Friday, 4 September 2009

Facing Winter without Food

4th September 2009

The Malta Independent - Friday Wisdom

Hoteliers are like ants facing winter without food.

At this time of the year, with August behind us and the tourism season past its peak, hoteliers would normally be counting their treasure and wondering how much of it can stay preserved as true profit when the lean winter months turn cash flow negative. Like ants they work hard in summer, when most of us are holidaying, and store resources to get them over the lean winter months, hoping that at the end of the financial year there will be enough left to justify their efforts and their return on capital. They hope there will be enough resources left to finance further investments to remain fresh and competitive.

This year rather than counting their treasure most hoteliers are scratching their heads and wondering if they have enough oxygen left to get through winter.

Considering how important tourism is for the general economy and for wide distribution of the wealth it creates, the problem is not just owned by hoteliers; it belongs to us all.

This year most hoteliers have probably not been far out in the number of guests staying at their hotel. But they are far out in their profitability. To get close to the numbers in volume terms they have had to discount extensively and all these discounts represent a straight one for one wipe off their bottom line as costs cannot respond in similar matter. The bulk of their costs are payroll, energy and maintenance/supplies. Payroll is a sticky expense with little space for economies except through redundancies or short work-weeks, which cannot be implemented while chasing volumes. Energy costs have gone up and maintenance costs tend to increase during lean periods, as hotels undergo extraordinary jobs during low occupancy periods.

The only solace comes from savings on financing costs as low interest rates make a positive contribution to the bottom line through savings in non-operating expenditure. The low interest rates most depositors are getting on their bank deposits indirectly subsidise the finance costs of business borrowers, not least hoteliers who borrow to finance their asset rich businesses.

The question hoteliers are asking themselves and everybody around them, is whether this is a one-off bad year or the start of a series. Given that tourism is very much dependent on the macro-economic performance of the main EU countries, our hoteliers have to make guesstimates in order to drive their business forward about whether 2010 will see a V shaped recovery from the recession or whether economic performance will be L, W or U shaped meaning that recovery will be slow, and that one should not expect the 2010 financial year to be much better than 2009.

This is a question that is vibrantly debated between economists and investment managers. Hoteliers cannot just debate such semantics. They have to base their business decisions on their view of the world one way or the other. They have to soon decide their rate strategy for 2010. They have to decide what investments are absolutely necessary and most of all they have to know if they have the financial resources, not only to get through next winter, but also through another poor summer after that, if the recovery proves anaemic.

Should government intervene with direct assistance to hotels beyond its contribution to the marketing efforts of the Tourism Authority? Can the government afford it, seeing that its own finances have suffered as well and will be way, way out of the planned deficit for 2009? Even if it can afford it, how can such assistance remain within the limits set by the EU single market, no subsidies, obligation?

These are not easy questions to answer but doing nothing is no solution either. Simply hoping that hoteliers can somehow get through the winter and that next summer everything will be business as usual is management by hope to the point of irresponsibility. We should hope for the best but we have to make back-up plans in case the best proves elusive.

There is no silver bullet. The true solution is resorting to strong international economic growth. But this is beyond our ability to influence. We can only react to, not influence, international economic realities.

Solutions cannot come from a single source. It would be wrong for hoteliers to expect government to come to their rescue. Banks cannot be expected to increase their risk unduly to keep hoteliers afloat during this difficult period. On the other hand leaving hoteliers to their own destiny could involve the death of set-ups that deserve to be assisted and saved.

Those hotels that have not made sufficient profits in the good years and are facing an existential threat from one bad year probably don’t deserve to be rescued. But those that have proven their ability to generate profits during the good times should be assisted if the current bad scenario prolongs.

It is time for the Tourism Authority to start serious consultations with the MHRA to see what sort of rescue packages would be needed if the crisis prolongs beyond next winter. If we let the deserving ones fail who is going to be there to take advantage of the rebound, when finally it comes? The theory that it is the second mouse that eats the cheese could have some short-term appeal but for the long term it does not promote investors’ confidence in the industry.

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