Dec 16 - Fitch Ratings expects the European hotel industry's performance to deteriorate in
2012 following the strong recovery in 2010 and 2011.
"A slowdown of the hospitality sector in Europe seems inevitable in 2012, as the
sector is closely linked to changes in GDP growth," says Johnny Da Silva,
Director in Fitch's Corporates team. "In this context, the challenge for most
hotel operators will be to maintain occupancy rates and the pace of their
development programmes in a slower economic environment."
Fitch's outlook for 2012 contrasts with the strong year in 2011. Fitch notes
that in western Europe, occupancy rates returned to historical levels for the
largest hotel operators in all segments (from budget to upper-end). Hotel
operators successfully implemented expansion programmes in their core and
overseas markets through acquisitions of hotels or signing franchise and
The industry research company STR Global reported a 1.9% year-on-year
improvement of room occupancy rates for hotel operators across Europe in October
2011 and RevPar growth of 2.8% year-on-year. However, RevPar performance varies
by countries and cities. For instance, in London RevPar went up 7.8% year-on
year in the nine months ending October 2011, while declining 0.7% year-on-year
in October 2011, reflecting a deceleration of occupancy rates. Premier Inn
(Whitbread's budget hotel chain) reported like-for-like sales growth of 2.6%
year-on-year for the 13 weeks to 1 December 2011.
On a positive note, most large companies are continuing to develop their
distribution capacity (e.g. internet) and leveraging their brands. For instance,
Accor ('BBB-'/Stable) is regrouping some of its brands under the IBIS brand.
Over the past two years most hotels operators have shifted their business models
towards a more "asset-light" operating structure by signing franchise and
management contracts in their core European and international markets. The
"asset-light" model championed by companies such as Accor or Star Eco focuses on
limited capex and reduces profitability volatility.
In addition, following the 2009 recession, most large hotel operators gradually
switched their fixed leases to variable leases based mainly on revenues, which
has enabled them to share the cost of an economic slowdown with landlords.
Notwithstanding these recent initiatives, in 2012 Fitch expects business and
leisure demand to weaken, given reduced expectations for economic growth in the
eurozone. Consequently, Fitch anticipates a stabilisation in operating
performance and slower pace of deleveraging for most hotel groups, following
rapid recovery from 2009.
In the 2009 economic recession, EBITDA for some hotel groups declined by as much
as 30% year-on-year. This led them to implement cash preservation measures such
as cutting capex to 50% from 20% year-on-year in order to maintain their
financial profile. This was the case for Accor, Whitbread Plc ('BBB'/Stable) and
A more pronounced impact on financial performance from the Eurozone crisis in
2012 would likely translate into a slowdown of asset transactions, such as
sale-and-leaseback. In particular, less support from lending banks may also
limit expansion programmes, develop new projects or facilitate growing
Smaller independent hotel chains will be more vulnerable in this context as
banks are increasingly reluctant to lend on a loan-to-value basis (given that
some of legacy loan exposures have yet to be refinanced in the bond market).
Smaller chains may focus on repaying debt rather than pursue growth.
Fitch expects branded hotels to gain further market shares over independents in
a more severe economic environment as they are more financially robust. This
relates to their competitive advantage in using online booking reservation
systems, better customer segmentation and greater flexibility in managing their
marketing budgets. By category, Fitch believes that the low-end, economy and
budget segments are likely to show stronger resilience in a pronounced economic