Governments prepare to support sector

(White House)

The hospitality sector was expected to receive support from a number of governments globally, as travel was restricted due to the spread of COVID-19.

The US was due to announce targeted relief for the hotel sector, while today’s Budget in the UK was also expected to outline emergency measures.

The impact of the virus on trade remains impossible to quantify while the virus itself has yet to be understood. A number of companies have withdrawn guidance, including Booking, Host and Pebblebrook, while others, including TUI, have frozen hiring and bought in other cost-saving measures.  Cancellation fees have largely been waived across the market. Some Airbnb hosts, meanwhile, were offering virus-free breaks with liberal supplies of toilet roll.

Should the virus’s run be short and the bounceback fast, the impact on performance can be managed with assistance from government.

The US Federal Reserve announced that it would cut interest rates by half a percentage point, while the Bank of England was drafting an action plan to deliver a “powerful and timely” response to the coronavirus outbreak. Australia has signalled it may resort to Quantitative Easing and Italy has suspended mortgage payments.

Nigel Green, CEO & founder, deVere Group, said: “I believe that based on what we currently know, the risk of a coronavirus-driven short, sharp global recession this year is significantly growing. The epidemic has already dented anaemic global economic growth this year and it can be expected to slow further, then contract, as the fear of the virus takes hold.

“We can see both supply and consumer demand are already being impacted in key sectors, such as travel and tourism, hospitality, manufacturing and retail, and it is going to extend to others. This scenario is then likely to feed on itself: a lack of consumer confidence and spending, lack of business investment, more job cuts, which means even less spending and demand, which leads to further job cuts.

“Unfortunately, companies already on the edge are likely to fold.”

In the UK, Kate Nicholls, UKHospitality CEO, said: “This is now an emergency for our sector. If government doesn’t act to mitigate the impact and give us support, businesses are in danger. This means cash flow becomes a problem, venues are under threat and jobs at risk.

“By the time the immediate threat of the virus has subsided it may be too late for some businesses. Support is needed and it is needed now.”

The organisation warned that hotel occupancy had fallen 15% while forward bookings across hotels, restaurants, pubs and bars had fallen by up to 50%.  

It called for a moratorium on business rates for a minimum of three months, extendable dependent on the extent of virus spread; any quarantined area to have business rates annulled for the period of non-trading; business payment delay to ease cashflow (i.e. on VAT, PAYE and NICs) and a VAT cut for hospitality and tourism, to incentivise bookings, so that trade could resume as quickly as possible when the virus threat subsides.

The UNWTO has revised its 2020 prospects for international tourist arrivals to a negative growth of 1% to 3%, translating into an estimated loss of $30m to $50bn  in international tourism receipts. Prior to the COVID-19 outbreak, UNWTO predicted a positive growth of 3% to 4% for this year.

The UNWTO also called for financial and political support for recovery measures aimed at tourism, and to include support for the sector in the wider recovery plans and actions of affected economies.

UNWTO Secretary-General Zurab Pololikashvili said that “small and medium-sized enterprises makeup around 80% of the tourism sector and are particularly exposed with millions of livelihoods across the world, including within vulnerable communities, relying on tourism”.

Where some analysts have taken Sars as their template, William Crow, managing director, real estate research, Raymond James, looked at the impact of the post 9/11 period and 2008-2009 financial crisis on hotel industry when lowering estimates on Marriott, Hyatt and Hilton.

He said: “We remain optimistic that the actual COVID-19 outbreak will persist for a matter of months, not quarters, but there is a high likelihood that the tail impact to travel will extend through much of this year. We are not changing ratings at this juncture. It feels too early to upgrade and too late to downgrade and while valuations look attractive, based on our estimate revisions they are not yet compelling, at least based upon historical ranges.”

Illustrating the fall, the Baird/STR Hotel Stock Index dropped 11.7% in February to a level of 4,296. Year to date through the first two months of 2020, the stock index dropped 18.5%.

“Hotel stocks fell off a cliff at the end of the month due to mounting COVID-19 concerns domestically, and the broader stock market correction has disproportionately impacted travel-related stocks,” said Michael Bellisario, senior hotel research analyst and director at Baird.

“Increased cancellations and stricter corporate travel policies will impact near-term profitability for both hotel owners and hotel brands; however, the disruption for owners, particularly ones with more urban gateway and group exposure, will be far greater than the impact on the global hotel brands companies.”

Green added: “Against this backdrop, we should prepare for a short-term but severe global recession. However, the world economy is likely to bounce back strongly. We could even see revived global growth as economies rebuild and adapt; and especially so if central banks and governments step in to actively kick-start growth.”

 

Insight: The message is clear; the sector is likely to bounce back, but which groups are likely to do the bouncing will depend on what external support is given. The vultures are already circling and in a sector where margins were already under significant pressure, if one thing can be accurately forecast, it is an uptick in deals this year.

As Langton Capital’s Mark Brumby told us: “Whilst outbreaks such as this one are thankfully extremely rare, hotels find themselves in an almost uniquely unfortunate position. Some of their attributes, such location at travel hubs, their interaction with tourists, place them at ground zero when it comes to attempting to contain the spread of the disease and the authorities and, more importantly, prospective guests, are only too aware of this and will act accordingly.

“The disruption may be significant and it could test business models, which most of the time only have to deal with ‘normal’ abnormalities in terms of demand, to the limit.”

He added: “Leisure companies with pre-existing conditions are particularly vulnerable to COVID-19. Co-morbidity characteristics include high gearing, onerous leases and tired products.

“The epidemic could/should, for better or worse, have worked its way through by end-summer. Creaking balance sheets with patchy cash flows are the corporate equivalent of old age, diabetes, morbid obesity and a heavy smoking habit when it comes to COVID-19.”

Dalata Hotel Group was one of those describing “a significant reduction in bookings and a significant increase in cancellations following the spread of COVID-19 to Europe”, with CEO Pat McCann, commenting: “Dalata's decentralised operating model means that we have responsibility at a local level, co-ordinated through group, enabling us to respond quickly and effectively as this situation evolves. Our lowly-geared asset backed balance sheet together with our experience in reacting to crisis scenarios gives us the resilience to manage the impact of the unfortunate outbreak of the COVID-19 virus.”

As Brumby noted, whatever happens, afterwards the physical assets will still be standing. Those who have gone asset-light may find cause to pause.

The sector finds itself trapped. A travel ban between countries seems like certain death, but the domestic market may step up and pick up the slack. At the moment, the bans in place have been bought in by companies, not government.

Anecdotal evidence pointed to everything from general travel bans and public transport bans to employees being required to tell their overlords where they have been on holiday so that they can be banned from the workplace. The Institute of Directors said that one in three business directors surveyed had cancelled or restricted employee travel while up to a half were encouraging home working. The caution was understandable, but without word from government, the question of insurance remains a grey area.

Trade draining away slowly or in a sudden shock seems to be the choice and it’s not a tempting one.  As one CEO said to this hack: “We are bleeding slowly”. Interests are not aligned: governments have to consider the stress on health provision, whereas businesses may prefer more definitive action. Of course businesses are also looking to the longevity of their workforce, but it would be nice to be able to pay them too.

Recognition of the importance of the sector is varied around the world. The US has a hotelier for a president. The UK remains obsessed with manufacturing over the services sector. Effective relief will come to those with the loudest voices.