HOTEL INDUSTRY : Survival for Existence and Beyond

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HOTEL INDUSTRY : Survival for Existence and Beyond

The Covid-19 crisis has pronounced a death knell for the Nepali hotel sector. The outlook is bleak for the once booming sector and much is at stake for hoteliers and half a million hotel employees who are looking towards proactive support from the government to face the challenges posed by the global health emergency.

By Tamish Giri

Kathmandu Marriot Hotel and Aloft Kathmandu, two new five-star franchises of the US hotel chain Marriot International started their operation from July 2019 aiming to capitalise on the Visit Nepal (VN) 2020 campaign.

A year later, the two hotel properties established with investment of Rs 2.6 and 5 billion, respectively, are struggling to sustain operations as 99 percent of their rooms and beds have been unoccupied for over four months due to the Covid-19 pandemic.     

The series of worldwide unfortunate events over the last six months have dealt a massive blow to the Nepali hotel sector, which has an estimated investment of Rs 100 billion, with both international and domestic travel falling to zero, particularly after governments across the world rushed to impose lockdowns in a bid to control the spread of coronavirus starting from mid-March.

With the pandemic taking the Nepali hotel sector to the verge of collapse, hoteliers find themselves surrounded by unprecedented challenges. While the magnitude of the hit is the same to all hotels, the difficulties for the newly established hotels are greater.

“The crisis has ruined everything for us. Even though we are submerged in loans, we have been forced to shut down our operation entirely. We don’t see the road ahead and everything is uncertain at the moment,” expresses Sumit Kumar Agarwal, vice chairman of MS Group which owns Kathmandu Marriott.

Aloft Kathmandu’s Executive Sales Director Bipin Khadka says that the hotel’s occupancy rate currently stands at a meager one percent. "We are struggling to cover up operational expenses at this moment and there are no additional bookings coming in," he says. Reena Serchan, sales manager of Aloft says the business potential for the hotel has waned for a long time and will continue to until the containment of the virus.  

Turbulent Times
Currently, there are altogether fifteen five-star hotels in Nepal out of which only Kathmandu Marriott, Aloft Kathmandu, and Soaltee Crowne Plaza are functional. The two new franchises of Marriott are providing limited services to the few tourists stranded in Nepal due to the ban on international flights, while Soaltee is serving the flight crew of Nepal Airlines as quarantine.

According to Upaul Majumdar, general manager at Soaltee Crowne Plaza, out of 282 rooms at the hotel around 85 are currently in use. “Our occupancy rate was 70 percent in 2019 which is currently below 10 percent. It has caused a revenue loss of 80 percent to us,” he informs.

The story of Radisson Kathmandu is no different from other hotels. “Our hotel has been deserted for over five months. In 2019, our average occupancy rate was 60 percent which is zero this year,” says Subrata Banerjee, general manager of Radisson Kathmandu. Radisson's guests are primarily from countries like the United States, United Kingdom and India who contributed to the hotel’s Rs 1.40 billion transactions last year. Likewise, Tiger Top Palace had a 70 percent occupancy in 2019 and currently faces a complete closure.

According to Shreejana Rana, president of Hotel Association of Nepal (HAN), the hospitality sector has faced almost 100 percent business loss this year compared to last year. “Hotel owners are facing an anxiety-filled environment with jobs on the line and businesses at stake,” she expresses. According to Rana. the scenario is so grim for hoteliers at the moment that they are not even hoping that the sector will recover in 2020, or that the situation will return to normalcy even in 2021,

HAN has estimated that its member hotels are bearing a monthly loss of up to Rs 1.8 billion. “And, of course, if this situation continues, the sector will incur even further losses, we don’t have any hope for recovery this year,” says Rana who is also the Executive Director of Hotel Annapurna.

According to HAN, on average, hotel room occupancy in 2019 was 65 percent, the number fell to 15 percent by January which is less than 5 percent currently. According to the Western Region Hotel Association, 70 tourist-standard hotels have shut down completely. Most of the hotels in Pokhara are in rented buildings. Tourism entrepreneurs are having a hard time after their banks started calling them to pay the monthly instalments. According to hoteliers, hotels in Pokhara are incurring monthly losses of Rs200-250 million after business evaporated due to the pandemic.

A Foreseeable Future Full of Challenges
Hoteliers observe that the pandemic-induced global economic downturn, which has eroded the spending capacity of international travellers, as the main short-term challenge. “There are no bookings at the moment. From the end of October, I can see just 10 percent bookings coming in which may increase during the period of November-December. But this will be very negligible if I have to look at business in concrete terms, it will start from January onwards but, it is uncertain, the coming times are challenging,” Banerjee adds.

Sunil Sakya, chairman of KGH Hotels and Resorts thinks that the current uncertainty will continue for a long time and hoteliers will have to be ready to brace further impacts. “Estimations of WHO and scientists across the globe that it will take around 18 months to develop a proper Covid-19 vaccine is a long time for the hotels. I fear many hoteliers and tourism entrepreneurs may have to quit their business if the current situation drags on for this long,” he opines.

Before the start of the pandemic, KGH’s monthly revenue was Rs 500 million from its branches of seven hotels situated in Kathmandu, Lumbini, Chitwan and Pokhara. The group which has been providing employment to 700, so far has avoided layoffs. But Sakya fears that KGH might not be able to hold on for longer if the slowdown continues.

The bleak outlook has led to a rise in apprehension among hoteliers in that they may have to face a number of other problems in the near future. Managing price wars in the hotel sector, deterioration in labour relations and convincing international tourists about the health safety in Nepali hotels are some of these business problems, they say. “Ensuring health safety, managing administrative expenses and regaining the confidence of clients will be the primary challenge for hoteliers while the sector has to confront the factor of sustainability in the long run,” mentions Majumdar of Soaltee Crowne Plaza. According to him, low occupancy rate is likely to constrain big hotels during the initial recovery phase. “However, the focus of hoteliers needs to be diverted from a panicked to a positive approach,” suggests Majumdar.

Hoteliers agree there will be challenges in creating a robust consumer connecting ecosystem, as issues related to health and hygiene have become the new normal for the tourism industry. “So, as to position guests, employees and brand safety over anything will be the top priority of the hoteliers,” shares Banerjee, adding, “There is going to be a new normal until the vaccine comes out. One has to be very careful and all those sanitation requirements should be in place before we think of opening any part of the hotel.” He is of the view that hoteliers need to understand it will require a little bit of capital investment and at the same time the business is not going to be that good until a certain period.  

Jeevan Neupane, finance manager of Tiger Palace Resort, a five-star resort property at Rupandehi, says that hotels will face the challenges related to awareness and implementation process. “Even if hygiene of an above par quality is maintained, we still have to face difficulties to convince foreign guests,” he opines.

Risks of Deterioration in Labour Relations
It is estimated that the hotel sector directly employs around 500,000 Nepalis which is almost half of the 1.05 million people working in the overall tourism sector. The last couple of years have seen a building up of a healthy relationship between hotel owners and employees who agreed to end their long running disputes. Nonetheless, due to the Covid-19 crisis, the disagreement between the two sides has resurfaced. Currently, hotels have maintained a skeletal staff deploying employees who are mostly security personnel and staff for cleaning and maintenance purposes. A majority of the management and general level staff have been kept on unpaid leave. This has created friction between owners of the hotels and employees with labour unions asking for the payment of full salaries to the staff from the date when the lockdown began.

Hoteliers argue that employee salary payment has become the topmost challenge for them at a time when the hotels haven’t earned for the last four months with no work except for cleaning staff and security personnel.

“Just to sustain the business, a hotel needs at least 35 percent occupancy rate which is zero now. Talking about KGH, we have received only about 5-10 percent of room bookings for October which is also uncertain given the current situation. If this situation persists, certainly, we won’t be able to operate our business. A condition like this indeed will compel hoteliers to shut down the operation of hotels and slash jobs for survival,” mentions Sakya.

HAN President Rana says that with almost 100 percent of workforce on leave and almost zero room occupancy, it is likely that around 60-70 percent employment in the hotel industry is at risk currently as a result of this crisis. “And even if the lockdown is lifted and businesses reopen, the hotels will have to focus on their survival first, which may further affect the employment in the sector,” she warns.

Hoteliers stress on the need for a tri-party agreement between the government, employer and employees to face the current crisis and that the relief in terms of the government’s contribution to staff salary can be crucial for the hotels to survive.

From Boom to (Probability of) Bust
After suffering from a deep slump during the height of the Maoist insurgency in the early and mid-2000s, the Nepali hotel industry gradually got back on its feet to witness a period of fast growth in the last 5-6 years. With Nepal’s return to political stability, the sector was considered to be a lucrative one with new hotels and resorts opening across the country with big investments. The fact that the Department of Industry (DoI) registered more than 516 new hotel projects between 2014 and mid-January 2020 with investments totaling Rs 96.38 billion is a testimony of investor attraction towards the sector. The number of tourist-standard hotels which was 1,125 in 2018 increased to 1,151 in 2019. Likewise, the number of star hotels went up to 138 in 2019 from 129 in 2018. Similarly, more than 3,000 beds were added last year. To cash in on the emerging opportunities, some big Nepali hotel brands as well as new players in the sector were concentrating their efforts to establish new properties and expand the network of existing hotels in different parts of the country.

Hotel sector has been one of the most preferred sectors for investment of late. In fiscal year 2019-20 alone, 91 hotel projects have been registered at the Department of Industry.

Hyatt Regency Kathmandu, for instance, had planned to build a separate 150-room four-star hotel property within its premises primarily targeting Chinese visitors and establishing a unique Boudha-based cultural market project. Shangri-La Hotels and Resorts had sketched out plans to operate a new resort property at Begnas, Pokhara by 2021 alongside hotels at Chitwan National Park and Shivapuri National Park. However, the future of these important investment plans has become shrouded in uncertainty due to the Covid-19 fallout.

Even more painful is the fate of new hotel properties that are currently under construction. Siddhartha Rana, who is one of the major investors of Soaltee Hotel Limited, is constructing the 160-room five-star Siprabhya Hotels and Resorts at Ravi Bhawan, Kathmandu with a staggering investment of Rs 5.4 billion. Likewise, Hotel Sheraton at Kantipath and DoubleTree by Hilton at Naxal - two new five-star properties under construction –had planned to start their operation from mid-2021. The construction of these three hotels, which was in full swing before the beginning of the crisis, has now stalled indefinitely. 40 percent of Hilton’s construction was completed before the pandemic hit. “The construction has been stalled for months and won’t be resuming soon. We were planning to start the hotel’s operation by July 2021, but it has become uncertain now,” says Nitin Kumar Sharma, project head of DoubleTree by Hilton. Shanker Group is constructing the project with an estimated investment of Rs 4 billion.

The work on Hotel Sheraton, which was close to finish, has been halted for at least six months. Suresh Chitrakar, project manager of Sheraton informs that 95 percent of the structural work of the hotel has been accomplished and partition and interior work were ongoing. The construction of the hotel project was stopped six months ago, and it won’t resume until the next six months,” he says. According to Chitrakar, the hotel was initially set to operate by mid-2021 which has now been pushed back by a year because of the Covid-19 pandemic. “The current pause in construction will increase the project’s expenditure by over 55 percent,” he adds. Hotel Sheraton, which will be managed by Starwood Hotels and Resorts, a Marriot International company, has a whopping Rs 8 billion investment from MIT Group Holdings owned by the Nepali-Australian business magnate Shesh Ghale.

In the meantime, Covid-19 has also forced Oyo Hotels and Rooms to exit from the Nepali market; the Indian hotel unicorn, which was once expanding its service in Nepal aggressively, partnering with budget and mid-tier hotels, has ceased its operations entirely. “Starting from June, we have scaled back all our operations in Nepal for the time being. We hope to reassess this decision in the future as the situation begins to improve and people start travelling again and rebuild our vision of quality, affordable hospitality for this great nation. The Nepali market has been one of our strong footholds in the South Asia region," an Oyo spokesperson replied in an email response to New Business Age.

Is the Relief Package Adequate?
As the hardest hit sector, it was obvious for hoteliers to seek a comprehensive relief package from the government. Before the announcement of the Federal Budget for FY2020/21, they demanded relief measures including staff salary payment, extension of bank loan repayment deadlines, subsidy on interest rates and income tax waivers and introduction of flexible tax rules during the crisis, among others.

In his budget speech, Finance Minister Dr Yuba Raj Khatiwada announced a Rs 50 billion fund to support tourism businesses and small and medium enterprises (SMEs). For those who have lost their jobs in the tourism sector, the budget has provisioned a soft loan at 5 percent interest rate. Additionally, Dr Khatiwada announced to provide concessions for travel to government employees to revive the domestic tourism market.

However, people in the tourism and hospitality sector are not satisfied with the announcements. Many hospitality and tourism entrepreneurs who talked to New Business Age were sceptical even to consider the measures in the budget for upcoming fiscal year as ‘relief’. They also expressed dissatisfaction over the inability of the government and the central bank to finalise the modality of the soft loan scheme. “It seems it will take a while for the process to complete. However, hotels and tourism businesses are in desperate need of finance,” says Tek Bahadur Mahat, CEO of HAN.     

Some entrepreneurs are even questioning the feasibility of the soft loan scheme. “We are not in a position to even avail loans to pay staff salaries and rent because of no earning for the last four months and this situation will probably drag on for the next couple of months. It is an irony in that we have never had a government that truly understood how the economy and businesses functions. So what you can really expect is incompetence,” expresses Raj Gyawali, founder director of Social Tours.

Bijay Amatya, CEO of Kora Tours sees the measures not as a rescue and relief package but as an ordinary support which is far too inadequate to revive the pandemic-stricken tourism business. “It is not what we had expected. We had hoped for a stimulus package with programmes for staff retention for a year, refinancing (at 3-4 percent interest rate) and tax relief for two years,” he mentions.

Soaltee Crowne Plaza CEO Majumdar holds a view similar to Amatya. Citing examples of other countries where hospitality businesses are proactively receiving state support to offset the financial damages, he suggests the government to come up with rescue measures. “For instance, hotels in Thailand have been provided 80 percent of their operational expenses including staff salary by the government. This is the type of relief that Nepali hoteliers currently need,” stresses Majumdar.

Hoteliers say that the government has largely ignored HAN’s suggestions which HAN deemed important in order to provide the much-needed lifeline to the hotels at this moment and to smoothen the recovery in the sector. “We are seeking government support for both employee and employers. Employee support entails financial assistance to help fund salaries of staff. Employer support entails moratorium assistance including loan refinancing, rescheduling and restructuring facilities, interest rate reductions, tax, and utility tariff waivers, and lease rental waivers. But what we got is the soft loan scheme only and this doesn’t support the hoteliers,” asserts Rana.

KGH Chairman Sakya is disappointed that the government announced measures without evaluating the current scenario and determining the needs of the hospitality business.  “In an ideal world, the government would immediately analyse the losses, talk to the people in the industry and work for mitigation measures to prevent further losses. Many governments across the world have announced lucrative relief measures to support tourism entrepreneurs which our government has failed,” he opines.

Many in the hotel industry think that even availing soft loans won’t be easier given the deep slump in the hospitality industry and the deteriorating situation which is unlikely to improve anytime soon. According to Majumdar, BFIs will look after the financial history of any business for the assurance of the repayment of loans. “Almost all hotels have not registered any transaction for over five months now and banks won’t sanction the loans due to the uncertainty,” he adds.

Meanwhile, the government’s announcement to promote domestic tourism has received lukewarm response from hoteliers. Banerjee of Hotel Radisson says that the programme hasn’t given hope to big hotels. “However, domestic tourism is something which needs to be developed and it has helped many countries,” he mentions.

Recovery Hopes
Although the government is yet to decide a tentative timeline for opening the country’s airspace for international commercial flights, many of the world’s most popular travel destinations are reopening to global travellers this summer to help the tourism and hospitality businesses revive.

Tourism entrepreneurs suggest the best strategy in the current situation would be to promote domestic tourism and try to open a ‘fast lane’ connection for international tourism with countries that have, to some extent, been successful in controlling the coronavirus transmission, and have direct accessibility with nations including China, Thailand, Malaysia, South Korea, Hong Kong, India and UAE.

The clouds of uncertainty hovering over the global travel business with no end in sight of the Covid-19 infections across the world have dampened the prospect of recovery for the Nepali tourism sector. Most of the hoteliers and tourism entrepreneurs who talked to New Business Age don’t see much in the way of business until next year and say that the fear of the virus among international tourists has to subside before they travel again. “Coronavirus cases have surged in Nepal at a time when hoteliers are doing all they can for the survival of the business. It looks it may take us a long time to recover as the contagion is likely to worsen here in the new few months,” says Sakya.

According to Majumdar, tourists won’t come to Nepal for a holiday unless the situation is under control and they are convinced that Nepal is safe to travel.  
Kora Tours CEO Amatya thinks that the tourism season for 2020 is almost over. “I have reached to a point to say let’s start planning for 2021 as business for 2020 is gone,” he says.

Banerjee of Hotel Radisson, meanwhile, sounded more optimistic. “What we can see is about 10 percent growth of room bookings from October end onwards. Hopefully, from January things will look better and occupancy will start growing, not by leaps and bounds, but slowly by 30-40 percent. It may take us 3-5 years to make a full recovery,” predicts Banerjee.

Presently, the most important factor to restart activities is regaining the confidence of international travellers, say entrepreneurs. “These are very uncertain times, our business relies on the confidence of travellers combined with the ease to travel and both factors have been affected badly at the moment,” mentions Gyawali of Social Tours.

Hoteliers say that the recovery rests on the government’s plans and policies and to send a message internationally that Nepal is a safe destination.  “In the current situation, we can only train our staff and prepare for robust sanitation measures. Apart from that, everything is entirely dependent on the actions of the government,” opines Neupane of Tiger Palace Resort.

Post-Covid Trends in Hotel Sector
As the pandemic is changing the ways of travel worldwide, new trends are expected to emerge in the hospitality business mostly concerning health and hygiene. Maintaining optimal level of sanitation and social distancing in hotels will be a new industry normal.  HAN CEO Mahat believes that wellness, yoga, meditation, and gastro tourism will be game changers for hotels in the post-Covid era. “Similarly, we will see significant growths in eco, adventure and jungle tourism as tourists will avoid crowded places,” he adds.

Sakya predicts that tourists will start opting for small and medium sized hotels in off-locations to avoid big gatherings. “Adventure, eco, wellness, and nature tourism will be the topmost priority for tourists,” he says.

Conversely, the demand for MICE (meetings, incentives, conferencing and exhibitions) tourism, which saw a boom in Nepal contributing a major chunk of income to hotels over the last few years, will decline sharply post-Covid, according to Majumdar. “The number of events may fall and people’s participation will also reduce. However, the number of family and solo holidays will grow,” he suggests. 

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