May 12, 2020 / 12:57 PM / By Fitch Ratings / Header Image Credit: Business Insider
Fitch Ratings assumes the coronavirus pandemic will cause a 60% drop this year in European hotels' occupancy rates, which will not recover until at least 2023. All ratings in the sector have Negative Outlooks or are on Rating Watch Negative (RWN), with smaller high-yield companies most at risk of downgrades.
The virus spread and lockdown measures have drastically reduced business and leisure travel, and led to severe operational disruptions in the lodging sector. Occupancy rates have more than halved and our rating case is for a slow recovery with 2019 occupancy levels only reached by 2023. Our stress-case forecasts show occupancy not recovering until 2025. We do not expect hotels to engage in price wars that will result in materially reduced average room rates, so revenue per available room (RevPAR, occupancy multiplied by an average room rate) should mirror a recovery of occupancy.
The sector will continue to face adverse conditions when the lockdown measures are gradually lifted. Borders may continue to be closed in some countries, limiting international tourism. People may simply prefer not to travel overseas. Some forms of government-imposed social distancing will continue to be in place, which may lead to only selected hotel re-openings. Moreover, stringent compliance cost requirements could add to hoteliers' costs. Hotels' bars and restaurants may have to stay closed for a longer period and conditions for their re-opening may severely reduce their profitability.
Corporate travel will take longer to resume as video-conferencing could be viewed as a suitable substitute for face-to-face meetings by recession-hit businesses. Competition from private lodging assisted by online market places, such as Airbnb, will be intense, given the increased privacy they allow.
Hotel companies, especially branded groups, are adjusting their cost structures to mitigate revenue pressures and shield earnings. The government support schemes in some countries allow furloughing employees and temporarily cutting staff costs. Those companies that own or lease assets (asset-heavy) have a significant portion of fixed costs and less flexibility to lower expenses, particularly hoteliers with large leases. Although we understand that most operators are renegotiating rent levels and payment schedules, we will review the results of these negotiations and incorporate flexibility to adjust rent payments into our ratings on a case-by-case basis.
Hotel operators with management and franchise business models (asset-light) are not safeguarded from the market stress. Their revenue and fees are typically linked to revenue or profits of hotel properties, although their cost structures benefit from a lower number of employees and no rents.
Asset-heavy hotel chains are also reviewing and cutting their capex plans. Only minimum maintenance capex is contemplated with all new developments, expansions and major refurbishments being postponed until at least 2021 or cancelled. Operators are bound to keep investing sufficient capex to maintain their closed hotels in good condition.
However, these measures are not enough to offset the unprecedented decline in occupancy and revenue. There have been ten rating downgrades in the global lodging sector since March 2020, and all European hotel ratings now have Negative Outlooks or are on RWN. Investment-grade companies, such as Accor and Whitbread, have higher financial flexibility and stronger liquidity positions, and are therefore better placed to sustain their ratings, although the downturn in the sector will delay their deleveraging. High-yield hotel operators have lower rating headroom and face more liquidity pressures, which raises the risk of further downgrades.