Hotels face RM3.3 bil loss in first half, possibly permanent closure for some

This article first appeared in The Edge Malaysia Weekly, on April 13, 2020 - April 19, 2020.

Concorde Hotel Kuala Lumpur is closed until May 1. Photo by Shahrin Yahya/The Edge

Yap: Conservatively, the country will see up to 30% of hotels closing down either temporarily or permanently.

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CHRIS, who manages a hotel chain in the country, does not know when his hotels can start to receive bookings again. As with most other hotels, his have been unable to accept any guests since the Movement Control Order (MCO) came into force on March 18.

“Everything is uncertain. We really cannot predict. We have nothing to base it on,” Chris (not his real name) tells The Edge.

“We feel numb, we do not know how to react,” he laments of the MCO — an unprecedented measure undertaken to curb the transmission of Covid-19 and now into its fourth week.

“Many (hotel operators) are bleeding [red ink]. Even if the MCO is lifted, will people be brave enough to travel and stay at a hotel?” he asks, adding that it could take up to a year to return to normalcy.

Another seasoned hotelier, who operates a hotel in Langkawi, paints a slightly more optimistic picture. He says hotels on the island generally had a good month in January but that by March, occupancy had declined to about half.

“Since the MCO, occupancy has been zero,” he tells The Edge. But he expects to see a slight pickup in business in July, possibly with 30% occupancy. Very few hotels will be in the black this year, he believes.

Many accommodation providers are also in for a rough ride this year. They face heavy losses and possibly closure. Consequently, some are expected to let go of staff. Already a number have had to make the painful decision to temporarily halt operations. HPL Hotels & Resorts, a subsidiary of Singapore-listed Hotel Properties Ltd, for example, has decided to temporarily cease operations of its Hard Rock Hotel Penang, Concorde Hotel Kuala Lumpur, Casa del Mar Langkawi and The Lakehouse Cameron Highlands until May 1, and Casa del Rio Melaka until April 30.

Malaysian Association of Hotels (MAH) CEO Yap Lip Seng tells The Edge that for the January to June period, hotels are looking at potential losses of RM3.3 billion from room revenue alone (see table). These losses are on the assumption that the MCO will end on April 28. These losses will be far worse each time the MCO is extended.

MAH represents 1,000 hotels in Malaysia with 164,000 rooms.

During the first phase of the MCO from March 18 to 31, hotels lost RM510.75 million in room revenue, and in the second phase from April 1 to 14, an estimated RM570.35 million.

“On average, every 14 days of MCO will cost the hotel industry RM500 million [in losses],” says Yap. And these numbers do not take into account loss of revenue from the food and beverage and events segments.

Yap says, generally, F&B revenue — including that for meetings, incentives, conventions and exhibitions as well as banquets — accounts for 28% of total revenue for a three-star hotel, 37% for a mid-range four-star hotel and 32% for a high-end five-star hotel. “The industry is anticipating a ban on mass gatherings for the next six months and, thereafter, [it would be] dependent on the situation at the time.”

A recent job survey of MAH’s hotel operators reveals “signs of desperation” among employers, Yap says, adding that as at March 20, some 4% of employees had been laid off, 17% put on unpaid leave and 9% had taken pay cuts.

“With little to no revenue since the MCO, hotels are already cutting operational costs, but it does little to help ease the burden of cash flow, in particular payroll. In general, the payroll costs of budget hotels are about 25% of revenue; mid-range hotels, 32%; and high-end hotels, 29%. This represents a third of what the hotels are not making, hence, the difficult decision to impose pay cuts and unpaid leave in order to retain jobs instead of terminating or laying off employees,” he says.

 

Low occupancy and hotel closures

Yap distinguishes Covid-19 from the severe acute respiratory syndrome (SARS) outbreak in 2003. In 2002, Malaysia saw 13.31 million tourist arrivals but in 2003, arrivals declined to 10.57 million. “By 2004, the industry had recovered to 15.7 million [arrivals].”

As the sector has grown over the years, with a projection of 30 million tourists this year, Yap expects the impact to be at least twice as bad as during the SARS outbreak.

Early this year, MAH had projected that the hotel occupancy rate nationwide would improve to 65% this year, after declining for two straight years in 2018 (60.72%) and 2019 (59.99%). Hotel operators were hoping that Visit Malaysia 2020 — which has now been cancelled — would help boost occupancy.

In 2018, foreign tourists’ contribution to accommodation amounted to RM21.62 billion, representing 25.7% of total tourist expenditure. As the original target for 2020 was RM100 billion in total receipts, an estimated RM25.7 billion was to have gone towards accommodation.

With Singapore, China and Indonesia accounting for 64% of all arrivals, which are equally affected by the pandemic, Yap projects the average occupancy this year to be “no more than 30%”.

If so, it would mark a record low and potentially create yet another problem — hotel closures.

According to Yap, hotels face extended losses from March this year onwards and, depending on when the MCO ends, there is a possibility of a “recovery” six months after the order ends. However, the term “recovery” indicates a return of tourists to Malaysia and not a profit recovery for hotel operators.

“Hotels are not expected to record any profit below a 50% occupancy. And given such projections, conservatively, the country will see up to 30% of hotels closing down either temporarily or permanently, with many up for sale even as we speak,” says Yap.

Depending on where your hotel is located and which category it operates in, the scenario can vastly differ. As a hotelier puts it, if a hotel is backed by a tycoon (who has diversified business interests), it would probably survive the downturn, but if hotel operation is your bread and butter, you could face a shutdown.

Two weeks ago, it was reported that Tower Regency Hotel in Ipoh, Perak, would cease operations permanently on April 30 to cut losses. It was also reported that five hotels in Melaka may face the same fate as their business has been badly hit.

Yap observes that tourism will never be the same again, particularly hotel operations. “The very essence of the hospitality industry revolves around human interaction and various sections of the hotel will need to evolve and change to accommodate disease prevention, especially food and beverage.”

Meanwhile, similar to a move undertaken by neighbour Singapore, Malaysia has gazetted hotels to be used as quarantine centres.

“In view of the high number of Malaysians returning to the country due to the pandemic, the government has mandated that from April 3, all returnees must be quarantined for 14 days. MAH took the lead and assisted the government in sourcing for hotels at a minimal cost and, as at April 10, had secured more than 23,000 rooms for the purpose. The hotels have been officially gazetted as quarantine centres.

“The rooms, being funded by the government, are expected to assist the hotels that have offered their properties with operational revenue,” Yap says, adding that the hotels are participating as part of their corporate social responsibility initiatives.

 

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