• Spanish agony made worse by tour operators

The agony for Spanish hoteliers is continuing with both major players, Sol Melia and NH Hoteles, slashing costs and rebuilding their balance sheets.

NH has been forced into the most drastic action with an emergency rights issue of Eu197m and plans to sell Eu300m of assets.

The two for three rights issue at Eu2.00 per share is at a 55% discount to the closing price on the day of the announcement last week. The details, including a possible premium to the price, have yet to be finalised.

The first quarter of the year showed a like-for-like revpar decline of 18.7% across the group with the core market of Spain and Portugal suffering a drop of 25.5%.

Operating expenses at the hotels were down 12.9% in the quarter, year-on-year, as the company reduced staff costs by 11%. Full time equivalent staff numbers fell by 13% for comparable hotels which meant the FTE per occupied room ratio was roughly static despite plunging occupancy.

The proportion of the workforce on temporary contracts is 36% which leaves space for further manoeuvring if occupancies continue to drop, according to the company. Additional measures include improved purchasing which shaved 23% of the costs of food and beverage supplies, non-profitable hotels are being sold; capex is being frozen to the prior years' commitments; leases are being renegotiated; and all employees are being drafted into a sales effort.

Analysts at investment bank Jeffries International described NH's numbers as "dismal". They said that EBITDA of Eu200m is required to stay within debt covenants even if both the rights issue and asset disposals hit target.

EBITDA is estimated by Jeffries at Eu170m for the full year. The first quarter saw an EBITDA loss of Eu5.6m.

Meanwhile, over at Sol Melia, the past quarter was described as the worst seen by the tourism sector for 20 years. Spain's biggest hotelier said that net profit shrank to just Eu0.5m from Eu18.1m a year earlier.

Revpar was down 14.2% and it expects revpar to remain under pressure in the next couple of quarters. Bookings in Spain for the summer season are below last year's levels by double digits although it is not expected to be quite that bleak as the booking window has shortened markedly. Cities are expected to suffer more than resorts.

Sol has a contingency plan based around four factors: revenues; cost optimisation; risk management; and cash flow management and financial equilibrium.

The company estimates that its revenue boosting activities under this plan added Eu8m to Eu10m to sales in the first quarter.

On cost savings, an extra Eu20m has been identified on top of the Eu35.6m outlined at the year-end results. About 44% of these savings are to come centrally.

Within the risk management, Sol has dumped three leases in Germany and Brazil, and is navigating carefully the bankruptcies involving tour operators and airline.

The company's debt position was shored up at the end of April thanks to a Eu80m syndicated loan with six banks. In addition, it has less than 20% of its assets encumbered with mortgages. It has recently extracted Eu20m through mortgaging and says it has significant capacity to do more.

The economic crisis has also led to a shake-up of senior management. Gabriel Escarrer is now the sole CEO and Sebastian Escarrer is becoming non-executive vice chairman and is lined-up to take over from Gabriel Escarrer Julia.


HA Perspective: The economic crisis has hit Spain hard and its property sector has been particularly sharply impacted. Hotels inevitably have been caught up in the meltdown.

With the economy crashing, business hotels in cities have been devastated and tourism has been hit by the economic decline in key feeder markets, most spectacularly Germany but also in the UK. The devaluation of the pound has also made Spain relatively more expensive for the key UK.

It is no surprise then that in the first quarter of this year, the volume of foreign tourists arriving in Spain declined by 16.3%. Nobody is expecting a recovery by the summer season.

Barcelo, the third biggest hotelier in the country, after Sol and NH, believes there will be significant consolidation opportunities. The company's co-chairman, Simon Pedro Barcelo, believes medium sized groups of about 15 to 20 properties are most vulnerable.

It is possible that Sol will be one of the consolidators but there is also a chance that the much mooted takeover of NH will happen. But it is hard to see an obvious predator in the short-term given the debt situation.

It is also worth noting that there appears to be some winners in the battle of the beaches. Tui, Europe's largest tour operator, enjoyed good results at its hotels and resorts division in the first quarter. During this period, turnover rose 2% at what is Europe's fourth largest hotelier, just ahead of Sol in terms of the number of rooms. Underlying EBITDA at TUI's hotels held steady at Eu13m.

The vertically integrated TUI business model is a huge challenge for any Spanish hotelier. During the boom, the spill-over of tourists were shared with properties outside of the TUI stable.

In the tightening market, TUI has maintained margins by sharply cutting the volume of holidays it sells but at the same time it is increasing its bed capacity in key destinations. The first quarter saw a 5.6% uplift in available hotel beds within the hotel division. The volume of holidays sold by TUI with beds outside of the TUI stable is now much, much smaller and the resultant pressure on hotels reliant on tourism is much, much bigger.

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