Fear of Sars could wipe out Asian hotel profits

01 May 2003 by
Fear of Sars could wipe out Asian hotel profits

Hotels with a high exposure to the Asian market could struggle to survive if the Sars epidemic is not brought under control by the summer, or autumn at the latest.

Of UK-listed companies, Millennium & Copthorne (M&C) is seen to be most at risk, as Asia contributes between 28% and one-third of its profits.

"Some hotel groups are going to be badly affected if the epidemic is prolonged," predicted analyst Peter Joseph at stockbrokers Peel Hunt.

M&C, he added, could see its Asian profits "almost disappear". The risk, he said, was reflected in its share price, which has dropped to less than £2 from £4 a year ago.

Other groups at risk include both InterContinental Hotels Group (IHG) and Hilton, which derive 6-8% of their profit from Asia, and French group Accor, which makes 4% of its profit from the region. However, the fact that many hotels are management contracts or franchises will dilute the impact.

Nevertheless, IHG's first-quarter trading statement last week revealed its Asian hotels had performed well until the outbreak of Sars in mid-March, while its properties in Europe, the Middle East and Africa had suffered.

"The effects will be severe if not contained," agreed Richard Chamberlain, hotels analyst at Goldman Sachs. "Bookings in Asia have recently fallen off a cliff."

Hoteliers in the Far East are reluctant to divulge current occupancy figures, but the Hong Kong Hotel Association has said five-star hotel occupancies are at 10% - although they could be lower. Singapore occupancies are about 20-30% from a norm of 70%. Occupancy levels at Mandarin Oriental's Hong Kong and Singapore properties are believed to be about 5%.

Mark Abramson, hotels analyst at the New York office of Bear Stearns, believed M&C was less at risk than perceived, as its profit stream was concentrated more in Taiwan and Korea rather than the worst-hit areas of Beijing, Hong Kong and Singapore.

The real concerns, he said, centred on Asia-based groups such as Raffles, Shangri-La, Hong Kong and Shanghai Hotels, and Mandarin Oriental, which derive a third of their profits from Hong Kong and Singapore.

Brokers were particularly wary of the last two groups, which have high levels of debt. Although Abramson pointed out that break-even occupancy levels were much lower in Asia, he warned that unless the situation improved significantly by the summer or autumn, "they are going to have to get some support from their banks and controlling shareholders if they are going to survive this epidemic".

Across the Pacific, hoteliers in Canada's largest city, Toronto, have reacted with fury at its being named by the World Health Organisation (WHO) as the first Western destination to avoid.

"Toronto hoteliers take their cue from the health officials. They say the no-go is unwarranted," said Rod Seiling, president of the Greater Toronto Hotel Association, which represents 150 hotels. "The warning is devastating to the industry and its employees."

Although Toronto hoteliers remain upbeat, reports suggest occupancy has fallen to 40-45% or lower. Abramson believes they must be struggling, because there has been a "big lull in the pace of finance services travel into Toronto, which is one of the biggest industries driving upscale hotels in the city", and several business and medical conferences have been cancelled.

There were hopes that the WHO might reverse Toronto's rating this week. Canada's prime minister, Jean Chrétien, has pledged Cdn$10m (£4.3m) to help the country's tourism sector recover.

Sars update
\* Last week Toronto, Beijing and China's Shanxi province were added to the WHO list of no-go travel destinations. They joined Hong Kong and China's Guangdong province, where Sars is thought to have originated.

\* Experts are optimistic that Sars has peaked in all travel-alert regions except Beijing, where cinemas and caf‚s have closed and hospitals are in quarantine.

\* Vietnam is believed to be the first country to have contained the epidemic, but Shanghai in China is expected to see case numbers soar.

* As Caterer went to press, 5,050 cases and 321 deaths had been reported from 26 countries. In addition, South Korea and New Zealand have both reported their first probable Sars cases.

Business as usual at Heathrow
Contract caterers have reported business as usual at the main airport terminals serving Hong Kong and Canada.

A spokeswoman for Sodexho said that, although the company operates North American departure lounges at Heathrow, staff had not noticed any passengers wearing masks. Neither had they noticed a tail-off of business, other than a slow-down in bookings since the start of the Iraq war.

Even so, all staff in the company have been issued with the Sars guidelines from the NHS website.

By Angela FrewinSource: Caterer & Hotelkeeper magazine, 1 - 7 May 2003

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