Jeffrey R. Immelt, chairman and CEO, GE, cancelled his trip to India due in the first week of October in response to the “exigencies” back home in the US. These, of course, included a third successive quarterly decline in profits and raising $15 billion (Rs 72,000 crore) from a stock sale.
There is a drop in number of foreign tourists visiting India
Then, Jim Doyle, Governor of Wisconsin, called off his trip to India, scheduled for November this year, after a series of bomb blasts shook several Indian cities. The 258-member delegation accompanying him would have netted India an estimated Rs 2.1 crore in tourism earnings during its proposed five-day stay in the country.
While these are only two highprofile visits that weren’t, they are by no means the only ones who did not board their flights— it’s becoming a trend that has the Indian tourism and hospitality industry on tenterhooks.
“Ours is an industry that derives its demand from other sectors. There is a direct correlation between GDP growth rates and tourism growth figures—so, to say that there will be no impact of financial meltdown will be wrong,” admits Nakul Anand, Divisional Chief Executive, Hotels, ITC, who estimates the downswing to be 10 per cent this year. “The acid test, however, will come after November as we are currently riding on the crest of bookings made some 5-6 months in advance. Plus, October has a lot of holidays, so corporate travel will also be down,” he adds, an indication, perhaps, that while he is high on optimism, there is a palpable nervousness in the market.
It’s not without reason that hotels and travel agents alike are feeling knots in their stomachs. The US (along with Canada) and Europe account for almost 50 per cent of India’s inbound tourist arrivals, which, in 2007, crossed 5 million for the first time since Independence. In fact, the US, at 15.73 per cent, and the UK, at 15.67 per cent, brought in over 31 per cent of the total tourist arrivals of 5.08 million last year. But while the financial turmoil will take its toll, top-end corporate executive travel is certainly down for the financial services and ITES sector—the recent blasts at Bangalore, Ahmedabad, Delhi, Malegaon, Modasa and Agartala have shaken tourist confidence in the country.Flat year for travel companies?
“A prospective tourist makes his decision based on what he sees on television. So, while a stray bombing might be dismissed, a series of bomb attacks across the country—with a potential threat of more to come—has an effect on the psyche of a tourist,” says Madhavan Menon, MD, Thomas Cook India. Menon, in fact, adds that, while on its own, the financial meltdown will not have significantly slowed down the inbound arrivals, combined with the security situation in the country, it may result in a flat (no growth) year in terms of earnings for many travel companies.
Arrivals this year could be hit by up to 18-20 per cent, and leisure destinations such as Rajasthan and Kerala are likely to bear the brunt of large-scale cancellations. In fact, data shows that even before the peak tourist season— October to March—got under way, the rate of growth in inbound tourist arrivals was significantly down this year vis-à-vis 2007. In July and August 2008, for instance, the growth figures have tapered to 7.4 per cent and 9.2 per cent, respectively, from 18.5 per cent and 17.5 per cent in 2007 and 2006.
“On an average, there’s a 10-14 per cent growth in tourist arrivals year-on-year. This year, while the first half has seen around 12 per cent growth, the second half may be much slower—growing by about 5 per cent only. So, the average yearly increase this time may be in the region of 7-8 per cent,” feels Ashwini Kakkar, Executive Vice-Chairman, Mercury Travels.
India calling! Not now, say tourists
Foreign exchange earnings, too, have been hit by two factors. First, cancellations from the US and UK, India’s two biggest source markets, have already crossed 26 and 20 per cent, respectively, since the start of the financial year. Normally, cancellations from both countries are around 10 per cent of the total bookings.
Secondly, companies overseas are cutting slack. Yahoo!, for instance, has cracked down on noncompliance with travel entitlements. It is strictly monitoring adherence to expense limits for various cities and airfares and booking hotels only from their approved list. For air travel, any ticket booked above a difference of $200 (Rs 9,600) more than the cheapest air fare gets flagged to the Senior VP level.
Measures like these are prompting hotels in India to revise their targeted room nights, which in some cases, are lower this year than the corresponding period in 2007. “It is the high-end leisure market that will be affected, while some mid-value travellers will become low-value tourists and, yes, while India, per se, is still an attractive destination, the guy there (in the US and Europe) doesn’t have the money to spend—more so due to the higher air ticket prices than anything else,” argues Patu Keswani, Chairman and MD, The Lemon Tree Hotel Company.
On tenterhooks: The tourism and hospitality industry
Indeed, as Keswani points out, growth in revenues will not be a problem—the industry, on an average, is expected to report growth of 15-20 per cent. His bullishness will see him raising Rs 680 crore this year to fund his expansion plans and he is also getting into a 51:49 JV for a 200-room project in New York with an investment of $47 million (Rs 225.6 crore).
What may be of concern, Keswani says, will be the momentum, as the expected growth was slated at 25 per cent. It’s barely the beginning of the peak tourist season and hotels across the spectrum are already discounting their rooms.
At The Park Hotels, for instance, the best available rate (BAR) is hovering at Rs 10,000 against a rack rate of Rs 14,000—exclusive of taxes. The average duration of stay is also down from 3.25 days to 2.75 days while delegation strength for conferences has also halved—from 15-20 to 7-9. And given the sombre economic mood globally, the incentive market is completely down. Even at upscale business hotels like The Oberoi, New Delhi, one can get a standard room for Rs 10,500 against a rack rate of Rs 18,000 (exclusive of taxes)—a discount of over 41 per cent. Much of this discounting has to do with lean corporate travel this month due to a surfeit of holidays. This anomaly, say hoteliers, should correct itself in the next month—with the result that the difference between the rack rate and the BAR will be considerably reduced. New entrants, beware!
While the established players may be able to sail through with a few bruises, it’s the new entrants whose survival could be in jeopardy. The meltdown has already claimed one victim—Dawnay Day Hotels, which has been sold off even before it welcomed its first guest. According to its MD Mandeep Singh Lamba, except for the three properties coming up—in Jaipur (January 2009), Ahmedabad and Pune (mid-2010)— all other proposed hotels will have to wait for the green light from the new owners.
More than the pain in the current quarter, it’s the next 3-4 quarters that are scaring the living daylights out of the tourism industry— that is when the after-effects of the current downturn will become visible. Belt tightening has already begun— mostly concentrated around trimming the workforce or rationalising it. “Over the years, the hospitality industry, riding the boom phase, converted some of its variable costs into fixed costs—such as manpower costs in back-of-the-house areas. These can be outsourced without compromising service quality,” says ITC’s Anand.
Others like Keswani are looking at redeploying staff across functions and also cutting down on discretionary expenses to shore up their bottom lines. New markets are also being tapped—in particular China, Japan, Eastern and Central Europe and even Pakistan and Bangladesh, which, incidentally, was the thirdhighest source country in 2007 with a share of 9.45 per cent.
Will these measures help? They may not, says Keswani, but they will certainly narrow the gap between expected and actual growth and the industry could well live with that—till another day.