Covid-19 Impact on Hotels and Tourism
“In terms of our business, Covid-19 is like nothing we’ve ever seen before”, remarked Arne Sorenson, CEO Marriott International. The lockdown in the country to control the spread of Covid-19 has had a devastating effect on the hospitality sector, particularly for hotels. Hotels are very capital intensive businesses and even have very high operating costs. Normally, the capital-intensive portion is a debt that must be serviced by payment of interest on the debt and repayment of debt. Hotels are often labor-intensive because they have plenty of fixed expenses in addition to paying government levies, such as wage bills.
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Covid-19 impact on Hotels
- The hotel players’ operating parameters (Occupancy rates-ORs & Average room rates-ARRs) are projected to be adversely impacted over the next few quarters. While this has a medium-term impact, it can lead to lower cash flows for hotel companies and thus put pressure on their profitability and liquidity.
ORs will see a drop of about 27 percent to reach an overall average of about 40 percent during the year with maximum effect in H1 2020, as per CARE rating estimates.
- Hotels that derives a higher share of the revenue from foreign passengers and the food & beverage segment will be the worst affected. The needs of the hour are cost-cutting measures. Hotel groups that can cut unnecessary costs quickly and introduce new steps to increase productivity will be able to better minimize the harm. Employee costs are one of the largest cost components of the hotels accounting for about 25-30% of the total expenditure.
- The long gestation period characterizes the hotel industry. In contrast to mature assets, hotel entities with recent expansions or groups with a higher portfolio of new assets would face additional heat on their already poor finances. These organizations may experience a tightening of their liquidity and credit profile with high debt repayments and squeezed profitability. In addition, hotels need to rethink their Capex plans as future growth is expected to be derailed by the Covid-19 effects.
- There are various stakeholders that are connected to the hotel sector. The whole supply chain will be affected.
The overall loss of total revenue for the ~140,000 branded/organized hotel rooms across the nation would be between US$ 1.3 billion and US$ 1.55 billion, as calculated by Hotelivate. As compared to last year, this corresponds to a 27 percent to 32 percent erosion in total sales. In addition, given that these 140,000 rooms account for just around 5 percent of India’s total accommodation industry (95 percent of them are B&Bs, Guest Houses, Unbranded & Unorganized Supply, etc.), it is our estimation that there is likely to be an additional loss of total revenue between US$ 4.2 billion to US$ 4.7 billion across the alternate accommodation industry.
- According to the Credit Rating Agency ICRA, India’s hospitality sector is facing its biggest crises ever and the mounting credit stress may force several hotels to shut down their business permanently.
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“The industry is facing its biggest economic challenge with the larger and combined effect of 9/11 and the slowdown of 2009 and estimated bigger effect than the Economic Depression and World War II,” said The Federation of Associations in Indian Tourism & Hospitality (FAITH). Due to lack of cash flows, over 95% of MSMEs from 53,000 travel agents, 115,000 tour operators, 15,000 adventure, 911,000 tourist transporters, 53,000 hospitality, and five lakh restaurants are facing the heat.
A significant percentage of India’s total tourism business operation, estimated at $28 billion-plus in forex and upward of Rs 2 lakh crore in domestic tourism activity, will be at economic risk during the year, according to FAITH.
Covid-19 impact on Tourism
- In all its geographical segments-inbound, outbound, and domestic, and almost all verticals-recreation, adventure, heritage, MICE, cruise, and corporate, perhaps the most noticeable and immediate Covid-19 impact is seen on Hotels and Tourism.
- Given various travel restrictions imposed by the Indian Government as well as Governments across the globe, forward bookings for various conferences and leisure travel bookings to foreign destinations have already been canceled. In India, most of the summer holiday bookings have been canceled (about 40-50% most of which was to states of Kerala, Rajasthan, and Goa) impacting domestic tourism.
- Total foreign tourist arrivals (FTA) in India stood at 10.9 million and foreign exchange earnings (FEE) during 2019 stood at Rs 210,971 crore. With travel restrictions in India and all over India and most of the flights of major airlines being suspended along with lockdown in India, the Indian domestic as well as foreign travel and tourism industry is expected to witness a sharply negative impact in 2020. (Care Rating)
- According to Care rating estimates, the Indian tourism industry is expected to book revenues of Rs 69,400 crore during H1 2020, a y-o-y loss of over 30% during the period. During H2 2020, assuming the virus impact subsides, it expects FTAs to still be lower affecting the FEEs by about 50% to reach Rs 56,150 crore vis-à-vis Rs 112,300 crore during H2 2019. Therefore, for the year 2020, the industry is expected to book a revenue loss of Rs 125,550 crore, a loss of over 40% y-o-y.
- With the tourism industry contributing approximately 10% of the GDP (2019), the Indian tourism and hospitality industry is staring at a potential job loss of around 38 million, which is 70% of the total workforce,” due to Covid-19, as per the report by KPMG. The value chain of tourism throughout hotels, travel agencies, tour operations, locations, restaurants, family
entertainment venues and transport by air, land, and sea would collapse into a slump.
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- Undoubtedly, the most hard-hit industry is the interdependent hospitality and tourism sector. The sector has expressed its shock and dissatisfaction at the lack of funding from the 20-lakh crore AatmaNirbhar package.
- With the number of cases rising in India, Hoteliers anticipate the whole 2020 year might be tough for the hospitality and tourism industry.
- The companies begin to lay off employees due to cash flow problems and unemployment due to the Covid-19 impact on Hotels and Tourism; particularly in the tourism industry continues to rise.
All in all, like everything, this too shall pass.
Author: Keval Shah
About the Author: Keval Shah is a Chartered Accountant and FRM 2 Candidate. He is passionate about financial markets and loves to play Chess.