Slowdown in Sydney

While hotels in New York and London have been rocked by the terrorist attacks in the USA and the subsequent war, in Australia the collapse of an airline has exacerbated the oversupply of hotel rooms and an economic downturn. Sara Guild reports from Sydney.

To say that it has been a rough year for hotels in Sydney, Australia, would be to put it mildly. At the beginning of the year, the expected uplift in occupancies following the 2000 Olympics didn't materialise, sparking talk of an Olympic hangover. By August, the effects of the expected slowdown in the global economy were beginning to show. The events of 11 September were compounded when Australia's second-largest airline, Ansett, went into voluntary administration and stopped flying three days later.

According to consultancy Andersen's hotel industry benchmark survey, room rates in Sydney fell by 52% in September, with occupancy declining by 23%. The overall result was a 63% drop in revenue per available room (revpar) compared with the same time last year. The drop is not due entirely to September's events, but also to the fact that rates and occupancy last year were boosted by the Olympic Games.

The pre-Games marketing of Australia and Sydney, and the success of the sporting event itself, had led hoteliers to believe that they were in for a boom in the Antipodean summer. But visitors failed to materialise and those who did were spoilt for choice, especially in Sydney's central business district.

Six new five-star hotels with a total of 1,227 bedrooms had been added to downtown Sydney in the two years preceding the Olympics. Across all categories, 12 hotels were opened in central Sydney in 2000, according to Andersen's survey for 2001.

But there were already signs of trouble before 11 September. Andersen's survey for August 2001 showed that occupancy in the first eight months had fallen by 3.3% for hotels in Sydney, while rates had fallen by 4.1% to an average of A$166 (£59.20). This resulted in a 7.2% drop in revpar compared with the same period in 2000.

"While an economic downturn was expected, the severity of this downturn, combined with the impact of new supply and falling demand in the wake of recent world events and the Ansett failure, has left many hoteliers unprepared," says Rutger Smits, Andersen's director of hospitality and leisure services, Australia.

Overcapacity

While everything is discussed in terms of pre- and post-11 September, the blame for poor performance before the autumn events is placed at the door of overcapacity. "There wasn't the demand to fill the supply," says Stephen Lewis, general manager at the five-star, 561-bedroom Regent Sydney. "We did 60% occupancy in June to August, and had forecast 10 points higher than that."

At least one of his competitors agrees. "Lots of people stayed until October," says Fred Matti, general manager of the 416-bedroom Westin Sydney. "But it's true that hoteliers thought it would be more buoyant after the Olympics. I think people expected too much too quickly."

The Westin opened in September 1999 and had time to establish itself in the corporate market before the Games, but other newcomers opened later and concentrated on the Olympics. By January 2001, the Radisson Plaza Hotel Sydney had just 50% occupancy. Average rates for its first six months were A$180-A$190 (£64.20-£67.80), buoyed by rates of A$300-A$400 (£107-£142.80) during the Olympics. Now the average rate has dropped to A$160 (£58) and general manager Rick Erdos is concerned. "We have had to adjust our rates to build occupancy at the expense of yield," he says. "Revpar is A$90 [£33] now. I am hoping that will hold, but there is pressure."

Knock-on effects of rate cuts

While the Radisson Plaza calls itself a five-star hotel, the rates are clearly four-star compared with the top-of-the-market rates of A$220-A$260 (£80-£95).

For Erdos, the concern is that those at the upper end will be forced to reduce rates, forcing the Radisson Plaza and others like it even further down. But for now he doesn't have to worry. Lewis at the Regent says: "We have not dropped our rates, and we cannot afford to do that without compromising the hotel and our standards."

His average achieved rate is A$260 (£92.80), compared with about £260 (A$714) at the Four Seasons London. "That makes us 300% cheaper but our labour costs are similar to London," he says. "Cutting rates now would be the wrong thing to do." He forecasts yields of A$170 (£62) for 2001.

But Lewis acknowledges that before 11 September, 85% occupancy was forecast for October and 92% for November. Both figures plummeted to about 50%. With labour costing 60% of turnover, Lewis took the decision in early October to shut 120 rooms and lay off 37 members of staff.

Matti agrees that cutting rates is pointless. "If people are not going to travel because of fears for their safety, they are not going to travel because rates are cheaper," he says. His average rate is A$240 (£87) and he has revised his occupancy forecasts down by 6%, expecting occupancies in the low 80s. He forecasts a drop in turnover of 5% for the year and a "soft first quarter" for 2002.

Much depends on the business mix of the hotel. Westin has 45% corporate, 30% leisure and 20% international groups. As it is US-owned, it is unsurprising that the USA accounts for 25% of its market.

The Four Seasons-owned Regent is heavily exposed to the US market, with 40% of its clientele coming from North America. The corporate market accounts for 47% of the business. Another badly affected area, especially since the collapse of Ansett, is the Japanese market, which accounts for 15% of the Regent's business. In addition, Lewis says his cruise ship accounts will be "heavily hit".

The Regent and Westin may be holding their rates, but corporate clients and tour operators are piling on the pressure. Russell Durnell, sales and marketing director at W hotel, knows of firms contacting hotels to say they don't expect a rate increase - they want a 20% reduction.

"That is a fairly inelastic attitude," says Durnell, "but there are some hotels that will agree to that. The smart sales and marketing director sits down and talks about adding value, not just cutting rates."

The W will turn over about A$10m (£3.6m) this year, with an average achieved rate currently at A$254 (£92). Durnell would expect that to be A$270 (£98).

One operator who freely admits trying to attract business through rates is Derek Picot, regional director, Australia, for Le Méridien and general manager for the Le Méridien Sydney and Rialto Melbourne hotels. Picot is a Briton who oversaw the rebranding of the Heathrow estate of the Forte Group before taking up his Le Méridien job in June. "We're buying the market, and building our business and our rate," he says. "This is not a rate war, but a war for the hearts and minds of corporate customers."

The hotel's average achieved rate is A$176 (£64), including 10% tax. Picot says the rate should be A$200 (£73), but first he wants to get people through the door. "My strategy is to build the business, get the clients in and build the reputation of the hotel," he says.

Low-rate business

Picot is not concerned that, having brought customers in on a lower rate, it will be hard to raise it. "I'm fairly strategic and you can move business around that you do not want," he says. "By shifting out low-rate business, someone will take it, and when higher-rate business comes, you have the capacity and your competitor doesn't."

Le Méridien's client base may protect Picot from the worst of the fallout from the USA - the hotel has 70% domestic guests and only 30% international. And Le Méridien's marketing association with Nikko Hotels will be instrumental in building the Japanese market from 15% to 23%. Yield now is A$120 (£44), but Picot knows it should be A$150 (£55). Turnover for 2001 is forecast at A$28m (£10.2m).

A glimmer of hope for hoteliers comes as a new airline looks ready to rise from the ashes of Ansett, and in wooing back the Asian market. Westin's Matti says: "I think Japanese and Asian travellers who had planned to go to Hawaii or the USA may look for a safer destination and switch to Australia."

Hotel industry and the collapse of Ansett

Three days after the terrorist attacks in the USA, Australia's second-largest carrier, Ansett, collapsed. Overnight, 700 daily domestic flights were cancelled. Two months on, a rescue plan for a new airline, Tesna, has been launched by two Australian businessmen, and existing carriers Qantas and low-cost airline Virgin Blue have used larger new aircraft to add capacity.

The Australian government has pledged A$20m (£7.3m) in a tourism assistance package to support hotels and package-tour operators that have honoured Ansett holiday packages but have not been paid by the airline.

Rick Erdos, general manager at the 362-bedroom Radisson Plaza Hotel Sydney, felt the impact from Ansett more than that of the attacks on the USA. "Hundreds of room nights have been cancelled," he says. "One of our major suppliers used Ansett, and its groups couldn't hop from the Gold Coast down to Sydney."

He adds: "Our domestic corporate travel held OK in light of the 11 September attacks, but the collapse of Ansett made that much worse. The Japanese and Asian market will be affected by the events in the USA, but also by not being able to hop, skip and jump around Australia as they are used to doing."

Fred Matti, general manager at the 461-bedroom Westin Sydney, concurs. "September was the toughest month because of Ansett," he says. "Forty per cent of our business is corporate so [Ansett] impacted us."

The Sydney-to-Melbourne air route is one of the world's busiest, moving 5.4 million passengers a year. The alternative of a 12-hour train ride is clearly not an option for the corporate traveller so, when Ansett stopped flying, they stopped travelling. The question now will be whether the start-up airline can get going and how much it will cost passengers.

"Our guests often fly in from Melbourne. It used to cost them A$300 [£109] return; now it will be A$700 [£255]," says Russell Durnell, sales and marketing director at W hotel, Sydney.

The Japanese market, which accounted for 14.7% of international arrivals to Australia in the first six months of 2001, would have been particularly affected as one of its major airlines, All Nippon Airways, had a route-sharing agreement with Ansett.

The Gulf War is the only analogous period analysts can look at when attempting to forecast the next six months for tourism in Australia. Jones Lang LaSalle has estimated that, in 1991, Sydney was hardest hit, showing a decline of 11% in international passenger air traffic, while the Gold Coast suffered from the economic recession in Australia and lost 26.3% of its domestic traffic.

Tips for working down under

• Australia awards long-stay visas on a points system based on skills shortages. Chefs are in demand, so British chefs eager to work there should easily get a visa.
• Travellers can get a working visa for one year, but you're allowed to stay in one place for only three months, so that discourages hotels from hiring staff on these visas.
• Sydney has a low staff turnover rate - 40%.
• Minimum wage for a waiter is about A$12 (£4.40) an hour.
• If there's a union, expect to work seven-and-a-half hours a day. Extra hours and work after 7pm on Saturdays is paid at time-and-a-half. Work on Sundays is paid at double-time and public holidays at triple-time.
• An executive sous chef can expect to earn about A$60,000 (£21,800), while a director of sales could earn A$100,000 (£36,400).
• Further information: www.workpermit.com or www.ozvisa.com