The last year has left their balance sheets battered. but hospitality players are counting on a reversal in fortunes... and soon. by Neha Sariya
When the corporate world sneezes; premium hotels are the
first to catch a cold. The slowdown and resultant cost cutting by companies have had a direct impact on occupancies, average room rates and revenue per available room for premium hotels in the country. With companies trimming on 5-Star perks and travel costs, bottom lines of major hotel players have felt the impact of low occupancy rates and cancellations. In fact, key players in the industry have been forced to cut tariffs by as much as 40% to accommodate new market realities. As per ASSOCHAM, profitability for premium segment hotels shrunk as much as 64% in the Jan.-Mar. 09', with a 31.4% decline on available rooms (RevPAR) and a 19% decline in Average Room Rates (ARR). While a big reason for the battered and bruised state of their balance sheets is the global meltdown, the three-day terrorist siege on Taj Mahal Palace Hotel in Mumbai last November has also taken its toll. Hoteliers have ever since had to bear the burnt of incurring bulk expenses for purchase of additional security equipment, as also for hiring relevant security and screening staff.
But all that is set to change. Having faced their worst time ever over the last year, premium hoteliers across India are tightening their belts to make the most of the expected turnaround in the economy during the second half of FY'09. First and foremost on their list is a price hike of almost 10-15% on existing room tariffs. Says Ajay K. Bakaya, Executive Director, Sarovar Hotels & Resorts, “Now that first quarter results are reflecting a positive outlook for the economy, we expect to consolidate. And we have already started accepting booking for winter months at an increased rate of around 15-20%.” Agrees Aradhana Lal, VP-Sales & Marketing, Lemon Tree Hotels. He says while, their annual revision will take place as per schedule on October 1, but they "expect to increase (their) RevPAR in FY10 for sure." Some however believe that the renewed buoyancy in the premium hospitality segment is not merely the outcome of revival signs in the economy. They say that hotel players anyway raise prices by 30-40% at this time to cash in on the winter season. However, the difference is visible in the simultaneous increase in brand leveraging to secure volumes.
When the corporate world sneezes; premium hotels are the
first to catch a cold. The slowdown and resultant cost cutting by companies have had a direct impact on occupancies, average room rates and revenue per available room for premium hotels in the country. With companies trimming on 5-Star perks and travel costs, bottom lines of major hotel players have felt the impact of low occupancy rates and cancellations. In fact, key players in the industry have been forced to cut tariffs by as much as 40% to accommodate new market realities. As per ASSOCHAM, profitability for premium segment hotels shrunk as much as 64% in the Jan.-Mar. 09', with a 31.4% decline on available rooms (RevPAR) and a 19% decline in Average Room Rates (ARR). While a big reason for the battered and bruised state of their balance sheets is the global meltdown, the three-day terrorist siege on Taj Mahal Palace Hotel in Mumbai last November has also taken its toll. Hoteliers have ever since had to bear the burnt of incurring bulk expenses for purchase of additional security equipment, as also for hiring relevant security and screening staff.But all that is set to change. Having faced their worst time ever over the last year, premium hoteliers across India are tightening their belts to make the most of the expected turnaround in the economy during the second half of FY'09. First and foremost on their list is a price hike of almost 10-15% on existing room tariffs. Says Ajay K. Bakaya, Executive Director, Sarovar Hotels & Resorts, “Now that first quarter results are reflecting a positive outlook for the economy, we expect to consolidate. And we have already started accepting booking for winter months at an increased rate of around 15-20%.” Agrees Aradhana Lal, VP-Sales & Marketing, Lemon Tree Hotels. He says while, their annual revision will take place as per schedule on October 1, but they "expect to increase (their) RevPAR in FY10 for sure." Some however believe that the renewed buoyancy in the premium hospitality segment is not merely the outcome of revival signs in the economy. They say that hotel players anyway raise prices by 30-40% at this time to cash in on the winter season. However, the difference is visible in the simultaneous increase in brand leveraging to secure volumes.
Keshav Baljee, Vice President-Corporate Affairs, Royal Orchid Hotels clarifies, “We were in a way vigilant about the anticipated slowdown. Thus to avoid any knee-jerk reactions, we renovated several of our properties to provide better value to our clients and retain some of the lost business.” To add to the cauldron, real estate prices have also softened (moving 12-20% from their peak), making purchases more affordable for players in the hospitality industry.
The road to recovery is not without hiccups though. Despite heavy lobbying for an infrastructure status for the sector and calls for a rationalised tax structure, both expectations have not been met in this year’s budget. Besides, the challenges ahead are also daunting. As Amol Rao, Independent Hospitality analyst avers, “With the current indications across the industry, RevPar is expected to see a decline of more than 15%. In that case, the players need to go in for inorganic growth in order to release stress on account of acquisitions of land banks and rising debt levels." In addition, demand for hotel rooms is also set to decline by 15.5% YoY in 2009-10 (as per a report by Crisil). Besides, there is the omnipresent infrastructure crisis. Connectivity of tourist destinations with major ports of arrivals like Delhi and Mumbai is abysmal, while infrastructure (security, information dissemination, accommodation) at tourist spots also needs a simultaneous beef up. Rao further adds, “Very few (hospitality) companies would be able to record growth in revenues in FY10, primarily due to lower occupancies and reluctance to susbstantially reduce room rates. Revenues of companies like Indian Hotels and EIH will definitely be hit on account of the damage (because of terrorism) to their flagship properties.”
Naysayers are however missing out on the biggest silver lining ever for the Indian hospitality sector viz. the Commonwealth Games (CWG) in 2010, when the estimated room shortage in the country is pegged at a whopping 150,000 rooms. The 60 odd hotel plots auctioned in 2006 by DDA, are mostly running behind schedule due to the financial crisis. With New Delhi expecting about 100,000 visitors to watch the CWG, clearly it's the existing hotel players, who are likely to gain most from the CWG windfall. Unexpected sure, but a windfall nevertheless!
The road to recovery is not without hiccups though. Despite heavy lobbying for an infrastructure status for the sector and calls for a rationalised tax structure, both expectations have not been met in this year’s budget. Besides, the challenges ahead are also daunting. As Amol Rao, Independent Hospitality analyst avers, “With the current indications across the industry, RevPar is expected to see a decline of more than 15%. In that case, the players need to go in for inorganic growth in order to release stress on account of acquisitions of land banks and rising debt levels." In addition, demand for hotel rooms is also set to decline by 15.5% YoY in 2009-10 (as per a report by Crisil). Besides, there is the omnipresent infrastructure crisis. Connectivity of tourist destinations with major ports of arrivals like Delhi and Mumbai is abysmal, while infrastructure (security, information dissemination, accommodation) at tourist spots also needs a simultaneous beef up. Rao further adds, “Very few (hospitality) companies would be able to record growth in revenues in FY10, primarily due to lower occupancies and reluctance to susbstantially reduce room rates. Revenues of companies like Indian Hotels and EIH will definitely be hit on account of the damage (because of terrorism) to their flagship properties.”
Naysayers are however missing out on the biggest silver lining ever for the Indian hospitality sector viz. the Commonwealth Games (CWG) in 2010, when the estimated room shortage in the country is pegged at a whopping 150,000 rooms. The 60 odd hotel plots auctioned in 2006 by DDA, are mostly running behind schedule due to the financial crisis. With New Delhi expecting about 100,000 visitors to watch the CWG, clearly it's the existing hotel players, who are likely to gain most from the CWG windfall. Unexpected sure, but a windfall nevertheless!
An IIPM and Professor Arindam Chaudhuri (Renowned Management Guru and Economist) Initiative
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