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Impact of terror attacks on the hotel sector - Views on News from Equitymaster
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Impact of terror attacks on the hotel sector
Dec 5, 2008

In recent times, the hotel sector in India has been facing the heat of the credit crisis with a slump in inflow of both business and leisure tourists. Having said that, the recent terror attacks are expected to have a grievous impact of the fortunes of the sector in the near term. The industry is highly susceptible to events like economic slowdown, wars, disease outbreaks and terrorism. In the past decade, events like 9/11 attacks, SARS outbreak, Afghanistan war, Bali attacks etc have shown significant negative impacts on international travel and tourism. For instance, after the 9/11 attack, domestic travel expenditures fell by US$ 27 bn in 2001. International visitors to the US also dropped by more than 5 m in that year.

Foreign travel in the U.S.: 2000-2004
Year Foreign Visitors (m) YoY change
2000 51.2
2001 46.9 -8.4%
2002 43.5 -7.2%
2003 41.2 -5.3%
2004 46.1 11.9%
Source: Travel Industry Association of America

Fall in demand
The serial blasts in Delhi, Jaipur, Ahmedabad, and Hyderabad had already added to the woes of the hotel sector in these regions. The business travel as well as tourist arrivals which grew by a healthy 13.8% in July, reported a growth of just 2.8% in October.

Mumbai hotels largely attract business traffic as compared to leisure traffic. They also enjoy higher room rates with the presence of other well-known 5-star hotels like J W Marriott, Leela, ITC, Le Meridien and Hyatt Regency apart from the Taj and Oberoi. However, the scale of attacks in Mumbai is expected to increase the cancellation rates of overseas bookings. As per the industry, volumes were down 30% to 40% across India in the last five days and upto 50% in Mumbai.

Not only metros, but also leisure destinations like Goa are expected to face tough times ahead. The hotel tariffs in the state have fallen in the range 20% to 25% in last couple of months on account of the global slowdown that forced tourists to cancel their travel plans. Further, the industry has been expanding capacity which has only made things worse in times of slowdown. As reported by a business daily, the hotel tariffs have dropped 20% after the terror attacks.

Falling room rates
Place ARRs before terror attacks (Rs) ARRs after terror attacks (Rs) Change
Mumbai 12,000 10,200 -15.0%
Goa 7,500 6,000 -20.0%
Hyderabad 12,000 6,500 -45.8%
Kerala 7,500 6,500 -13.3%
Jaipur 7,500 6,500 -13.3%
Source: leading business daily

Sensitivity analysis
We have done a sensitivity analysis to show the impact on the room revenues on account of the decline in room rates and occupancy rates. The scenario I shows a normal situation. The occupancy rate (69.5%) and room rate (Rs 7,915) is the all India average ballpark figure (source HVS). Scenario II shows the impact when ARRs fall by 20% keeping occupancy rate stable (at 69.5%). Scenario III shows the decline in room revenues when the occupancy rates decline, keeping the room rates stable. The 4th scenario shows the impact when both take a hit. With the recent crisis, the situation of falling room and occupancy rates is witnessed.

Hypothetical example of loss of revenue to a 100-room hotel
Normal situation 20% drop in ARRs 15% drop in occupancy rates Drop in both
No of rooms 100 100 100 100
Occupancy rates 69.5% 69.5% 59.1% 59.1%
Average room rates (Rs) 7,915 6,332 7,915 6,332
Room revenues (Rs m) 2,008 1,606 1,707 1,365
% change over normal -20.0% -15.0% -32.0%
Occupancy rate and room rate is average figure for India (HVS)

Going forward
The UNWTOs Secretary General has indicated that although the tourism industry recovered after a temporary slack in the aftermath of SARS, the tsunami and 9/11 attacks, the current situation (credit crisis and recession) seems to bring in more uncertainty. Until mid 2008 tourist traffic had held up well at levels close to 5% globally. But since then, deterioration had been observed and prospects continued to worsen. Though in the medium term, things will remain bleak, positive growth is expected in the longer term.

We expect that in India too, the hotel sector will witness a revival over the next two to three years after witnessing pressure on room and occupancy rates over the next couple of quarters.

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