Hotel industry: Long way to Recovery

Photo: For representational purpose

The Indian hotel industry is among the sectors that have been impacted the earliest by the outbreak of the COVID-19  pandemic on account of its inextricable linkage with travel and tourism, especially foreign travel and tourism, which evidently bore the first brunt of the global crisis. Likewise, it may be among the last sectors to recover, considering that due to its nature, travel and tourism is a discretionary activity. Additionally, with corporate entities all over the world getting acclimatised to interacting internally or externally in a zero-cost work-from-home mode, the resumption of business traffic, even in the event of the pandemic abating, is expected to be tardy.

Sector was on an uptrend till 2019

The Indian hospitality industry  along with tourism has been one of the key segments driving the growth of the services sector in the Indian economy. According to the World Travel & Tourism Council (WTTC), the Indian travel and tourism sector contributed about US$ 194 billion during CY2019 contributing around 6.8 per cent of the country’s GDP. Out of the 185 economies, India stood 10th in terms of the size of travel and tourism spends during 2019.

Pandemic and lockdown had a severe impact on revenue: a sharp decline in occupancy, ARR and RevPAR

The outbreak of COVID-19 severely impacted the occupancy level of hotels across all the segments. While the early signs of demand destruction in the domestic hotel industry started to seep in from February 2020, it only worsened by March. FTAs witnessed a year-on-year de-growth of 6.6 per cent during February 2020 indicating the first adverse signs of the pandemic. By March 2020, the pandemic had spread across various nations, and from March 02, 2020, the Government of India (GoI) also started issuing travel restrictions in a phased manner. As a result, FTAs witnessed a significant year-on-year degrowth of 66.4 per cent during March 2020.

The outbreak of Covid-19 in the country was closely followed by a nation-wide lockdown to contain the pandemic. The lockdown was implemented on March 24, 2020, which continued till May 31, 2020, under four phases, leading to a significant deterioration in the operating parameters of hotels. CARE believes that the average occupancy levels have plummeted to a range of 10-15 per cent during April and May 2020 for domestic hotels. Hotels have been able to generate minimal occupancy by deploying their rooms for quarantine patients, stay of medical staff, and employees of some corporate at nominal rates. Consequently, ARR and RevPAR  have also been severely impacted. Apart from the room revenue, the hotel players are also expected to lose significantly on the food and beverages (F&B) portion which typically contributes around 35-40 per cent of the total revenue.

Profitability expected to get squeezed

The domestic hotel industry has never been impacted as adversely as during the ongoing COVID-19 crisis. Besides struggling with plunging revenues, hotels have been grappling with shrinking profitability, primarily on account of a high share of fixed costs, and consequently high operating leverage. According to CARE Research, employee costs are one of the largest cost components of Indian hotels, accounting for around 25-30 per cent of the total expenditure. Besides, selling & distribution (S&D) costs account for about 15-20 per cent of the operating costs which include advertising expenses and marketing costs, and power and fuel costs account for 8-10 per cent. Hotels, therefore, have large fixed costs, and marginal costs per additional guest are comparatively low. Besides, F&B consumes about 10-15 per cent of the costs on an average. Other operating costs account for the remaining 35-40 per cent of the costs that include the repairs and maintenance, travelling expenses, etc, among others.

Click here for the full CARE Ratings report on the hotel industry.