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Can hotel industry bounce back? – Part II

CORRESPONDENT
Can hotel industry bounce back? – Part II
Since financiers are not philanthropic by nature, and often tend to be risk averse, they would need to be convinced by presentation of factual data that they would not be throwing their money into an abyss.

They would be keen to see a shift in the business model that would result in sustainable operational efficiencies and less pressure on an already strained balance sheet.

They would be keen to see evidence that would demonstrate that operators are well alive to their environment and challenging business landscape. An assurance that it will not be business as usual going forward.

This article focuses on engaging four of the key stakeholders in the hotel industry; financiers, investors, the government and HATAB. It also touches on operational efficiencies likely to be derived through conservation of cash, strategic sourcing and cost containment. 

Financiers

Occupying a high spot in the list of stakeholders would be lenders. This is the time to be proactive in starting those difficult conversations with financiers. Perhaps more than ever before, this time of financial distress calls on operators to seek cash injection in order to ease the pressure normally created by cash flow challenges.

Since financiers are not philanthropic by nature, and often tend to be risk averse, they would need to be convinced by presentation of factual data that they would not be throwing their money into an abyss. They would be keen to see a shift in the business model that would result in sustainable operational efficiencies and less pressure on an already strained balance sheet.

They would be keen to see evidence that would demonstrate that operators are well alive to their operating environment and challenging business landscape. An assurance that it will not be business as usual going forward. Key amongst interventions to be employed by operators would be how they would enhance their marketing strategy going forward, clearly articulating the costs of such interventions as well as envisaged rewards.

One way of winning support from financiers is for operators to analyse their past performance, factor in the COVID-19 effect on their business and produce qualified forecasts on performance for the next six to 12 months. To test the strength and resilience of such forecasts, they should be interrogated for sensitivity to a lower than projected room occupancy rate and to other factors that could exert a downward pressure on projected earnings.

Cost containment

Financiers would want to see what operators plan to do with a view to embracing an enhanced culture of strategic sourcing, austerity and cost containment. They will only entertain operators selling themselves through well-conceived and realistic plans. Financiers would be prone to listen to operators keen to engage them as partners, not as competitors. It would be essential for operators to hit the transparency highway with guarded vigour and share with potential lenders their mitigation strategies to all key risks, current and potential, through a well-crafted high level risk register.

A comprehensive business continuity plan and an objective assessment of all losses detailing all pertinent information would add value to the negotiating strength of operators. In their engagement of lenders, operators should sharpen their negotiation skills, especially in view of the fact that financiers would lean in favour of charging higher interest rates for any short term funding.

Operators wielding a well fleshed out strategy would also stand a good chance of persuading financiers to consider restructuring of their loans. Clearly, any proposals presented by operators who are not well prepared to engage financiers would never see the light of the day. However, in view of the fact that foreclosures might prove unattractive to financiers, at least for now, operators should not approach lenders as if they are beggars. Although foreclosures might eventually take place, such an approach would not be the financiers’ first line of defence against struggling operators. The question at the forefront of financiers’ minds would be, “what can we do to work together to survive this inclement weather?”   

Hotels must have already started the process of engaging their insurers with a view to putting through claims for business disruption. Some of them might be disappointed that while they thought they were well covered, they were in fact not. There might be some ventures that have never considered such a cover, especially those at the lowest end of the lower-tier bracket of hospitality establishments. This is an opportunity for them to court insurers who would be willing to cover force majeure events that would, apart from covering natural disasters and civil unrest, also include epidemics, pandemics and all government mandated shutdowns.

Cash conservation and engagement of suppliers

Financiers would be interested in a well thought out policy framework that would enable hotels to chart a sustainable way toward conservation of cash until revenue generation reverts to normal. Hotels that would only be profitable in paper would always be a few moments away from going belly-up when thrown in the woes of cash flow shortage. How would hotels be able to conserve cash? There are several ways of doing this. Key among these are, a proactive and focused review of all line item expenses, reevaluation and where possible followed by restructuring of existing contracts, negotiation of discounts and favourable payment terms with key suppliers, shelving of all scheduled maintenance and capital projects that can wait, deferral of non-mandatory operating expenditure and deliberate reduction in all discretionary costs associated with travel and entertainment. A caveat is in order here. Any postponement of maintenance that is overdue but which might catch the eye of patrons would earn management the wrath of guests and they might be motivated to take their money to more deserving outfits expressly demonstrating that they value their custom.     

 

A wholesale review of all tenancies in hotel premises such as for food and beverages, the gym and retail space might be of interest to financiers. This is essential in view of the fact that social distancing protocols could result in reduced patronage to such establishments, which might in turn adversely affect their capacity to sustain payment of rentals expressed in their leases for the balance of unexpired terms. 

Offering guests a total travel package

Hotels should seek and pursue effective ways of harnessing synergies. Potential guests would naturally gravitate to establishments braced to offer them a cost effective but attractive and unforgettable experience. Focus should therefore not be on provision of room only, but should be extended to cover ancillary needs of guests such as airline fares, health insurance, car rental, safari tours and other places of interest. For this to be fruitful, operators should fully appreciate the environment they are working in and take the initiative to approach potential partners. 

Investors. Executive management is charged with the responsibility

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of generating value for investors. There is an opportunity for review of existing relationships between owners and operators. Rather than being comfortable with receiving a monthly rental payment, as was the case in some establishments in the pre-COVID-19 era, some investors may choose not to limit their interest to the real estate element only. There is an opportunity to restructure their relationship with operators that could enable them to move from a mere business lease and a fixed income regimen to taking on a more active interest in the performance of the hotel as an investment instrument, thereby accepting variable rental regulated through a management agreement. An objective cost-benefit analysis would be essential. Perhaps, a projection on performance for the next 12 months might assist investors in making value based decisions on this matter.

Just as investors would have benefited from windfalls brought about by a favourable operating environment, they should also demonstrate their passion and commitment toward snatching from the fire an industry that has created wealth for them in the past. Capital injection might be the way to go. Their interest of course would not be in throwing money at the problem, but in assisting challenged businesses with potential for revival.

Operators would therefore need to be transparent and convince them with facts and figures. Where management fails, it might well be that such hotels could be candidates for alternative use. Even then, the necessary reconfiguration required for a perfect fit to the new use would demand ploughing in of capital. Operators should not be quick to throw in the towel though. Apart from traditional financiers, there are a good number of private equity holders who would be keen to make gains out of assets going through stress now but with potential for recovery. 

Government and HATAB

The government has to start by acknowledging that at a macro-level, the country is teetering on the brink of a recession. In view of the adverse effect of an ailing hotel sector on the economy, the government has to find ways of doing all in its power to keep hotels as viable enterprises offering gainful employment to part of the citizenry. No doubt tourist centres which benefited for a long time from domestic, regional and international guests are not only suffering from empty guest rooms, but also from an unprecedented hardship occasioned by loss of income by key partners such as tour operators, safari operators, fine wining and dining establishments and even the informal sector.

It is not only the viability of hotel investments which is at stake, but also what was considered in the past as sustainable sources of revenue to downstream activities. The government’s interests should be in the resumption of normal operational activities of hotels and retention of furloughed workers. Since the government cannot impose itself in the operational space of hotels, one way of doing this would be by engaging hotels and HATAB with a view to coming up with hotel sector specific relief packages. Piggy backing on HATAB’s influence, hotels would do well to deliberate on issues affecting them with a view to finding ways of meaningfully engaging the government.

There is going to be a phased approach to revival of the hotel sector. It would probably start with domestic individual and corporate travel that would see hotels getting support from locals. In time, revival would result in the widening of the catchment area to draw in guests from the region and further afield. At a policy level, perhaps driven by the African Union and regional organs such as SADC, governments in Africa should take the position that they want to lead from the front in reviving the hotel industry by creating an intra-Africa market for travel and hospitality. One way is by relaxing onerous conditions on issuing visas and opening up their skies for national airlines of African countries.

If a Schengen visa allows its holder access to 26 countries for a period of up to 90 days, surely this could motivate African countries to come up with similar or better offerings. Is there a good reason why the 16-member Southern African Development Community (SADC) does not have a common visa that allows entry into all these states? Could this cause some harm to the national sovereignty of any of the states? If so, is there anything stopping these states from speeding up the process of dealing with issues regarding this?

All efforts should target reduction in the cost of travel and perhaps a move toward hosting a good number of conferences and conventions on Afro-centric issues that are normally held in developed countries. It is always frustrating to see Africans traveling abroad to attend such conferences.

Another way of facilitating intra-Africa travel is through road connectivity. This is important particularly given the social distancing protocols that would see airlines losing at least 30% of their aeroplanes’ capacity. No doubt this will push flying out of affordability range for most Africans. As the cost of flying becomes more expensive, the cost of road travel might be more manageable for many. African countries would of course need to work not only on construction of new fit for purpose roads but also on maintenance of existing ones. This might take time while countries are still struggling with dedicating the bulk of their meager resources to curbing the spread of the coronavirus, treating the growing number of victims and developing badly needed health facilities.

Conclusion

Certainly, the hotel sector has been badly hit by COVID-19 and would never look back at the year 2020 with nostalgic fondness. The route to revival promises to be long and painful. Right now there are players who make up the revival team. Each one has to play their part, setting up goals and vigorously pursuing them, perhaps motivated by the words once spoken by Michelangelo di Lodovico Buonarroti Simoni, “The greater danger for most of us lies not in setting our aim too high and falling short; but in setting our aim too low, and achieving our mark”.

This is the time for ineptitude to yield to meritocracy. As operators, staff, guests, investors, lenders, suppliers, the government and HATAB all chin up and work on turning the raging tide on the hotel sector, we have reason to believe that ultimately, all establishments that were jam-packed with patrons only six months ago will once again start filling up, albeit gradually.

PAUL MORE*

*Paul Batshedi More is a property specialist and motivational speaker



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