COVID-19: Impact on the Indian Hotels Sector, A Report by HVS
To analyze the impact of COVID-19 on the hospitality industry, HVS published a detailed report on how to tackle the situation and be on the safe side after the virus is contained.
THE WORLD is still coming to terms with the COVID-19 outbreak and there is no doubt that the pandemic will change the world as we know it. With the globalized world going into partial or complete shutdown, the overall impact on human life, economic growth and businesses are immeasurable, both in the short term and long term due to the uncertainty as things evolve.
To analyze the impact of COVID-19 on the hospitality industry, HVS published a detailed report on how to tackle the situation and be on the safe side after the virus is contained. While most Economists and Analysts currently expect the global economy to rebound, by some measure in the latter part of 2020, the exact timeline cannot be determined until the virus is contained across the globe.
Nearer home, the Indian hotels' sector has been hit hard, grappling with significantly low demand, with very few future bookings. Essentially, all transient demand has completely vanished – the remaining is largely on account of either a few long stay guests or hotels having been prescribed by the Government for the international travellers returning to India.
Economists world-over expect the global economy to shrink in the first quarter of 2020, a first since the 2008 financial crisis. With the number of cases rising sharply on a daily basis, even if the pandemic is contained soon, the ripple-effects will be felt across the world well into the year, pushing all major economies into a possible recession.
Source: IMF, RaboResearch, MacrobondS
The Travel & Tourism Sector across the globe is undoubtedly the biggest casualty of the COVID-19 pandemic. Several countries have issued travel advisories and are in lockdown mode, with all major global business, social and sporting events getting cancelled since February.
Impact on Global Travel & Tourism Sector – a Few Alarming Estimates
* IATA estimates that global airlines need an emergency fund of up to US$ 200 billion as they fight for survival
* According to the World Travel and Tourism Council, the COVID-19 pandemic could slash 50 million jobs worldwide in the travel and tourism industry, reflecting a 12-14% reduction in jobs
* International travel could be adversely impacted by up to 25% this year, equivalent to a loss of three months of trave
* The industry could take up to 10 months to recover after the outbreak is over.
COVID-19 & Impact on the Indian Hotels Sector
The Indian hospitality industry is undoubtedly one of the biggest casualties of the COVID-19 outbreak as demand has declined to an all-time low. Global travel advisories, suspension of Visas, the imposition of Section-144 (prohibition against mass gatherings), India like most other countries is on lockdown, the ramifications of which are unprecedented.
Inbound Foreign Tourism Comes to a Grinding Halt and Limited Scope for Quick Revival
* Foreign Tourist Arrivals (FTAs) into India (particularly leisure travellers) started softening in February, as the spread continued its unabated movement to other countries.
* Following suit, the Indian Government suspended travel visas (with a few exceptions) till 15th April 2020, which in all likelihood will be extended. Even if it is not, the paranoia surrounding the events will continue to have a major impact on travel.
* Demand from FTAs is not expected to pick up any time soon. In our opinion, travel bans across the globe will fully roll down only by the end of the year, even though such a process will commence much sooner.
* Furthermore, the majority of the future travel bookings for winter i.e. October-March – the strong season for our industry - are done in the summer months, have largely evaporated.
Domestic Travel Will Be Key to the Revival
With new confirmed cases being reported daily, the penetration of the COVID-19 virus in India has caused mass hysteria, the reverberations of which are expected to continue well into the second quarter of the calendar year 2020. The current situation is extremely grim, as domestic flights have been ordered to shut shop from 25th March 2020 and all other demand segments such as MICE, business, social and sporting events have been cancelled or deferred indefinitely for the foreseeable future.
The silver lining to such devastation is that it has brought multiple representative bodies from Travel, Tourism and Hotels to collectively make representations to the Government and the Prime Minister’s Office. As we go to print, in all likelihood the Government should announce measures to revive and support the distressed sectors, with specific focus to the hospitality sector, among others.
The Impact on the Indian Hotel Sector will be Significant
The Indian hotels' sector sailed smoothly into January 2020, after a record year in 2019, with 2020 set to be “even bigger”. The country first started feeling the ripple effects of the global COVID-19 turmoil towards the end of February 2020, which worsened at the beginning of March. Occupancy across hotels in key cities declined rapidly and as per our estimates has declined by a staggering 45 percentage points compared to the previous year. Such a steep decline in such a short period of time has never been witnessed by the sector.
The report predicts the second quarter of the year to be the worst hit. Hotels will be unable to drive rates and may even seek to attract business at deep discounts.
The overall occupancy in the branded hotels segment in 2020 is estimated to decline by 16.7 – 20.5 percentage points over 2019, while ADRs are estimated to decline by 7% to 8% for the year. As a result, RevPAR will witness a significant decline of 31% to 36.2%.
Scenario 1: Demand picks up in July*
Source: HVS Research; *Analysis based on data available as of 23rd March 2020
Scenario 2: Demand picks up in October-November*
Source: HVS Research; *Analysis based on data available as of 23rd March 2020
Therefore, the overall revenue of the Indian hotel sector is set to decline by anywhere between US$ 8.85 billion to US$ 10 billion, reflecting an erosion of 39% to 45% compared over last year. Besides the actual business loss, the hotel owners will also incur losses due to fixed operating expenses, debt repayments, interest payments and several other compliances required to be undertaken as part of the sector.
The Way Forward
Recommendations for the Government of India
The Government has already taken a step in the right direction by announcing its plans to set up a COVID-19 Taskforce to undertake measures necessary to combat the economic effects of the pandemic on the country.
* Stimulus package to stabilize and support the sector in the near term, including a workforce support fund to ensure that there are no job losses.
* Provide a moratorium of ~ 6 – 12 months on all loans (principal & interest), including working capital payments and overdrafts.
* Ensure that Credit Rating agencies do not down-grade ratings of businesses, due to the expected volatility of the business in the short to medium term.
* With the fall in oil prices, subsidies on Heat-Light-Power (HLP) costs should be extended, as HLP is among the largest fixed cost for the sector.
* Provide a 12-month corporate tax holiday to travel, tourism and hospitality sectors.
* Defer all statutory dues such as advance tax, custom duties, excise duties, PF, bank charges etc. at central and state level for 12 months.
Direct Support to Revive Demand:
* Appoint a think tank to evaluate and decide the measures necessary for the revival of the sector.
* Waive / Reduce GST on products offered by the sector for a one-year period
* Incentivise travel by introducing a one-time opportunity for Leave Travel Allowance to be part of the new income tax slabs.
* Annual renewal of licenses paid for in 2020 should be extended till the end of 2021 without an incremental fee or charges.
Recommendations for the Operators
The hotels' sector at large has been the biggest casualty of the COVID-19 shock, with demand at an all-time low across the globe. As the sector continues to build contingency plans to alleviate the fallout of the crisis, hotel operators should also look to extend the hand of solidarity to their owners by providing certain relief measures.
One-time Waiver or Reduction in Base and Incentive Fees
The relief should be in the form of a one-time waiver or reduction in Base and Incentive Fees as well as Distribution, Technology and reimbursable costs, measured by correlating the total impact of the crisis on the hotel to the return of normalcy in operation post-COVID-19.
Defer Certain Brand Standard Provisions
All brand standard provisions that do not have a direct impact on revenues of the hotel and/or cannot be planned as per the revised CAPEX budget for the current year, should be deferred until such time normalcy in operation returns. While FF&E is an important fund set up by the hotel for periodic replacement and up-gradation, the funds should be released immediately and redeployed either towards initial working capital to resume hotel operations or towards the reduction in debt, as may apply to each situation.
Recommendations for Hotels
According to recent reports, over 90% of domestic hotels in China had resumed operations at the end of February 2020, just 2 months after the first COVID-19 case was reported in the country. Hotel bookings have also been increasing with business travellers accounting for the largest segment. Hotels located in proximity to transportation hubs have been the popular choice.
All the above news comes as a silver lining as it provides the Indian hotels' sector with a window to look for in the future, as it comes to terms with COVID-19 related travel restrictions and cancellations.
Hotels should use the opportunity to devise and implement a “Stop Gap Plan” to ensure that when demand bounces back, the hotels are well prepared to benefit from the upswing. Among essential items the Stop Gap Plan should include:
1. Bare minimum operations sufficient enough for quick recommencement when the opportunity arrives
2. Implement a subtle digital and social media marketing strategy to retain mindshare of customers
3. Engage with suppliers/vendors to compute their capacity to re-engage with the hotel on the recommencement
4. Develop and maintain communication lines with key customers and team members
5. Continue to remain in discussion with relevant local government authorities
6. Develop a Reopening Plan and Budget
7. Utilize this period for implementing Ken-fix-it / upgradation, wherever possible
“The outbreak of COVID-19 is an invasion of our businesses and personal lives in a manner as seen perhaps only in books on fiction or the movies. While the world is grappling with circumstances never experienced by the living population or the global political leaders in their lifetimes, the real extent of the damage wreaked by this pandemic still remains unquantifiable, despite several estimates made by various world bodies in light of its unprecedented impact on global economies. India is witnessing a nation-wide coordinated effort never seen before in an attempt to flatten the COVID-19 growth curve. The government’s determination to deal with the situation in a country of our size and complexity is laudable and deserves to succeed. The hotels' sector, which is going to bear an enormous brunt on account of the consequential lockdown in the country, will require the government’s economic assistance to help the sector recover from the devastation caused to all its multiple stakeholders,” says Mandeep Lamba, President – South Asia, HVS Anarock.
Prepare and Plan for the Reopening
The reopening plan of a hotel should be viewed through the prism of past preopening plans that were devised for the hotel prior to its initial opening. The only critical difference in this instance being that hotel will now reopen post a horrific event that would have fundamentally altered the foundation of hospitality sector globally.
Hotels should look to implement the reopening plan in the shortest possible time available, as when demand returns the customer will become a bigger and more demanding ‘King’.
Task Force Management Team
* ‘Stop Gap Plan’ task force team to handover the hotel to an operational ‘Reopening Plan’ task force team.
* The task force team should evaluate short term recruitment to bridge any gaps in operations
Re-engagement and Support for Returning Team Members
* Provide adequate support to the returning employees to restart their work life, including assistance on matters such as housing etc.
* Roll out training and re-engagement processes for their specific duties and departments.
Sales and Marketing
* Carrying forward from the ‘Stop Gap Plan’, aggressive efforts to reestablish connections with all customer through all available channels should be implemented.
* Effective digital and social media strategies must be rolled out as part of the communication plan
* Follow a mechanism whereby all the bookings that were previously cancelled or deferred are honoured in good spirit
* Instead of ‘Glocal’ go ‘Local’: demand from outstation travellers will be low in 2020, hence, it is time to focus and rely on local demand. Special experiential packages and promotions targeted at ‘locals’ should be the driving mantra.
* Promote packages for specific target groups such as ‘Staycations’
Maintain Pricing Charts
* Hotels should think ‘long-term’ and promote value-added services and flexible booking terms instead of reducing rates.
* Discounts can be creatively packaged, by bundling services into customized packages & promotions, without adding substantially to the hotel’s cost while leveraging the property’s exclusive characteristics to remain competitive.
* Offering a flexible cancellation and rebooking policy will reassure existing & potential guests.
Front of House Facilities
* ‘Demand outlook’ should be the funnel through which decisions for the opening of multiple fronts of the house facilities such as restaurants, Spas and Gyms be made.
* As demand improves, hotels should gradually re-open the areas which earlier were temporarily shut down.
Increase Ancillary Revenues
* Focus on ancillary revenues that may be generated through non-core revenue-generating areas such as Gyms, Spas, etc
* Provide services that have traditionally not been part of the hotel’s core offerings such as food delivery through online platforms or leasing of kitchens for cloud kitchen requirements
* Refrain from any form of spending that may not have a direct revenue benefit
* Continue cost-saving measures even when demand is back to normal to recover the losses during the crisis
Power and Equipment
* Prior to powering up all necessary equipment, a thorough service plan should be mobilized to ensure that all equipment is fully functional, adequately safe and capable of delivering the required results.
* Post assessment of supplier capability and categorization of all operating supplies including perishables in order of importance, the procurement team must ensure proper stockpiling.
Initial Working Capital
* A 90 to 180 days initial working capital credit line should be established
* Ensure that the hotel is compliant with any revised government and brand norms
* Ensure the hotel continues to follow the health and cleanliness guidelines
* Reassure Guests and Employees by intensifying routine maintenance and increasing deep clean measures
Conduct Dry Runs
* At the end of such dry runs, the hotels should be able to understand any gaps remaining prior to the full rollout of the hotel.
Around The World