Impact of Covid-19 on Hotels and Tourism

A. HOTELS
“In terms of our business, Covid-19 is like nothing we’ve ever seen before”, remarked
Arne Sorenson, CEO Marriott International. The lockdown to contain spread of Covid-19
in the country has had disastrous impact on the hospitality sector, especially for hotels.
The hotels are businesses which are very capital intensive and also have very high fixed
costs. The capital intensive component is normally debt and it has to be serviced by
payment of interest on debt and repayment of debt. Hotels are also labor intensive, so
they have lots of fixed costs such as wage bill, besides paying government levies.

Covid-19 impact

 The operational parameters (Occupancy rates – ORs & Average room rates –
ARRs) of the hotel players are expected to get adversely impacted for next couple of
quarters. Though a medium term impact, this may lead to lower cash flows for the
hotel entities and thus exert pressure on their profitability and liquidity.

FY19 OR (%) ARR (Rs per day) RevPAR (Rs per day)
Overall average 66.7% 5,973 3,981
` Source: Hotelivate

As per CARE ratings estimates, ORs to witness a decline of about 27% to reach an
overall average of about 40% during the year with maximum impact in H1 2020.
Also, with weak demand, the ARRs are expected to decline by about 30 – 40% and
reach around Rs 3,600 to Rs 4,200 per day. Consequently, the revenue per available
room (RevPAR) is expected to decline by about 58 – 64% during the year to reach
Rs 1,440 to Rs 1,670 per day.

 Hotels which derives higher share of revenue from foreign passengers and food
& beverages segment will be the worst affected. Cost-cutting measures are the need
of hour. Hotel entities which will be quick in trimming down the unnecessary costs
and implement various efficiency improvement measures will be able to cut down the
damage better. Employee costs are one of the largest cost components of the hotels
accounting for about 25-30% of the total expenditure.

 Hotel sector is characterized by long gestation period. Hotel entities with recent
expansions or groups with a higher portfolio of new assets compared to mature assets
will face additional heat on their already weak financials. With high debt repayments
and squeezed profitability, these entities may witness tightening in their liquidity and
 credit profile. Furthermore, hotels need to revisit their capex plans as the Covid-19
impact is expected to derail the future growth.

 There are various stakeholders which are connected to hotel sector. Entire supply
chain is going to be impacted.

 As per Hotelivate estimate, the overall loss of total revenue for the ~

140,000 branded / organized hotel rooms across the nation will be
anywhere between US$1.3 billion to US$1.55 billion.  This amounts to
27% to 32% erosion in the overall revenue as compared to last
year. Moreover, given that these 140,000 rooms represent only about 5%
of the total lodging sector in India (95% of it being B&Bs, Guest Houses,
Unbranded & Unorganized Supply, etc), it is our estimate that there is
likely to be an additional loss of anywhere between US$4.2 billion to
US$4.7 billion in total revenue 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.

B. TOURISM
 “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). Over 95 percent MSMEs of 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 due to lack of cash flows.

According to FAITH, a large percentage of total tourism business activity of India, which
is estimated at $28 billion-plus in forex and upwards of Rs 2 lakh crore in domestic
tourism activity will be at economic risk through the year.

Covid-19 impact

 Perhaps the most visible and immediate impact of Covid-19 is seen in the hotel and
tourism sector in all its geographical segments - inbound, outbound and domestic and
almost all verticals - leisure, adventure, heritage, MICE, cruise and corporate.

 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 cancelled. In India, most of
the summer holiday bookings have been cancelled (about 40-50% most of which was
to states of Kerala, Rajasthan and Goa) impacting the domestic tourism.

 India’s total foreign tourist arrivals (FTA) stood at 10.9 million and the foreign
exchange earnings (FEE) stood at Rs 210,971 crore during 2019. With travel
restrictions in India and all over the 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 sharp 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 expect 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, loss of over 40% y-o-y.
  With 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 report by KPMG.
The tourism value chain across hotels, travel agents, tour operations, destinations,
restaurants, family entertainment venues and air, land and sea transportation will get
into slump.

Conclusion

 Undoubtedly, the hardest hit industry is hospitality and tourism which are
interdependent on each other. The industry has voiced its shock and disappointment
at the lack of support from the AatmaNirbhar package of 20 lakh crore

 With 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 particularly in tourism industry continues to rise.

All in all, like everything, this too shall pass.