The premium (5-star and 5-star deluxe) hotels industry is set to experience tough times with profitability likely to plummet in 2012-13 and 2013-14 due to a fall in occupancy as well as room rates and rising costs. Operating margins will fall to around 16 per cent in the current fiscal, the lowest in the past ten years.

The premium segment hotels in the 12 Indian destinations, Crisil Research analysed, collectively account for 80 per cent of the country’s premium hotel rooms. Slowing demand growth coupled with large-scale room additions will cause occupancy rates (ORs) to slip.

Economic slowdown

The ongoing global economic slowdown is expected to hit business and leisure travel, which will result in annual demand growth for hotel rooms remaining subdued at around 7 per cent in 2012-13 and 2013-14. This will be compounded by large-scale room additions: Crisil Research expects 14,500 rooms to be added in 2013-14 to the existing 46,200 rooms.

Planning/construction of much of this upcoming supply started during 2007-08.

An increase in business travel and foreign tourist arrivals during 2004-05 and 2007-08 coupled with a dearth of supply led ORs of premium segment hotels to cross 70 per cent across destinations. A concurrent increase in average room rates led to an annual growth of 30 per cent in revenue per available room (revenue from rooms occupied divided by the number of rooms available). Consequently, operating margins peaked to 40 per cent in 2007-08, propelling plans for large-scale supply additions.

Intensifying competition

Over the next two years, as the increased room inventory intensifies competition and aggravates the demand-supply imbalance prevailing in the segment, occupancy rates will dip to 56 per cent in 2013-14 from 64 per cent in 2011-12. Room rates for premium hotels will dip by about 10 per cent over this period to Rs.6,950 in 2013-14 from Rs.7,750 in 2011-12.

The fall in occupancy rates and room rates will result in a sharp decline in revenue per available room. The average revenue per available room for premium hotels will plunge from Rs.5,000 a day in 2011-12 to Rs.3,900 a day in 2013-14.

Premium hotels in Agra and Goa will be exceptions to this trend. Due to limited room additions in this period, revenue per available room will remain stable in Agra and even increase marginally in Goa. However, the scenario in the other ten cities will be dismal. The worst-hit will be premium hotels in Ahmedabad and Chennai, with annual decline of around 20 per cent in revenue per available room. Hotels in Bengaluru, Hyderabad, NCR, Jaipur and Kochi will also record an annual decline of around 15 per cent in revenue per available room. This is mainly because premium segment room inventory in all these destinations is expected to increase by 40-60 per cent during this period.

The decline in revenue per available room will erode the profitability of premium hotels, as room revenues make up almost two-thirds of their total revenues. Rising costs will be adding to the pressure on profitability. Workforce shortage will result in mounting employee costs. Energy costs too will go up concomitantly.

The combined effect of all these factors will see operating margins fall to around 16 per cent in 2013-14 from around 24 per cent in 2011-12. The last time that margins had fallen to such low levels (around 16-17 per cent) was in 2002-03 and 2003-04, sparked by the 9/11 terror attack in the U.S. and the SARS (severe acute respiratory syndrome) outbreak in several Asian countries. But that fall in demand was temporary, and the margins soon rebounded to their earlier levels of 30-35 per cent.

This time around, however, the recovery will be slower. Although Crisil Researchexpects demand to recover over the longer term, a continued oversupply at least till 2015-16 will maintain the pressure on profitability of premium hotels.

(The author is Director, Crisil Research, a division of Crisil)

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