• Crisis for cities not Costas

The Costas have traditionally been seen as the weak link on Spanish hotel performance with predictions of an end to the sun and sand holidays.

But it is the resorts that have proved most resilient during this downturn and city hotels which have been hit hardest by the collapsing Spanish economy. The resorts now look set to recover the fastest as well.

The rebound on the Costas is continuing apace with a successful trading period over the Easter break showing early indications of a strong season ahead.

According to ABTA, the UK travel agent body, Spain has remained the outright favourite for British holidaymakers over Easter despite the unfavourable exchange rate situation. And the UK is one of the most important source markets for Spain.

A wet February, the wettest for 30 years, meant international visitors in Spain were down 3.8% year-on-year after showing a rise in January, the first increase for 18 months. The more important holiday season months, however, are expected to show an increase.

While volumes are rising, rates remain under severe pressure. Indeed, one reason UK tour operators say Spain remains popular is because hoteliers have slashed rates. And tour operators have leaned heavily on hotel groups to cut rates.

TUI, which describes itself as the number one leisure hotelier in Europe with 243 hotels and around 154,000 beds, says it has maintained high occupancy rates. Its travel agency business, the biggest in Europe, has remained robust thanks to capacity cuts.

In a trading update in late March TUI said booking volumes for this summer were up 13% in the UK and up 23% in the Nordics.

At the end of February, Sol Melia, Spain's biggest hotel company, said that city hotels were down 22.1% in 2009 but Spanish resorts slumped by 15.5%. The company said that it expects to see positive revpar at "some point" this year. For the cities, no improvement is expected until at least September.

At NH Hoteles, individual leisure travellers have helped mitigate the slump caused by much lower numbers of corporate travellers. Occupancy in the year though was still down at 57.4% from 62% in 2008. Revpar in Spain was down 23.9%.

Both Sol and NH are striving to shore up their balance sheets. Sol is confident of meeting its debt covenants but it will have to make a number of disposals to do so. It would not give a figure on the quantum it is targeting but said they might be outright sales or joint venture type structures.

NH breached covenants in 2009 and will do so this year. It wants to sell Eu300m of assets this year, including its London property which failed to sell last year as buyers were unable to find debt financing.

In late February NH sold three hotels in Mexico for US$57m in a move that focused its operations on urban hotels in that country. The properties were all operated under a franchise from Hilton.

NH is also renegotiating its leases and expects to have some success in reducing rents or at least postponing increases, on fixed leases, especially in Spain and Italy where the company said such moves were "accepted practice".

Revpar is expected to be flat in the first half and then show an increase in the second half.

HA Perspective: The stronger recovery in the resorts in Spain, which are reliant on mainly Northern European customers, is as much about the disastrous domestic as any underlying strength in the sector. In reality, the Costas are still in long-term decline and major structural adjustments are needed.

The bigger picture for Spain, however, remains its economy and, in particular, how it weathers the current sovereign credit storm.

While Greece has received all the negative attention recently, the Spanish situation is potentially also a problem even if its position is not as weak.

The critical issue is that Spain has to work through its deficit without the benefit of a devaluation, something which has rescued the UK in the last couple of years. With the highest unemployment in the Eurozone at 18.8% and a relentlessly efficient Germany pressing down on Spanish industry the outlook is not great.

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