Hotel Enterprises

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According to the Hellenic Chamber of Hotels in Greece, some 65% of hotels in the country are on the verge of bankruptcy. The outlook is equally dire in other tourist-heavy economies across Europe. EU officials are scurrying behind-the scenes to salvage what they can of the summer tourist season.

From a supply-side perspective, policy initiatives are focused on facilitating arrivals from so-called green zones in an attempt to draw tourists who may otherwise be hesitant to travel. But destination demand will be nil in a macro-setting where public-health officials wave the prospect of arrival quarantine. Are leisure travelers from China going to vacation for a month in Puglia if there is a prospect that they will be forced into an isolation facility for two weeks on arrival? Price incentives have their limit.

Admittedly, few officials foresee resurgent international arrivals in Europe this summer. The energies of most are being spent to round up those Europe-based travelers who might consider destinations within their home regions. Presumably, the idea is to help the industry to generate some cash, covering baseline company overhead and keeping some staff employed. Profits are aspirational.

One take on the industry crisis is the data itself. Half of the top ten worldwide destinations by country—according to the UN World Tourism Organization—are in Europe. By declining significance, the most travel-impacted nations in absolute terms are France, Spain, Italy, Germany, and the United Kingdom. Altogether, Europe sees at least four times more international arrivals than the United States.

From our perspective, global investors are asking the question whether or not it makes sense to build exposure to the travel industry, especially in Europe. Valuation measures on hotel properties, as one component of a bigger industry, are rock-bottom. Some argue that low-risk travelers, such as millennials, will always venture out, regardless of public health issues; those service providers who cater to selected demographic groups will benefit from market distortions.

Our concern is the supply side. Consumers, millennials or otherwise, are unlikely to embark on expensive jaunts, while the global economy is in deep recession. For now, that downturn seems, well, almost endless. Hospitality is a cyclical industry, driven by discretionary income. There is simply no market-clearing mechanism in place at this time. Companies are in an extended race to the bottom.

The obvious exception to our sober outlook is the ultra-high-end of the hotel industry. There are always enough well-heeled travelers (who also embrace above-average lifestyle risks) to fill $1400-a night-boutique properties. For the hospitality industry, our strategic issue centers on those firms that cater to the middle market. We expect many to be terminally-squeezed amid the coronavirus backdrop.

Our Vantage Point: Shipping is a notoriously cyclical business, but the maritime security component of the industry may prove counter-cyclical. A key reason is that a dramatic shift in labor costs has brought operating expenses back to reality, encouraging ship owners and operators to reinforce their front-line.

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Image: In Italy, the economy of the Amalfi Coast is based on tourism. Credit: AlehVaranishcha at Can Stock Photo.

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