The Gulf hospitality sector is expected to begin recovering in the fourth quarter of 2026 as geopolitical tensions ease, although hotel occupancy is unlikely to return to pre-war levels before the end of 2027, according to S&P Global Ratings.
The ratings agency said the sector remains one of the hardest hit by the Middle East conflict, with recovery hinging largely on the restoration of traveller confidence.
Hotel occupancy in Dubai dropped sharply after the conflict began, falling to about 33% in March 2026 from 84.7% in February, according to hospitality data provider CoStar. Across the UAE, occupancy declined to 36.2% over the same period despite support from domestic demand and widespread discounting.
S&P said many Dubai hotels have temporarily closed or brought forward refurbishment plans while awaiting stronger demand. Around 5,400 hotel rooms were removed from the market in April and are expected to return gradually through late 2026 and 2027.
"We expect occupancy should improve starting in the fourth quarter of 2026, but recovery to pre-war levels is unlikely until the end of 2027," the report said.
The impact has been less severe in Saudi Arabia, where the kingdom remained open for Umrah and Hajj pilgrims, helping support hotel demand. Oman benefited from travellers redirecting trips to Muscat, although hotel occupancy there has also weakened amid lower tourist arrivals.
S&P warned that if the conflict persists, the hospitality sector would face a prolonged erosion of traveller confidence rather than a sudden collapse in tourism. Weaker corporate travel and delayed or cancelled investment decisions could slow growth and postpone planned hotel developments.
While Dubai and Abu Dhabi's strong infrastructure and international connectivity should help cushion the impact, prolonged uncertainty could continue to weigh on hotel occupancy as well as the meetings, incentives, conferences and exhibitions (MICE) segment, in which the two emirates are regional leaders. In Saudi Arabia, a significant pipeline of new hotel supply over the coming years is expected to add further pressure on occupancy rates.Aviation sector faces headwinds Meanwhile, the aviation sector faces strong headwinds. Dubai airport recorded 18.6 million passengers in the first quarter of 2026, down 20.6% year-on-year. Cargo volume fell 22.7% year-on-year due to regional airspace disruptions. While the recent reopening of some air corridors is supportive, several international airlines have suspended regional operations until late 2026. In Saudi Arabia, domestic travel has largely compensated for fewer inbound visitors, and the country remains well positioned to capture international travel due to its steady religious tourism activity. The sector's recovery to pre-war levels will require a complete elimination of the risk of attacks, while a continuation of the recent intermittent escalations will result in severe revenue and EBITDA decline. "In our downside scenario, we expect lower passenger traffic, pressure on yields, and weaker cashflows as airspace remains disrupted and operating costs, including jet fuel and insurance, remain high. Air travel will be meaningfully altered as travellers opt for alternate transiting countries. "Airlines in the UAE, Qatar, Bahrain, and Kuwait are particularly vulnerable given their heavy reliance on international passengers. Oman and Saudi Arabia are also exposed to weaker regional sentiment, despite their lower dependence on international transit," the report said. - TradeArabia News Service