Oversupply of rooms, weak rupee dent hospitality sector margins

The year 2012 has been a mixed bag for the hospitality and tourism industry, hit by oversupply of rooms, Euro zone crisis and reduction of capacity in domestic airlines.

“By and large, we bid adieu to 2012 with mixed feelings. Reduction in the domestic airline seats capacity as well as additional supply entering some of the markets meant that all of us had to re-calibrate our projections and take proactive steps to search for new growth markets. For The Leela, we managed to show growth relative to the competitive set in each of our markets,” said Deepak Khullar, Vice-President (Sales and Marketing), The Leela Palaces, Hotels and Resorts.

Occupancy was affected due to new hotel rooms and the slowdown. Average room rates did not move up as expected.

Market price-inelastic

“The demand is yet to reach pre-recession period levels. The big difference the industry is experiencing this year is that the market has become relatively more price-‘inelastic’, inducing pressure on yields,” said Nakul Anand, Executive Director – ITC and president, Hotel Association of India.

Individual business travel has shown moderate growth of about 4-5 per cent across all markets. However, owing to the cutbacks companies imposed on discretionary spends, the MICE market remained sluggish overall. Whilst new hotels have seen impressive growth over the previous year, existing hotels have not seen much growth.

The euro-zone crisis has mainly had an impact on inbound leisure tourists.

“The weak rupee has had a negative impact on our cost of imports as well as a steep rise on our cost of external borrowings,” said Khullar.

Mixed outlook

“Cautious optimism” is the outlook of the hospitality industry for the year 2012.

“This would best describe how the travel and tourism industry would perceive 2013. Business destinations continue to lead the charge. Increased inventory in key destinations and other macro economic factors may continue to put pressure on rates leading to lower RevPARs (revenue per available room). However, volumes are showing upward mobility. The numbers, however, are in comparison to a lower base in the previous year,” Anand added.

“We expect year 2013 to be more stable globally and internally. We would still be largely dependent on what happens in other global markets during 2013,” said Anil Madhok, Managing Director, Sarovar Hotels.

A lot of new supply will come in in 2013 as well. Rates will remain under pressure. One defining trend will be high payroll costs despite sliding top line sales. Hotels will have to look at multitasking, rationalising staff and investing in technology to reduce energy costs, which would be another major expense.

Holidays dearer

A depreciating rupee made international holidays expensive this year. “We witnessed considerable demand for domestic and short-haul holidays. Air fare for domestic destinations witnessed substantial increase. This was primarily due to reduction in the number of flights scheduled for various domestic destinations with demand for air travel being considerably high. Implementation of service tax also affected the Indian tourism industry in the year 2012,” said Vishal Suri, Deputy Chief Operating Officer, Tour Operating, Kuoni India.

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