Sick and tired!

Once again, the industry in Asia Pacific is struggling for survival as the SARS epidemic and the Gulf war take a wicked toll on business. A look at how the region’s long-suffering hoteliers are coping

By Steve Shellum, Publisher/Editor, HOTEL Asia Pacific

There is nothing more depressing than an empty hotel. Except, of course, a full hospital.

A few days after  the Metropole Hotel in Hong Kong was pinpointed as the unwitting culprit in the spread of the SARS virus, a waiter goes quietly about his business, trying to keep himself busy. I order a coffee and try to engage him in small talk, but he is not  in the mood to hang around chit-chatting to customers, even though I am the only one in the coffee shop.

I act the ignorant tourist and ask the receptionist for a map of Hong Kong. She hands me one with a nervous smile but, when I ask her where all the guests are, she pretends not to understand, excuses herself and picks up the phone.

It's a heart-rending scenario that is being repeated, to various degrees, at many hotels throughout the region as the fear of SARS (severe acute respiratory syndrome), coupled with the impact of the Gulf war, keeps both tourists and business travellers at home.

It is anyone's guess how long it will take the industry to make a full recovery, but the general prognosis is that it is unlikely to be swift, and that the scars will take some time to heal.

With the threat of the Gulf war hanging in the air for several months, most hotels in the region had made contingency plans to focus on intra-regional travel to compensate for the inevitable loss of long-haul business.

Hardest hit has been Hong Kong, with the SARS outbreak leading to mass cancellations of flights, package tours, conventions and business trips.

A worldwide travel advisory by the World Health Organisation against travelling to Hong Kong and China's Guangdong province - the first ever to be issued by the international health body - dealt a further debilitating body blow to the industry.

The move forced the Hong Kong Tourism Board to halt all marketing promotions, and to save its resources for a blitz campaign once things start returning to some sense of normality. The timing could not have been worse, as March and April are the peak months for trade fairs and exhibitions.

According to Federation of Hong Kong Hotel Owners executive director Michael Li, occupancy rates have plunged by up to 30%, while Morgan Stanley has predicted that Hong Kong could lose HK$2 billion (US$256 million) in tourism revenue in the next two months alone.

As cases were also confirmed in Singapore, Vietnam and China - and with international media blaring headlines containing such emotive phrases as "killer disease", "fear", "epidemic" and "panic" - both international and intra-regional travellers started to cancel or delay their trips to the region in droves.

But the region's hoteliers, battle-hardened by six years of fighting against the odds, seem to be approaching the situation with commendable calm, gritting their teeth and digging in.

"We are faced with a challenging situation and we must be flexible and open-minded in our approach," says Kurt Rufli, MD of Thailand's Amari Hotels.

His "get-on-with-business" attitude is echoed by Starwood. "It's a difficult situation for everyone, and this is the period for us to work closely together," says a company spokesperson.

There are four major threads of optimism running through the industry: that the SARS outbreak will be contained; the Gulf war will be short; cancelled or postponed events will be rescheduled; and travellers will return en masse due to pent-up demand.

But no one is in any doubt that the next two or three months are going to be tougher than anything they have ever gone through - tougher than 9/11, tougher than the Asian financial crisis and tougher than any recession.

The double body blow of the SARS outbreak and the Gulf war has already sent occupancies plunging throughout the region, as well as the stock prices of many of the major listed hotel groups, including the Hongkong and Shanghai Hotels and Shangri-La Asia.

Although Shangri-La Hotels and Resorts got off to a good start at the beginning of March, the month was likely to end about 8% down on forecast occupancy, according to a company spokesperson.

Worst affected are its properties in Hong Kong, Beijing, Shanghai, Shenzhen, Taipei and Singapore.

"Some business has been postponed, rather than cancelled, and the forecast for the next few weeks very much depends on whether SARS is quickly contained, and the protraction of the war in Iraq.

"Consequently, it is difficult to give any accurate predictions at this stage, especially given the fact that most of the group's properties are business hotels and the lead times for bookings is becoming increasingly shorter.

"However, it is estimated that occupancy levels will be reduced by about 15% for the group during the next few weeks."

Amari's Rufli says occupancy levels have softened across the group, with an increasing level of short-term cancellations.

"It would appear that the SARS virus is perceived as a greater risk than the Iraq conflict," he says.

Although average room rates have not been affected so far, Rufli fears that the tremendous pressure could lead to a rates war.

"It is possible that, in the short to medium term, the market will adopt a more aggressive rates strategy in order to secure occupancy, thereby causing a decline in ARR," he says.

Despite the fact that forward bookings in terms of daily reservation transactions and new group requests for the coming months are down, Rufli says requests for Q3 are "ongoing".

Accor hotels in China, Hong Kong, Singapore and Hanoi have been hard hit by the double impact of SARS and the war. Hanoi has suffered the most, with more than 4,000 room nights cancelled.

According to a company spokesman, the situation in China, Hong Kong and Singapore "is not as clear, but the best estimate is that 80% of cancellations have been due to SARS".

The impact in Hanoi has also hit the Swiss-Belhotel-managed Hanoi Horison Hotel, according to president Gavin Faull.

"Our hotels in China are OK except, of course, the Pavilion in Shenzhen which has been dramatically affected."

Hotels in Shanghai, usually cushioned from the effects of global or regional disturbances, are also beginning to see a drop off in business, although nowhere near as much as in some other parts of China.

The Portman Ritz-Carlton, which is currently achieving an occupancy in the mid to high 70s, has received "more postponements than cancellations", according to PR director Michelle Wan.

Elsewhere in the region, Ritz-Carlton is feeling the effects of cancelled flights.

"Like all of the hospitality industry in Asia Pacific, we are impacted by this situation, particularly since the airlines have cut back or cancelled their flights," says a company spokesperson.

"Many people are postponing their travel, and we are working with each group and individual personally to determine opportunities for rebooking."

The biggest impact for Starwood has been felt more in key gateway cities, rather than secondary destinations, although the group has received a number of requests to reschedule events either to other locations or to other dates.

A spokesman for the Peninsula Group says long-haul travel has been most affected, with "a mix of cancellations and postponements of bookings". According to Arthur Kiong, DOSM of the flagship Peninsula Hong Kong, occupancy for March was likely to drop between 20% and 30%.

It’s a similar story in most parts of the region. Singapore arrivals fell by about 9% in March. According to Deputy Prime Minister Lee Hsien Loong: "Businessmen are teleconferencing rather than travelling, while hotel occupancies and forward bookings have dropped sharply."

Hoteliers in Indonesia have seen occupancies quickly tumble by about 10% - which is faster than the dive caused by the Bali bombing last year, according to Yanti Sukamdani, chairman of the hotel and restaurant association.

In Taiwan, hotels are seeing a fall-off in highly lucrative Japanese tours, although occupancies are still averaging about 70%.

Industry analysts in Malaysia are predicting that tourism arrivals will drop to 12.9 million this year, from 13.3 million in 2002.Occupancy at the exclusive Pangkor Laut Resort has dropped to 35% following cancellations mainly by European and Japanese visitors.

Meanwhile, several hotels have already begun cutting rates, including the 5-star Mutiara Beach in Penang, which is offering deluxe rooms for US$76 instead of the usual $92.

According to the Tourism Authority of Thailand (TAT), about 50,000 visits have been cancelled between April and June, and hotels are experiencing cancellation rates between 5% and10%.

A spokesperson for the Dusit Thani Hotel in Bangkok said up to 50% of foreign bookings had been cancelled, although regional arrivals remained stable.

The Amari Watergate Hotel reported 30 cancellations, and was managing to hold occupancy at 60%, while the Sukhothai was achieving 57%.

According to the Indian Express newspaper, foreign arrivals in India dropped by 50% in the first two days of the war, with airport hotels being hit the hardest.

And, true to form, the Philippines Tourism Secretary has told the tourism sector to continue promoting the country as a vacation destination and to ignore negative travel warnings. [Sometimes, it appears, ignorance really is bliss.]

Despite the undoubted seriousness of the SARS outbreak and the impact of the Gulf war on international travel, the hotel industry in Asia Pacific is nothing if not resilient.

More than any other region, it has learned the hard way the art of survival against the odds.

It may be down on its knees right now, but it always comes up fighting fit

Performance of the  UK Hotel Market
Has the bottom of the cycle been reached?

by Angela O’Reilly, Deloitte & Touche - April 2003

Preliminary results for 2002

2002 hotel data suggests regional UK hotel industry
in recovery, but average room rate continues
to fall in London.

Regional UK hotel performance held up well in 2002 despite the challenging economy, according to preliminary year-end data derived from the HotelBenchmark Survey by Deloitte & Touche. Hotels located outside London maintained occupancy levels with average occupancy at 70.3%, similar to 2001 levels. Average room rates experienced only a marginal decline, down 0.7% to £62.

Since June 2002 the performance of Regional UK hotels has been slowly recovering with occupancy levels advancing over 2001 levels. Average room rates have also moved ahead of 2001 levels in all but September when a 1.2% decline was reported. As a result, the industry has witnessed growth in RevPAR for the last six months of the year. In December Regional UK hotels reported a marginal decline in occupancy of 0.4% but, combined with a 1% increase in average room rates, RevPAR grew 0.5%.

In London, hotel performance was more mixed. Occupancy levels held up, with the total London sample reporting an occupancy level for 2002 of 75%. However, to stimulate demand, London hoteliers have had to discount prices resulting in average room rates falling 6.5% to £95

Table 1 – Performance of the UK Hotel Industry 2002

Has the cycle bottomed?

To ensure direct comparability of year-on-year data, we have analysed the performance of a consistent sample of hotels.

The analysis focuses on Moving Annual Totals (also known as Rolling 12s), a statistical technique that illustrates trends over a set period of time and removes seasonal bias from the equation.

Chart A tracks the Rolling 12 occupancy results of the London and Regional UK samples from January 2000 to November 2002 and reveals that both samples registered their lowest occupancy performance over the 12 months to July 2002.
Whilst the Regional UK sample has shown only a slight improvement, the London sample is demonstrating a stronger recovery.

Charts B and C present the Rolling 12 RevPAR performances with the lowest point in the cycle being in July 2002 for Regional UK hotels and August 2002 for London. The
inferred recovery in the Regional UK market appears somewhat more robust than in London as there is evidence of growth (albeit minor) in both occupancy and average rate.

Chart A – Rolling 12-month occupancy analysis for
London and Regional UK hotels (%)

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Chart B – Rolling 12 month revPAR
analysis for London Hotels (£)

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Chart C – Rolling 12 month revPAR analysis
for Regional UK Hotels (£)

Conversely, whilst occupancy in London has demonstrated quite strong growth in recent months, average room rates have fallen each month in 2002 compared to 2001, in part due to the differing mix of clients that the hotels are now attracting. Encouragingly, however, it appears as though the rate of decline is slowing with hotels reporting a 1.2% decline in average room rate in December, compared to the double-digit declines experienced at the beginning of the year.

Winners & losers – who are they?

Analysis of the UK hotel market confirms the resilience of the budget sector. Table 2 clearly indicates that on a Rolling 12 basis the UK budget sector has been unaffected by both the aftermath of 9/11 and the weakened economy, as occupancy levels have improved 5.7% between January 2000 and November 2002. Average room rates have moved ahead 2.9% during the same period resulting in a RevPAR increase of 8.7%. The Rolling 12 RevPAR performance of the UK budget sector relative to the mid-market and first class sectors is presented in Chart D

Table 2 – % change in KPI’s between January and
September 2002 on a rolling 12 basis

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Chart D – UK rolling 12 month revPAR analysis by grade
of hotel – First class, Mid-market & Budget sectors (£)

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Chart E – UK rolling 12-month revPAR analysis
by grade of hotel – Luxury sector (£)
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Luxury hotels, primarily located in London, have not fared so well, with occupancy levels falling 12.2%. Conversely, whilst the Rolling 12 average rate has declined since the peak achieved in August 2001, it is currently broadly in line with that achieved in January 2000. It is clear that luxury hotels have suffered as business customers have traded down to lower grade accommodation. However, it is also the sector that has the greatest capacity for growth as recovery in the sector continues. Chart E presents the Rolling 12 RevPAR performance of the luxury sample since January 2000, with improvement evident since September 2002.

What do the long-term trends reveal?

The difficult trading conditions of the last 18-months have caused much hand wringing amongst industry operators and observers alike. In our experience, the sector is sometimes guilty of talking itself into difficulty – as evidenced by the industry’s actions in 1998. Speculation regarding the onset of recession in 1999 resulted in operators taking fright during rate negotiations in late 1998. Consequently, and despite robust occupancy levels and growing GDP, RevPAR was relatively static in 1999 as growth in average rate had been stymied by pre-contracted rates. Conversely, operators handled the challenge of the foot & mouth outbreak in 2001 with aplomb.

Charts F and G track the indexed nominal and constant (i.e. deflated) RevPAR and occupancy trends of the London and Regional UK hotel markets between 1990 (previous peak of the cycle) and 2002 (with 1990 data at 1.00). It is apparent that it took a full five years for London and Regional UK RevPAR performances to recover in real (constant) terms after the previous downturn. However, it is also apparent that the decline in performance since 2001 has been less severe than that of the early 1990s.

Chart F – RevPAR nominal and constant indices for
the London hotel market (1990 to 2002)

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Chart G – RevPAR nominal and constant indices for
Regional UK hotel market (1990 to 2002)
 

London 2002 RevPAR in real terms is circa 2% below the 13-year average and 20% below the most recent peak of 2000.  Conversely, Regional UK 2002 RevPAR is some 13% above the 13-year average and only 2.5% below the peak of 2000.

The robust performance of the Regional UK market is mainly due to the consistently higher occupancy levels achieved since 1994. Occupancy levels in the late 1980s and early 1990s ranged between 60-67%, but have been at 70% and above since 1996.
This is attributable to a number of factors including:

• increase in weekend/leisure business allied to the inclusion of health and leisure facilities in full-service hotels;
• growth of the budget sector, encouraging new users of hotel accommodation;
• increases in disposable income – holidays are increasingly viewed as a ‘necessity’ rather than a luxury.

Whilst the UK leisure demand remains robust, seasonality constraints are deemed to prohibit a further significant increase in average occupancy levels in the medium term. Consequently, further RevPAR growth will need to be stimulated through a manipulation of business mix and increased rates.

And so to outlook…

Conversations with a number of the leading UK operators reveal that current indicators are raising concerns. The faltering US and struggling German economies and continued fears of terrorist incidents are of particular concern to London hoteliers. 

Closer to home, the media hype relating to an imminent decline in consumer confidence and retail spend; speculation that house prices are due to fall; redundancies; tight corporate travel and entertainment budgets; fewer business meetings; increasingly sophisticated buyers (e.g. corporate guests utilising cheaper travel agency or internet rates); the absence of events to stimulate demand (Commonwealth Games, Ryder Cup); and increasing operating costs (employer costs, insurance, and property taxes) are all cited as reasons for gloom. 

On the plus side, however, the British Tourist Authority predicts that UK visitor numbers should increase 3% in 2003 with spend rising 4%. Leisure demand generators such as TUI and Superbreaks have also indicated strong growth

forecasts for the UK market in 2003. And, despite stated concerns, the hotel operators we have spoken to are each anticipating some increase in RevPAR in their Regional UK hotels, driven by average rate rather than occupancy.

Expectations in London are almost the converse, with improving occupancy levels stimulating whatever RevPAR growth may be achieved. Expectations are that significant recovery won’t become apparent until the second half of 2003 through to 2004.

Our views on outlook can be summarised as follows:

Regional UK – flat to minor growth in 2003 as the economy falters, but with slow, steady RevPAR growth over the medium term.

London – RevPAR growth in the range of 2% to 3% in 2003 (war with Iraq or other international terrorist incidences notwithstanding), with more in 2004/05.

As usual, there will be winners and losers with certain sub-sectors (e.g. budget hotels) and those with strong customer loyalty perhaps sustaining higher growth.

Who’s selling – Who’s buying?

The uncertain economic outlook and faltering trading performance led to a slowdown in the number and volume of hotel transactions in the UK relative to the buoyancy of 2001.  This is attributable to the uncertainty as to pricing. Despite the relative illiquidity, there were a number of significant transactions in the UK hotel market in 2002, which we have summarised in Table 3.

Table 3 – Summary of major UK
hotel transactions in 2002

Source: Deloitte & Touche research

Other major transactions in the UK market in 2002 included the sale of Cliveden and Royal Crescent hotels by Von Essen Hotels for an amount speculated to be in the range of £50 million, with a further £5.5 million intended for refurbishment of the two hotels. Also in the luxury sector, Orient Express paid Virgin a reported £27-million for a portfolio comprising the 32-room Le Manoir aux Quat’Saisons hotel and restaurant in Oxfordshire, the 63-room La Residencia in Majorca; and, a 50% interest in the
Petit Blanc restaurant chain. MWB was also active, having acquired the remaining 50% of the Malmaison group from Rezidor (formerly SAS Hotels) for some £6 million, with a further £7 million to acquire the 18-year management contracts with Rezidor.

Of note is an emerging trend of acquiring hotel assets with a view to convert to residential usage – examples include the Posthouse Kensington and an expectation that Orb may convert a number of its London Thistle hotels. Indeed, recent coverage of 6C’s decision to halt refurbishment of the Inter-Continental Mayfair has raised speculation of another potential residential play.

The type of buyer over the last couple of years has shifted from traditional hotel operators to a diverse range of property companies, private equity investors and venture capitalists with increasingly sophisticated forms of sale and leaseback
becoming de rigueur. Some sector observers consider that recent portfolio transactions were more representative of refinancing initiatives than true open market values and perceive that prices will have to drop somewhat in order to stimulate further activity. Conversely, given the continued woes of the global stock market and economic uncertainties, real estate is an increasingly desirable asset in which to invest.

Consequently, our expectation is for continued interest on the part of private equity and venture capitalists with further sale and leaseback structures established. 

Transaction volume should pick-up throughout 2003 as anticipated recovery
transpires.

Potential UK deals currently being mooted include: Compass to sell Regent Palace and Strand Palace in London – the anticipated deal with London and Regional having failed to complete.

Whitbread to sell the remaining “non-fit” Swallow hotels – having withdrawn the portfolio from sale in 2002.

Terra Firma / Le Meridien to divest of remaining “non-fit” Principal assets as well as a number of international Le Meridien assets.

Finally, rumours and speculation abound regarding QMH; Thistle’s London assets; and 6C’s hotel division post demerger.

A lot of these transactions could be classified as unfinished business, which following on from last year’s refinancing led M&A activity could be considered a rather unexciting prospect. However, as always there will be some highlights and with the Travelodge deal looking imminent as we go to press, at least this year has got off to a good start.

This article was written by Angela O’Reilly, assistant director, CF Leisure Team.

For more information regarding the article, please contact Angela on 020 7304 1890 or e-mail Angela at aoreilly@deloitte.co.uk For more information on the Deloitte & Touche HotelBenchmark Survey, please contact Julia Felton on 020 7304 1785.

Illness Hurting Asian Hotel Industry