in
the reviewof 121studies ontourism/hospitality forecastingbySong
andLi (2008), onlytwousedneural network. Additionally, nostudies
usedthe ARCH/GARCHand the State Space approachfor forecasting.
The review also highlights the lack of forecasting research in the
hospitality discipline, as only one study used guest nights at the
lodging industry (Gustavsson and Nordstrom, 2001) and the rest
used international tourist arrivals for forecasting.
Atime series typically consists of three components, namely the
trend-cycle, seasonal and erratic components. As shown in Fig. 4,
the total number of hotel and motel guest nights in New Zealand
from1997 to 2007 trended upwards withseasonality. In this paper,
we will use the HoltWinters triple exponential smoothing and
BoxJenkins models, as these models encompass tourism trend
and seasonality, which are important in forecasting (Box and
Jenkins, 1970; Holt, 1957; Winters, 1960). Furthermore, these
models are appropriate for forecasting horizons of 1218 months,
and when a time series with at least 50 observations are available.
The accuracy of a forecasting methodis determined by analyzing
the forecast error, which is dened as the actual minus the forecast
(or tted) value of the variable for time period t, namely:
e
t
A
t
F
t
;
where e
t
is the forecast error at time t, A
t
is the actual guest nights
at time t, and F
t
is the forecast guest nights at time t.
Although forecasting accuracy is inversely related to the forecast
error, there is not a universally accepted measure of forecasting
accuracy. Forecast optimization typically chooses a model that
minimizes the forecast error. A variety of measures of forecasting
accuracy are available but those which are commonly used include
the root mean squared error (RMSE), the mean absolute (MAE), or
mean absolute percentage error (MAPE) of the forecasts:
RMSE

1
n
X
n
t1
e
2
t
;
v
u
u
t
MAE
1
n
X
n
t1
e
t
j j
A
t
;
MAPE
1
n
X
n
t1
e
t
j j
A
t
100:
Unlike past studies which compared the forecast performance
of models based on estimated forecast errors, this paper provides
post-sample forecasts. The latter is of paramount importance for
practical purposes, as the forecast estimates could be used by the
hotelmotel management explicitly for planning and decision-
making. Moreover, goodness of t can be computed to showhow
well the proposed forecast models have performed when the
actual data become available.
5. Unit root tests
Standard time series analysis rests on the simplifying
assumption that the process which generated the series is
stationary. A stationary process can be dened as one which
has a constant mean, variance and covariance. Using a stationary
model is a sensible strategy as the forecasts converge or revert to
the mean of the series, and it will not generate forecast errors
without limit. Before we estimate time series models for
forecasting, we need to determine whether the underlying
process which generated the series is stationary. The unit root
test is a formal method of testing the stationarity of the observed
time series. A variety of powerful tools is available for testing a
series for the presence of a unit root. If the series is found to have a
unit root, it is said to be non-stationary. In such a case, an
appropriate data transformation is necessary to obtain a
stationary series.
Monthly guest nights are tested for unit roots using the
PhillipsPerron (PP) test procedure based on the following
regression equation (Phillips and Perron, 1988):
DA
t
a bt dA
t1
e
t
; (1)
where DA
t
is the change in the number of guest nights at time t, t is
a deterministic time trend, and e
t
is a disturbance term which is
independent and normally distributed with zero mean and
constant variance. In order to test for unit roots, the hypotheses
of interest are
H
0
: d 0;
H
1
: d <0:
The null hypothesis of a unit root is based on the t-statistic
(which has a non-standard distribution) using simulated critical
values. The PP statistic of 4.21 for guest nights is less than the 5%
critical value of 3.44. Thus, the series is stationary and the
coefcient of the time trend is signicant at the 5% level. According
to the PhillipsPerron test, the guest night series does not have a
unit root, so that a data transformation is not necessary for the
series to generate forecasts. The guest night data can also be
described as a trend stationary series.
When modeling seasonal time series within the BoxJenkins
framework, the Hylleberg et al. (1990) (HEGY) procedure is
commonly used to test for the presence of non-seasonal and
seasonal unit roots in a univariate series. The presence of
seasonal unit root implies changing pattern as against a constant
seasonal pattern (Hylleberg, 1992). A test for seasonal unit roots
in quarterly time series by Hylleberg et al. (1990) has been
extended to the monthly case by Beaulieu and Miron (1993) and
Franses and Hobijn (1997). The HEGY test is based on the
following auxiliary regression for monthly observations:
1 L
12
y
t
mp
1
y
1;t1
p
2
y
2;t1
p
3
y
3;t1
p
4
y
3;t2
p
5
y
4;t1
p
6
y
4;t2
p
7
y
5;t1
p
8
y
5;t2
p
9
y
6;t1
p
10
y
6;t2
p
11
y
7;t1
p
12
y
7;t2
e
t
; (2)
Fig. 4. Total hotel and motel guest nights in New Zealand, 19972007.
C. Lim et al. / International Journal of Hospitality Management 28 (2009) 228235 231
where L is the lag operator, dened as L
k
y
t
= y
tk
(k = 1, 2, . . .).
y
1;t
1 L1 L
2
1 L
4
L
8
y
t
;
y
2;t
1 L1 L
2
1 L
4
L
8
y
t
;
y
3;t
1 L
2
1 L
4
L
8
y
t
;
y
4;t
1 L
4
1 L

3
p
L
2
1 L
2
L
4
y
t
;
y
5;t
1 L
4
1 L

3
p
L
2
1 L
2
L
4
y
t
;
y
6;t
1 L
4
1 L
2
L
4
1 L L
2
y
t
;
y
7;t
1 L
4
1 L
2
L
4
1 L L
2
y
t
and
e
t
is a normally and independently distributed error termwith zero
mean and constant variance.
Deterministic components which include an intercept, 11
seasonal dummies and a time trend are also included in Eq. (2)
which is estimated by OLS. The null and alternative hypotheses to
be tested are as follows:
H
0
: p
1
0; H
1
: p
1
<0;
H
0
: p
2
0; H
1
: p
2
<0;
H
0
: p
3
p
4
0; H
1
: p
3
60 and=or p
4
60;
H
0
: p
5
p
6
0; H
1
: p
5
60 and=or p
6
60;
H
0
: p
7
p
8
0; H
1
: p
7
60 and=or p
8
60;
H
0
: p
9
p
10
0; H
1
: p
9
60 and=or p
10
60;
H
0
: p
11
p
12
0; H
1
: p
11
60 and=or p
12
60:
Testing for the signicance of p
0
s implies testing for seasonal
and non-seasonal unit roots. The HEGY tests involve the use of the
t-test for p
1
and p
2
, and the F-tests for {p
3
, p
4
}, {p
5
, p
6
}, {p
7
, p
8
},
{p
9
, p
10
} and {p
11
, p
12
}. We have also conducted the F-test for {p
2
,
. . ., p
12
}. The results presented in Table 2 are compared with the 5%
critical values provided by Franses and Hobijn (1997) using 10-
year observations. Diagnostic checking using the Q-statistic and
Lagrange multiplier test indicate there is no serial correlation in
the residuals. The null hypothesis of a non-seasonal unit root
(p
1
= 0) is rejected while the presence of seasonal unit roots cannot
be rejected. We apply the 12 differencing lter to y
t
and the
transformed series is denoted by D
12
y
t
.
6. Methodology
As the technical details of the HoltWinters and BoxJenkins
methods are well known, this section will concentrate on some
salient features of these models. The HoltWinters exponential
smoothing model has three smoothing parameters. Specically, the
model computes the average guest nights for the period of interest,
such that the most recent observation receives a greater weight and
distant observations receive a lower weight in an exponentially
decreasing manner. This smoothing technique can be desirable
because it reduces much of the uctuations due to the erratic
component in the observed guest night time series. Similarly, a
greater weight is given to the latest trend and seasonality in
determining forecasts for guest nights in New Zealands h(m)otel
industry.
There are two versions of the HoltWinters method, depending
on how the seasonal component is treated. The HoltWinters
Additive method is appropriate if the magnitude of the seasonal
effects in the guest night series do not change. However, if the
amplitude of the seasonal pattern changes over time, then the
HoltWinters multiplicative method would be suitable. Both types
of HoltWinters method are used for forecasting, and the
smoothing estimates (for the level, trend and seasonal parameters)
are generated by EViews in which the sum of squared errors is
minimised. These models which generate an i-period-ahead
forecast (F
t+i
) at time t, involve three smoothing equations, one
each for the level, linear trend and seasonal factor:
Forecast : F
t
L
ti
b
ti
S
tj
; (3)
Level : L
t
aA
t
S
tj
1 aL
t1
b
t1
; 0<a<1;
(4)
Trends : b
t
bL
t
L
t1
1 bb
t1
; 0<b<1; (5)
Seasonal : S
t
gA
t
L
t
1 gS
tj
; 0<g <1; (6)
where a, b and g are smoothing coefcients. The estimate of the
current additive seasonal factor is obtained from Eq. (6) for j
seasonal periods per year (with j = 12 for monthly data). For the
multiplicative seasonal model (Eqs. (3), (4) and (6)) are rewritten
as
F
t
L
ti
b
ti
S
tj
;
L
t
a
A
t
S
tj

1 aL
t1
b
t1
;
S
t
g
A
t
L
t

1 gS
tj
;
where S
t
is a multiplicative seasonal factor, and the trend remains
additive.
Computationally, there is extra effort involved in the Box
Jenkins approach because it combines two models known as the
autoregressive (AR) and moving average (MA) processes or ARMA
in short. The ARMA process is represented by:
A
t
c a
1
A
t1
a
p
A
tp
e
t
b
1
e
t1
b
q
e
tq
; (7)
where A
t
, A
t1
, . . ., A
tp
are the current and past numbers of guest
nights. The e which represent current and past values of random
errors, are assumed to be identically and independently normal,
with mean zero and constant variance.
The seasonal ARMA or SARMA (p,d,q)(P,D,Q)
s
model, which
consists of seasonal and non-seasonal components is given as
follows:
1 f
1
L f
p
L
p
1 F
1
L
s
F
P
L
Ps
1 L
d
1 L
s

D
y
t
C 1 u
1
L u
q
L
q
1 Q
1
L
s
Q
Q
L
Qs
e
t
:
(8)
where F and Q are xed seasonal AR and MA parameters,
respectively, and s is the number of seasons or periods in a year.
Many business activities related to the tourism and hospitality
industry are affected by seasonality, which Hylleberg (1992, p. 4)
has dened as follows:
Seasonality is the systematic, although not necessarily regular,
intra-year movement caused by changes of the weather, the
calendar, and timing of decisions, directly or indirectly through
the production and consumption decisions made by the agents
of the economy.
Table 2
HEGY tests for seasonal integration of monthly guest nights
Estimated value Critical value at 5% level
t(p
1
) 4.35 3.19
t(p
2
) 1.06 2.65
F(p
3
, p
4
) 0.48 5.77
F(p
5
, p
6
) 3.94 5.77
F(p
7
, p
8
) 13.96 5.77
F(p
9
, p
10
) 3.93 5.84
F(p
11
, p
12
) 5.01 5.82
F(p
2
, . . ., p
12
) 1.33 4.50
Note: An intercept, 11 seasonal dummies and a time trend are included in the HEGY
regressions. n = 120 is the number of observations in the series. The critical values at
the 5% level are taken from Franses and Hobijn (1997) for 10-year observations.
C. Lim et al. / International Journal of Hospitality Management 28 (2009) 228235 232
The seasonality phenomenon may stem from natural factors
(related to climate, weather, temperature) and/or institutional
factors (related to school vacations, religious festivals, social
customs/practices, other national celebrations and special events).
When we generate alternative ARMAmodels for the original series,
seasonal dummy variables are included to account for determi-
nistic seasonal effects. Additionally, the BoxJenkins SARMA
models are estimated for the transformed series, D
12
y
t
.
7. Forecasting
In this section, we will evaluate the forecast performance of the
HoltWinters and BoxJenkins approach. Since the BoxJenkins
method is primarily designed for short-termforecasting, a sensible
strategy for the BoxJenkins procedure is to estimate different
combinations of AR(1), AR(2), MA(1) and MA(2) models with a
constant and eleven seasonal dummies. According to Frechtling
(2001), it is seldom useful to proceed beyond these models into
higher order ones (p. 130). Similarly, different combinations of AR,
MA, SAR and SMA models with values for p, q, P and/or Q 2, and a
constant are estimated for the 12 differenced series, D
12
y
t
.
Only models with all signicant parameter estimates at the 5%
level and with no serial correlation are selected. We have identied
two and eleven such ARMAand SARMAmodels, respectively. Using
selection criteria such as the Akaike information criterion (AIC) and
Schwarz Bayesian criterion (SBC), the ARMA and SARMA models
with the smallest AIC and SBC values are selected to generate
forecasts. Accordingly, ARMA(2,1) and SARMA(2,0,1)(1,1,0)
12
are
the optimal models for forecasting h(m)otel guest night demand in
New Zealand.
As suggested in Frechtling (2001), we will retain the most
recent data available. The HoltWinters and BoxJenkins models
are used to generate forecasts, and the latter is tested against our
retained data. In this way, we can evaluate how well these
models perform, before we generate forecasts beyond the known
values of the series (see the gure below). Specically, our
estimation sample is monthly guest nights from January 1997 to
December 2006, from which we develop the optimal forecast
models. These models are used to generate 1-month-ahead
forecast for 12 periods. The forecast estimates (also known as ex
post forecasts) can then be compared with the monthly guest
night data available in 2007. This will help to determine which
model produces the best forecasts. These models are subse-
quently used to compute future values of guest nights (that is, ex
ante forecasts).
The smoothing estimates for the level of the series are 0.25 and
0.21 for HoltWinters additive and multiplicative method,
respectively. The zero values estimated for the trend and seasonal
components show that they are xed or not changing. These
smoothing estimates are subsequently used in the HoltWinters
model to generate forecasts. The guest night forecast from the
HoltWinters and BoxJenkins models are given in Fig. 5. It is clear
that the HoltWinters and ARMA methods outperform the SARMA
model in tracking the guest night series in 2007. The correlation
coefcient is also computed as a goodness-of-t measure to show
how well the models forecast guest nights. Table 3 shows that the
correlation coefcients of the BoxJenkins and HoltWinters
models range from 0.25 to 0.99. Undoubtedly, the tted ARMA
and HoltWinters models forecast guest night demand in hotels
and motels very well, as 99% of the variations in the guest night
forecasts are associated with variations in actual guest nights in
2007.
Thesemodels aresubsequentlyusedtogenerateexanteforecasts
(for whichactual dataarenot yet available) for 18months from2008
to2009. The results are presentedinTable 4andFig. 6. In2007, hotel
and motels in New Zealand experienced on average a negative
growth of 1.0% in monthly guest night demand. The HoltWinters
additive and multiplicative methods predict negative growth of
1.752.1% between 2008 and 2009. In comparison with these
methods, the forecast estimates generated by the BoxJenkins
ARMA model is quite pessimistic. Guest night demand forecast for
the 18-period is substantially lower than 2007.
Fig. 5. Estimated ex post guest night forecasts for New Zealand, 2007.
Table 3
Correlation coefcients between actual and predicted guest nights in New Zealand
using BoxJenkins and HoltWinters models, 2007
Model RMSE Correlation coefcient
HoltWinters additive 57 999 0.991
HoltWinters multiplicative 45 963 0.991
ARMA(2,1) 83 755 0.990
SARMA(2,0,1)(1,1,0)
12
61 178 0.245
Table 4
Estimated ex ante guest night forecasts for New Zealand, 2008 and 2009
Forecast horizon ARMA HWA HWM
2008M01 2 182 497 2 217 443 2 312 218
2008M02 1 269 705 2 125 478 2 200 621
2008M03 1 325 343 2 146 563 2 219 948
2008M04 1 052 537 1 898 895 1 918 279
2008M05 722 002 1 490 660 1 414 683
2008M06 795 923 1 417 737 1 317 410
2008M07 1 107 549 1 707 524 1 674 551
2008M08 920 682 1 632 380 1 583 679
2008M09 1 022 108 1 717 422 1 685 558
2008M10 1 110 693 1 852 285 1 858 331
2008M11 1 164 342 1 965 650 1 991 069
2008M12 1 123 169 1 939 484 1 953 235
2009M01 1 456 574 2 274 977 2 385 358
2009M02 1 226 175 2 183 012 2 270 048
2009M03 1 282 494 2 204 097 2 289 801
2009M04 1 010 358 1 956 429 1 978 482
2009M05 680 484 1 548 194 1 458 965
2009M06 755 054 1 475 271 1 358 540
Note: ARMA, HWA and HWM denote the autoregressive-moving average, Holt
Winters additive and HoltWinters multiplicative methods, respectively.
C. Lim et al. / International Journal of Hospitality Management 28 (2009) 228235 233
8. Conclusion
It is found that there are some variations in the growth and
distribution of lodging guest arrivals in selected destinations in
New Zealand. However, we do not expect the small regions to
have signicant inuence on the overall national patterns of
guest nights in the h(m)otel sector. The purpose of this paper
was to highlight some time series models which the hotel and
motel industry practitioners could condently use to forecast
guest nights at the national level. Given their considerable
practical value and usefulness, the industry can benet from
using these models since forecasts can be obtained at low cost
for effective planning. It is essential that a sufciently large
sample is used for estimation, and the fundamental nature of the
data used is not violated so that the approach to forecasting is
robust. The latter includes unit root testing for stationarity and
diagnostic checking of models before selecting optimal models
for forecasting.
While recognizing that a myriad of models is available, we
support the view that some form of forecasting undertaken by the
hospitality industry is better than none at all. Depending on the
amount of resources the industry is prepared to invest in obtaining
forecasts as inputs for their business planning and operations, this
will determine the type of technique to use. The ndings of this
paper showthat relatively simple models, such as the HoltWinters
method, can forecast as well as the ARMA model and better in
comparison with the statistically sophisticated BoxJenkins SARMA
model. Furthermore, this method is available in many econometric
software packages such as EViews, which is menu driven and user
friendly. With adequate ex post forecasts achieved, and at low cost,
their practical value and usefulness are considerable. The h(m)otel
industry can, therefore, benet signicantly from time series
forecasts, and save in lower inventory costs.
The issue as to whether it pays to combine forecasts of a variable
has beendebatedfromthe 1970s since the Bates andGranger (1969)
path-breaking article was published. In addition to comparing the
forecast performance of competing models, Granger and Newbold
(1986) have argued that an alternative forecast, which is simply the
average of individual forecasts, might be more successful. According
to Palm and Zellner (1992), a simple average of individual forecasts
has worked well in practice, whereby equal weights are assigned to
individual forecasts. The potential usefulness of combined forecasts
will be considered in future research.
Acknowledgements
The authors are grateful to the editor and two anonymous
reviewers for helpful comments and suggestions. The second
author wishes to acknowledge the nancial support of the National
Science Council (NSC 97-2410-H-005-004-), Taiwan. The third
author is grateful for the nancial support of the Australian
Research Council.
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