The impact of the coronavirus pandemic might lead to a bleak FY21 for the hospitality and tourism industry according to credit rating agency CARE Ratings.
The agency said that for the year 2020, the industry is expected to book a revenue loss of Rs 125,550 crore, loss of over 40 per cent y-o-y. It’s not all grim however, this might be an opportunity for the industry to increase Average Room Rates (ARRs).
After witnessing growth between FY97 and FY08, occupancy rates declined for all major cities in FY09 and FY10 led by the macro-economic factors that were affected due to the financial crisis and the Mumbai terror attacks that jeopardized the tourism in the country during the period. Experts believe that a similar situation could arise after the COVID-19 pandemic.
Immediate 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 canceled. In India, most of the summer holiday bookings have been canceled (about 40-50 per cent most of which was to states of Kerala, Rajasthan, and Goa) impacting domestic tourism.
The impact on the inbound and outbound passengers is expected to be most severe in the next couple of quarters.
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 Maharashtra, Tamil Nadu, Uttar Pradesh, and Delhi accounting for about 60 per cent of FTAs.
Impact of lockdown
However, now with travel restrictions in India for over 80 countries and most of the flights of major airlines being suspended along with 24 lockdowns in states of India till March 31, 2020, the Indian domestic as well as foreign travel and tourism industry is expected to witness a sharp negative impact in 2020.
“Assuming the impact to be about 50 per cent during January and February 2020, while the impact being higher at about 70 per cent during March 2020 post the suspension of international flights and about 100 per cent during Q2 2020 (April – June 2020) on the overall foreign travellers with travel advisories being put out, 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 per cent during the period.”
“During H2 2020, assuming the virus impact subsides, we expect FTAs to still be lower affecting the FEEs by about 50 per cent 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 per cent y-o-y,” said the report.
In terms of tourism, the growth rates have been quite inconsistent over the last 25 years. However, during the major events in FY09, the country did witness a decline both in domestic as well as foreign travellers led by the financial recession that impacted the world economy. Further the terror attacks in Mumbai jeopardised the international as well as domestic tourism in India.
The impact on tourism will have a direct impact on the hotel industry too. Its revenues stood at Rs 10,030 crore as of FY19 (3.5 per cent y-o-y growth vis-à-vis FY18). “Hotels which derives a higher share of revenue from foreign passengers and food & beverages segment will be the worst affected,” it said.
The hotel sector is characterized by a 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.
Need to revisit capex plans
Furthermore, hotels need to revisit their capex plans as the Covid-19 impact is expected to derail future growth.
Hotel entities that 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 per cent of the total expenditure.
While certain demand is expected to be impacted on account of the ongoing Covid-19 concern, India is also expected to benefit from it as demand for MICE from other Asian countries is expected to be diverted to India to some extent, benefits of which will be seen only be seen post FY21.
“On back of marginally positive sentiments for the domestic tourism and MICE led by social and industrial activities, we expect the momentum to pick up going forward and the industry to register a growth of about 3-5 per cent in revenues for FY20-FY21,” said the report.
Back in 2008, post the crisis, due to increased investments in marketing and higher demand from businesses as well as leisure demand in the region, hotel markets in Pune, Ahmedabad, Hyderabad, Jaipur, Mumbai, Bengaluru and Agra witnessed positive growth during the period between FY11 and FY19 while Goa, Kolkata, New Delhi and Gurgaon witnessed slower growth during the period. Noida and Chennai markets witnessed a decline in ORs during the period.
Perhaps the most visible and immediate impact of Covid-19 is seen in the hotel and tourism sector in all from businesses as well as leisure demand in the region, hotel markets in Pune, Ahmedabad, Hyderabad, Jaipur, Mumbai, Bengaluru and Agra witnessed a positive growth during the period between FY11 and FY19 while Goa, Kolkata, New Delhi and Gurgaon witnessed slower growth during the period. Noida and Chennai markets witnessed a decline in occupancy rates (ORs) during the period.
ARRs Growth
ARRs, on the other hand witnessed higher growth between FY97 and FY09, post which most of the cities went in for expansions and supply increased. However, with increased supply, competition increased as well which lead to a decline in ARRs between FY09 and FY16. The average room rates have witnessed a marginal uptick between FY17 and FY19 on back of lower supply additions in the market as well as increased demand, foreign as well as domestic.
The expected future inventory in 11 major markets (across categories - only branded) is lower at around 50,170 rooms for the next 5 years (FY19 to FY24).
Therefore, with increasing demand on back of improvement in economic activities and lower room additions, “we expect the major markets in the industry to sustain the average room rates (ARRs) going forward and grow at an average of 3.5-4.5 per cent per annum. Also, we expect the occupancy to inch up to an average of about 68-70 per cent by the end of FY22 compared with 66.7 per cent in FY19.”
Accordingly, the hotels industry is expected to see an increase in room revenue at the rate of about 6-8 per cent CAGR over the next 3 years.
All in all, even though the demand may be lesser, this will still give the industry an opportunity to increase the ARRs.