Business - Worldwide financial shock hits Indian Hotels

Arun Kumar & Kalpana Pathak

After two years of roaring business, the hotel industry is checking in for tough times. The global financial turmoil and growing domestic terrorism in major cities have triggered a fresh round of cancellations by both business and leisure travellers.

“We are already facing cancellations of about 25 per cent of reservations and 10 to 20 per cent have been put on hold,” said Ajay Behl, general manager of Ramada Hotel, Jaipur, where a series of bombs exploded in the busy tourist areas earlier this year.
“I believe that the occupancy rate across the country has come down by more than 10 per cent and even average room rents have dropped by the same amount,” he added.
Early signs of the slowdown were visible in this year’s off-peak period (May to October) when hotels reported occupancies of 70 per cent against 75 per cent last year.
Some experts said the aggregate figure understated the problem. In the last six months, the occupancy rate across the industry fell 10 per cent, said Sushil Gupta, managing director of Asian Hotels, which runs hotels under the Hyatt brand.
That sharp drop in occupancies was the result of the impact of the US sub-prime crisis that began in September last year and growing domestic terrorism.
Now, it is clear that the busy season for hotels is going to be less busy. Companies in India are cutting back on travel as the global financial turmoil kicks in. And fewer foreign tourists are likely to visit India this year following this month’s bomb blasts in the capital. Foreign tourists typically account for 75 per cent of a hotel’s revenues.
“There have been indications of a softening of demand and yields in comparison to the same period last year,” agreed Deepak Haksar, chief operating officer, ITC Hotels, which runs the Welcomgroup chain of hotels.
Indeed, the average room rate has not increased for hotels in the major markets of Delhi and Mumbai despite the fact that there has been no significant addition of rooms.
The downturn in the industry is starkly evident in Bangalore, the city where demand has consistently outstripped supply. This year, tariffs in the IT city have already seen a 10 per cent drop.
Yogesh Kapur, senior vice-president, Enam Securities, predicts a 10 per cent drop in occupancy rates in the next six to 12 months, that will force hotels to cut tariffs as well.
“The hotel sector will start feeling the heat in the fourth quarter,” agreed Amitava Chakraborty, president and head of Religare Securities.
Evidence of the impending slowdown in this year’s busy season is already building in traditional tourist hotspots like Jaipur and Pushkar, which hosts world-famous annual cattle fair in November. Earlier, hotel rooms, especially five-star ones, in such locations were booked a year in advance and required full non-refundable pre-payment.
This year, several hotels are reporting rooms to let and agreeing to full refunds of advances.
The slowdown puts hotels in a bind because many have committed to major expansion plans on the back of buoyant growth in 2006-07 and 2007-08. Over the next two years, the industry will be adding 7,500 premium to mid-budget hotel rooms to the current availability of around 110,000 rooms.
Whether it is the Oberoi group, Taj, Leela Ventures or Asian Hotels, all have aggressive expansion plans with a combined capital outlay of around Rs 4,500 crore. International players like the Starwood Hotels, Hilton Hotels, Raffles Holdings and Shangri-La Asia have charted out aggressive plans for the Indian market.
Now, many hotel groups are going slow on their expansion plans. “With the current global meltdown, disbursement of funds to the Indian hospitality sector in the past 12 to 18 months has been on hold,” said Siddharth Thaker, executive director, HVS Hospitality Services.
Going by prognoses for the global economy in 2009, hotels in India are unlikely to see an upside much before 2010, when the Commonwealth Games, which are being hosted by Delhi, will boost demand in some pockets.
But observers think the slowdown is a short-term trend. “The long-term story remains intact as the Indian economy has the resilience and ability to overcome these challenges,” Haksar of ITC Hotels said.