As per the new IMF growth estimates, in FY21, India is expected to grow at 1.9% compared to 5.8% estimated in January earlier this year. The travel & tourism sector will undoubtedly be one of the biggest casualties of this pandemic. Internationally, the World economic forum has estimated the travel industry to be impacted by a minimum of 25% which is equivalent to three months of travel and could also result in job cuts to the tune of 50Mn jobs worldwide. They also expect the industry to take at least 10 months to recover once the outbreak has been controlled and we return to normalcy.
Travel advisories issued by governments, Visa suspensions, imposition of Sec-144 across India and a complete lockdown of Air, Rail and Road transports even within towns and cities has had unprecedented ramification to the demand in the hotel sector. By February, Foreign Tourist Arrivals (FTAs) to India, especially for leisure, had started to soften but came to a halt by the end of March. International Travel to and from India is expected to be suspended till the end of the current lockdown period which is till the 17th of May. Demand from the FTAs is not expected to pick up any time soon, this is assured by the fact that majority of the future travel bookings for winter i.e. October-March – the strong season for our industry – are done in the summer months, which have largely evaporated.
FTAs are expected to stay subdued till early next year. In the medium term the revival of the manufacturing and logistics businesses should slowly start to bring back business travellers. However, the revival of the Indian Hospitality industry will largely be dependent on the Domestic Travel which could also take 3 to 4 months. In the 5 years before the coronavirus pandemic, the industry witnessed an exponential increase in supply led by growth of the unbranded and alternate accommodation (Home Stays, Hostels, Airbnb’s etc) segment. The demand for this was primarily driven by millennial travellers who have been smitten by the travel bug. This combined with marketing on social media platforms led to a boom in the domestic leisure travel industry. While marketing did play a key role in mobilizing travellers, better affordability thanks to a myriad of accommodation options ranging from hostels to boutique homestay’s and deep discounting by operators offered something for every kind of traveller depending on budget and requirement. On the other hand, ~71% of the demand in the organised segment was primarily driven by Business/MICE travellers.
This means that operators are now facing the possibility of little business for a period of 5 to 6 months with massive fixed costs (65% of revenues), low cash reserves and a big question mark on their own survival itself. While the veracity of the impact on the sector will be only fully known much after the pandemic has been controlled, with 60% of the hotels in India shut and the others operating at single occupancy, the industry estimates suggest that there could be a loss of USD 9Bn – USD 10Bn across organised, semi organised and unorganised segments, reflecting an erosion of ~45% of last year’s revenue. The overall occupancy in the branded hotels segment in 2020 is estimated to decline by 16.7% – 20.5% points over 2019, while ADRs are estimated to decline by 7% to 8% for the year. As a result, RevPAR will witness a significant decline of 31% to 36.2%. A scenario analysis carried out by HVS indicates as seen below:
Going forward, the next 9-12 months are going to be very turbulent for the industry and only the ones that operate with a tight leash on their finances can be expected to stay afloat. With major stress across all businesses the access to bank loans, venture capital and government support will also be hard to come by. The survival of branded and unorganised players will also be highly dependent proper planning and preparations of reopening, maintenance of high hygiene standards, reworking of the pricing since discounting will no longer be an option and strict compliance of government and brand norms. Further, the government could also lend support by deferring or reducing the GST and other such taxes being charged from the operators. Reduction of fees for licenses and renewal permits for both hotels and travel industry could also prove to be beneficial.
The pandemic has negatively affected most businesses, and hotel, aviation and travel seem to have taken the biggest hit amongst all. A lot of hospitality-based companies have faced major financial instability and will continue to face it for another 9-12 months. Its best to be prepared for such unprecedented events by investing in financial advisory services. We at PINC offer financial advisory services with our expertise in mid-market Investment Banking advisory, Institutional Securities Trading, and private wealth management services. We put in meticulous efforts and professional integrity in every financial service we provide.