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Travel
Impact Newswire by Imtiaz Muqbil - Distinction in
Travel Journalism
Arthur Andersen Study Probes Impact of Crisis on Hospitality
Summary: The Asia-Pacific hotel industry has suffered major shockwaves
and is set to undergo major changes in ownership, management,
marketing and operational strategies. The results of this survey by
management consultants Arthur Andersen show how some of these
changes
are likely to pan out.
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Part I -
The financial crisis that sent shock waves throughout Asia has left no
industry untouched in the last year. The hotel industry, whose
fortunes typically track the general economy, is no exception. Since
the first signs of crisis in the Thai Baht devaluation on July 4997,
room occupancies have plummeted in many hotel markets. Individual
hotels that maintained strong occupancy have generally done so by
reducing room rates.
Inevitably, price wars have affected the competitive dynamics in the
marketplace. In China, for example, five-star hotels have adjusted
prices to levels directly competitive with mid-market properties.
Occupancies in Hong Kong during the third quarter of 1998 were
estimated at 70%-a level achieved only through room rate reductions of
up to 40% in some cases.
The challenges facing hotel companies in Asia-Pacific raise questions
for the hospitality industry throughout the region. In September 1998,
management consultants Arthur Andersen surveyed 640 senior executives
working in Asia-Pacific and asked them three pressing questions:
What is the current and likely future impact of the economic turmoil
on the hotel industry in the region?
What characteristics does the current hotel investment environment
show?
And what are the strategies being contemplated to weather this storm?
The basic questionnaire was tailored to three constituencies in the
industry-hotel owners, financial investors and management companies. A
total of 141 completed questionnaires were received, a response rate
of 22%. The following is an edited version of the findings.
Hotel Demand Plummets
The Asia-Pacific hotel industry serves a complex mix of regional and
international business and leisure travellers. Many hotel products and
destinations, however, are highly dependent on Asian customers,
primarily from Japan and Korea.
When these two countries stumbled economically, room demand began to
fall across all hotel market segments in Asia-Pacific in the first
three-quarters of 1998, compared to 1997. One of the exceptions is
Thailand where tourism arrivals have been up by more than 6%. Japanese
tourists and business executives have in many cases accounted for 30%
of occupancy at Hong Kong luxury hotels. Almost overnight, this demand
has been reduced to near zero.
The majority of executives believe that demand for hotel accommodation
will continue to be either moderately or severely affected by the
financial crisis. Almost 80% of all respondents thought that demand
will decrease to some degree in four travel segments: the
business-individual traveller, leisure - individual traveller,
corporate meeting and incentive meeting.
The segment most positively viewed was the business individual
traveller where almost two-thirds indicated that the decrease would be
only "moderate." In the leisure group tour segment, almost
three-quarters of the executives believe that demand will "greatly
decrease" or "moderately decrease." Opinions were more divided,
however, on this segment than others. Almost 18% of the respondents
predict an increase of demand in leisure-group tour, making it the
only area in which any significant number of executives expect a rise.
The survey asked the executives to assess the impact of the regional
crisis by comparing four hotel products: city business hotels and
resorts, and luxury business hotels and mid-market properties.
Surprisingly, respondents believe that city business hotels will not
be impacted more severely than resorts. This is in direct
contradiction to speculation by industry observers and commentators.
These executives appear to think that the destination, location and
demand patterns of the hotel product will be the key determinants of
how much a business is affected by the region's economic problems-not
the type of customers it attracts.
Interestingly and not surprisingly, nearly 60% of the respondents
believe that the luxury hotel market will be harder hit than the
mid-market hotels. As demand has plummeted in many markets, five-star
hotels are openly competing with the four-star market to gain lost
occupancy. But there can be consequences to pay. The luxury hotels
have higher cost structures. While they can reduce their room rates
temporarily, such strategies can exacerbate the impact on bottom line
margins. This is especially true for those five-star properties that
do not adjust their operating cost structure accordingly.
Leadership Agrees -- Reduce Operating Costs
Executives face a disturbing dilemma. How can they maintain
profitability during these prolonged economic downturns? Some owners
of hotel properties are facing significant devaluation in market
value, cash flow shortages and an increase in US$ denominated loan
balances. Many hotels in Thailand, for instance, are literally
bankrupt and have failed to pay interest to their lenders. On the
other hand, lenders have little legal power to foreclose on such
under-performing assets.
Given this bleak situation in many parts of the region, executives
were asked whether they believe that "cutting operating cost is the
best strategy to maintain profits during downturns." More than 50% of
the hotel owners and management executives agreed or strongly agreed
that this is the case. A portion of respondents, however, were sharply
divided on this question.
Almost 30% of management executives
disagreed that cutting operating costs is the best strategy, compared
to only 10% of hotel owners.
Hotel owners and management can implement cost cutting in diverse
ways. Both hotel owners and management ranked payroll and
labour-related costs as their first choice. Owners ranked capital
expenditures (Capex) as the second area to cut. In contrast, hotel
management companies ranked utilities and other energy costs as their
second choice. Capex was rarely cited by hotel management executives,
who indicated instead that they would prefer to focus first on cutting
costs in the Admin & General department. The general agreement among
owners and management on the importance of reducing operating cost,
however, is certainly positive given the urgent problems facing many
properties.
Show Me the Money...
In the years prior to the current financial crisis, the hospitality
industry was enjoying a period of growth that was without precedent in
the region. The continuous availability of low-cost funds fuelled a
pipeline of hotel transactions and development activities. As
financial turmoil began to topple economies, many hotel projects
underway across the region were suspended, while developments on the
drawing boards were mothballed. Few hotel properties are currently
being considered for development anywhere in the region. For example,
the Westin and Grand Hyatt in Kuala Lumpur, both of which are already
out of the ground, have now been suspended for at least two to three
years.
Given these problems, more than 80% of the executives polled indicated
that the current availability of both debt and equity capital for
hotel investments is significantly worse than one year ago. Notably,
debt capital was considered to be even less available than equity
capital. Banks lending in the region are carrying a substantial ratio
of under-performing loans on their books and often have little legal
power to foreclose and sell the assets at fair market value. As a
result, the lending situation is unlikely to change any time soon.
However, countries such as Thailand are making strides to push through
new laws dealing with these exact issues, as they have come to
recognise that this is stalling the recovery process and keeping
foreign investors at home.
As to how quickly the situation might turn around for the better in
Asia-Pacific, there seems to be no significant difference in opinion
among the hotel owners, investors and management. Viewed from a wider
perspective, nearly 40% of the total respondents believe that the
hotel industry in Asia might recover within two years. Another 40%
believe that the hotel industry in Asia will recover within three
years-with the balance of executives polled being more pessimistic.
It is our conviction that different Asian hotel markets will recover
from their domestic problems at different rates, depending on the
government's willingness to act and the ability to re-establish
confidence in the domestic markets and economy. Countries such as
Thailand and South Korea have already taken many of the right steps
forward, which will see them recover more quickly than countries such
as Indonesia or Japan.
continued
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